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Srinivasan, General Secretary

A hundred times everyday I remind myself that my inner and outer life depended on the labours of other men, living and dead and that I must exert myself in order to give in the same measure as I have received and am still receiving.

For Internal Circulation only

PREFACE This book is an attempt by an independent think tanks commitment in contributing substantially to public education, which is the need of the hour. Given the democratic polity that we have in India we need to educate our public mind on vital issues to enable them to make right choices at all levels. No democracy can afford an ignorant public mind. An ignorant public mind is more dangerous than an invading army. The true defence of democracy is informed public opinion. Our people should be educated on issues of consequences. As they hold the sovereignty and elect their representatives who shape their course of their destiny, awareness about vital issues of socioeconomic life of the nation is indispensable.

Rightly said, attitudes are more important than facts. Lincoln was right when he said that nothing could succeed without public support and nothing could fail with it. Indian economys midnight hour is here. India is rediscovering herself under a new economic paradigm. This has brought us all under a massive socio-economic transition that is essentially painful. We, the nation, must understand and face this rather wrenching phase of transition to tame its ill effects. The issues are essentially confusing and common people simply do not understand them. Companies in hundreds are getting closed down, many companies are being privatized. This is causing loss of employment. We all hear the talk of Job less growth, Labour displacing growth, etc. The air is replete with terms like new Economy, Global Recession, Stagflation, demand pull recession, etc. This is a dangerous decade but it is equally pregnant with great opportunities and potential. Already India is recording a very high, sustained rate of growth. Some sectors of the economy like the IT are consistently performing. We have a technocrat as the President of the country. This is the period of becoming all that one can become. That is why people must understand the vital issues and their possible consequences. This understanding must go beyond short-term benefits. In fact, ours is a democracy of the illiterates. Very few seem to be discussing critical issues facing the nation. Most of the time our politics is misfocussed or trapped in non-issues. This is lethal for the future of the country. Many countries like China are racing ahead of India. Sadly, our media too is not paying required attention to educate our public mind. There is definite need to go beyond reporting. Given the massive, pervasive illiteracy there is an urgent need to educate our public mind under an all-out effort on war footing. Nothing is more powerful than an informed public mind able to take quick decisions of consequences. Basic knowledge of economy is essential for right decision making in all fields. People should be able to understand implications of economic changes. You do not have to be a mechanic to learn driving. Thus, to understand and analyse the changing economic environment one need not be a trained economist. Sadly, economics is taught not as a common sense subject but as a very complex, academic subject. Economists too talk of some other worldly language full of jargons. Economic Literacy is very important for right, informed decision making in all fields. Common people find economics very mysterious and confusing. They do not understand GDP, Inflation, stagflation, Current Account Deficit etc and the ones to be blamed for this plight are our economists. This is because they talk in the esoteric language of economy full of jargon. Economics must be demystified and should made easy for the common man to understand and put to use. At last, everything boils down to economics. Economics is the most important science directly impacting lives of the people -one and all. It should be explained in the language our people can understand. Even those who invest their hard earned money in stock market also do not understand even basic concepts of economics.

That is why AIOBEU has taken up upon itself to educate the public mind and explain vital concepts beyond jargon to people.In the coming years AIOBEU will be coming out with focused books, special papers, etc. by organizing seminars and workshops. This book is for all. The objectives of this book is to enable people to understand important concepts in economics, banking, jargons of globalisation, etc. and to get insightful understanding of changing economic environment and impact of Liberalisation, globalisation, privatization on our lives. I wish to place on record the excellent job done by our General Secretary, Com. S. Srinivasan and his able team and the extra unpaid labour they had put in writing, collating, collecting informations, data from scores of reference books, materials in bringing out this book in a record time frame .. But for their committed effort this book would not have been a success that it deserves to be. In this venture of ours we are Grateful to all the personalities, for their contributions and to all friends of the people known and unknown who have been responsible for the success of this edition; who have not claimed intellectual property rights whose noble objective is to reach information to more and more people . Economists cannot change the economy. They are professional as any other But People can ,and must , for own sake , for economic activity is made in political terms . We have made some humble attempt in bringing out this book to quip our membership, public mind to understand economy beyond jargons so that we can go together to change it. I am confident this book will touch the chord of trade union activists, students, journalistsand the public alike. Thank you Com.CHINU. AIOBEU will be proud this book - yet another precious jewel in the union archives. L BALASUBRAMANIAN PRESIDENT - AIOBEU & NCBE 24-07-2004

From the General Secretarys desk

The ambiguous state of our educational structures leave the common man with no grasp of the basis of various economic jargons. Treatises and documents are boundless, but yet so verbose, that one has neither time to read it not ever glance it. Over the years it was greatly felt that a standing reference material which helps a member to understand the impacts of various economic jargons on our life and work is necessary. Therefore, the genesis of this book lay in the long felt need for compilation containing an authentic and updated materials drawn from various resourceful materials. I do not claim any originality. There may be some gaps in between. But, nevertheless, I had tried to cover many dimensions and definitions in globalisation, banking and economic basic literacy jargons. Any part of this book may be freely reproduced in any form by any organisation. But we would appreciate the copy of material is sent to our office with comments for furthering our knowledge. In preparing this document I had infringed on the intellectual property rights of several individuals and also various resourceful documents, books in good faith with the hope that authors of these documents oppose patenting of intellectual property rights as they oppose IMF, WTO dictates. We term IPR as RIP (Restriction on Intellectual Progress). We hold the conviction that right to information is directly linked with bringing truth to light. Information is power and documented information is democracy. I thank our President Com.L. Balasubramanian for encouraging me to write this book and dedicate this edition to his trade union acumen.







001 - 091


092 - 098




One of the greatest deceptions of our times is the notion of internationalisation of ideas, markets and movements. It has become fashionable to evoke terms like Globalisation or Internationalisation to justify attacks on all forms of solidarity,

community and / or social values under the guise of internationalism; Europe and U.S. have become dominant exporters of cultural forms most conducive to depoliticising and trivialising everyday existence. The images of individual mobility, self made person, the emphasis on self-centered existence (mass produced and distributed by the U.S. mass media industry) now have become major instruments in dominating the third world..... The essential ingredients of the new cultural imperialism is the fusion of commercialism sexuality conservatism each presented as idealised expressions of private needs of individual self-realisation.

James Petras

1 MILLION = 10,00,000 = 10 LACS


= 1,000 MILLION








SOME REVEALING STATISTICS: Source Economic Survey 2000-01



YEAR 1996-97 1997-98 1998-99 1999-2000

RECEIPTS 2,878 2,914 2,933 3,036

PAYMENTS 858 1,437 1,743 2,139

NET 2,020 1,477 1.250 897

Net foreign exchange revenues from tourism have declined sharply in the last few years because of the step increase in payments on account of foreign travel by Indians. The figure for payments was just 392 million in 1990-91. TRADE BALANCE (U.S.$ BILLION) YEAR 1996-97 1997-98 1998-99 199-2000 IMPORTS 48.95 51.19 47.54 55.38 EXPORTS 34.13 35.68 34.30 38.29 -13.25 -17.10 TRADE BALANCE -14.81 -15.51

The trade deficit has grown steeply. The trade deficit for 1990-91, the year of an acute foreign exchange crisis, was $9.44 billion.


Page 10

Capital transactions subject to controls : Capital and Money market These are no longer restricted

Outflows: Sale / issue abroad by non-residents 2 Page 10 Inflows: Sale / issue abroad by non-residents 3 Page 10 Derivatieves & other instruments Purchase locally by residents Page 13 4 Para 2: FEDAI (who prescribe the level of charges for all foreign exchange services) Page 15 5 Central Banks: Hong Kong Sri lanka Page 17 First Para : External debt Rs.175,000 crores or 70 billion dollars. The 6 internal debt today is of the order of Rs.3,50,000 crores Hong Kong Monetary Authority Central Bank of Sri Lanka All figures are of 1992 - 93 and not current and are converted at the then exchange rate Delete the word "today" read as "debt converted at the then exchange rate, is of the order of Rs.3,50,000 crores Also see Note 1 in addendum Page 25 7 FCNR: 1st line : Interest rates revised periodically by RBI 8 Page 82 IAS - International Accounting Countries Standards. 9 Page 82 OECD - Organisation of Economic Corporation Developments International Accounting Standards Oragnisation for Economic Cooperation and Development This FCNR scheme no longer exists

According to the ENS economic bureau though the country has achieved $100 b. in foreign exchange reserves its external debt rose to $112.54 b. at the end September 2003 from $104.70 b. in March. The forex reserves are not enough to cover this debt. NRI [Non Resident Indian]

deposits rose to $27.19 b. from $23.16 b while external commercial borrowings rose to $23.65 b., from 22.37 b.

Further, the Central Governments fiscal deficit crept upto Rs.93, 656 crore till November 2003, which is 61 per cent of the budget estimate of Rs.1, 53,637 crore for 2003-04. This indicates the government is slipping on the deficit front. The deficit till November, which works out to 3.4 per cent of GDP, was marginally higher than Rs.85, 978 crore till October 2003.

According to figures by the Controller General of Accounts, expenditure surged to Rs.2, 80,051 crores while receipts were at Rs.1, 86,395 crores.

Additionally, it will be noted that there had been a $155.56 b. in the net capital account but India lost $31.46 b. through trade deficits. Simply put, India accumulated this huge forex reserves mainly through borrowed cash under different heads. These, in reality, are liabilities. Foreign investments brought in $55.4 b; NRI deposits accounted for $21.8 b., external aid $11.8 b., external commercial borrowings amounted to $15.3 b. and other items in the capital account totaled $ 11.2 b.

These high reserves had a very low level of return [about only 2 per cent] 2003 because of a global low regime.

Likewise, our foreign assets as on March 2003, were about $94.68b. Of this, direct investment abroad added up to mere $5 b. portfolio investment was $0.72 b., while other investments amounted to $12.8 b. As against this, foreign liabilities totaled $154.75 b. This liability included

FDI in India [$30.8b.] portfolio investment [$32b], and other investments [$91.7 b.,] So, in reality, the liabilities are $60 b more than the reserves!

On examining the purpose these huge reserves can be put to another reality unfolds. As on September 30, 2003 the total foreign currency assets were $87.2 b. Of this, $31.7 were invested in securities, $39.64 b. were deposited in other Central Banks and BIS and $15.83 b. with foreign commercial banks. The country earned only 2 per cent returns from this reserve. On the other hand some of the forex flowed back to India as external commercial borrowings by Indian corporates on which the Indian public pay much bigger return.

Keeping all these figures in view against the backdrop of the declining value of the US $ in the global market, the actual earnings must be much below 2 p. compared to the GDP, the country forex reserve is about 20 per cent. There is, thus, much at stake.


SL.NO. 01 Aggressive Growth Funds SUBJECT PAGE NO. 34

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Applications on the Live Register Balance of Payments Berne Convention Bind Bindings Black Economy Bond Funds Bond Ratings Buffer Stock Facility CRR Callable Bonds Capital Account Capital Account Convertibility Capital Account Liberalisation Capital Account Liberalisation and India Capital Controls Capital Controls in Developing Countries Capital Flight Capital Markets - Glossary Capital Transactions Subject to Controls Cash Loss Categories of Capital Controls Central Banking System Certificate of Deposits CIS Countries Close End Funds Commercial Bank Commercial Paper Comparison between FDI & PI Compensatory and Contingency Financing Facility

02 02 04 04 03 03 61 50 53 16 51 05 06 07 07 07-09 09 12 05 11 04 09 15 13 16 62 25,30 13 27 53

32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61

Conditionalities Contracting Party Convertible Bonds Country Funds Coupon Rate Debt Service Ratio Credit Cards Credit Controls CTD Currency Board Currency Trading Current Account DDT Debit Service Ratio Debt Servicing Debt Trap Deficit Deficit, Budget Deficit, Fiscal Deficit, Revenue Derivatives Devaluation Direct Taxes Dirty Float DMEC Domestic Bonds DOT Double Ready Forward Dragon Bonds EEC Emerging Markets Funds

14 14 51 62 16 14 20 15 20 74 04 17 16 18 17 17 17 17 17 18 18 17 21 18 51 20 67 51 21,22 33

62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91

Euro Bonds Yankee Bonds Euro Currency Exchange Rate Exchange Rate Mechanism Exchange Rate System Exchange Trade Funds Expectation of Life at Birth Export Lead Growth Extended Arms of World Bank Extended Fund Facility Factoring Failure to their Own Strategy FDI Financial Derivatives Financial Globalisation a Balance Sheet Financial Intermediary Financial Sector Fixed Exchanges Rates Flexible Exchanges Rates Flying Forex Foreign Currency Non-Resident Accounts Foreign Exchange Foreign Exchange Trading Forest Area Forest Cover Forex Reserves Forward Transactions Free Trade Area Freight Tonne Kilometers Funds of Funds

51 74 21 21 20 32 20 22 79 54 22 43 27 25 36 30 25 21 21 30 26 26 27 24,70 24 31 74 26 25 34

92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121

Futures G77 GATS GATT GDP GDP at Market Price Gilts Global Depository Receipt Global Funds Global International Funds Glossory for Basic Economic Literacy Glossory of Popular Banking Jargons GNP at Market Price Gross Capital Formation Gross Domestic Fixed Capital Formation Gross Domestic Products or GDP at Factor Cost Gross Domestic Savings Gross National Product at Factor Cost Gross Output Goal Macro Funds Hard Currency Hedge Funds Hot Money IBRD ICOR IDA IMF Impact of Devaluation Indirect Taxes Infant Morality Rate Inflation

19 35 34 34 31 32 35 62 62 33 102-153 95-101 33 32 32 32 32 32 33 36 37-39 36 79 55 80 44 42 55 55 44

122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151

Inflation Indexed Bonds Intellectual Property Rights Interest Rate Controls International Bonds International Reserves Internet Bubble Investment Bank Join Stock Companies LDC Liberalisation Literacy Ratio LLDC Market Capitalisation Market Neutral Funds Marshall Plan Merchant Banks Treasury Bill MFA MFN MIGA MNC Money Market Funds Money Markets Money Supply Monitary Controls Dot MTN MTO Multinationals Mutual Funds National Income National Treatment

52 49 20 49 54 54 30 69 58 55 58 58 68 34 59 26 60 60 81 56 61 59 59 20 60 60 60 60 64 63

152 153 154 155 156 157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180 181

NDP at Market Price Net Capital Formation Net Domestic Product Net Domestic Savings Net Output or Value Added Net Worth NRI OECD Offshore Funds Open End Funds Organised Sector Other Financial Instruments Overseas Bonds Paris Convention Passenger Kilometers Passenger Load Pegged Exchange Rate Per capital Income Plant Breeder Rights Popular Abbreviations / Acronyms Portfolio Management Poverty Line Price Index Primary and Secondary Markets Private Consumption Expenditure Private Investment Plan Projects Loans Protection Protectionism Public Debt

63 64 64 63 63 64 63 64 62 62 64 63 51 64 65 65 21 64 64 154 65 65 45 65 66 66 77 66 67 66

182 183 184 185 186 187 188 189 190 191 192 193 194 195 196 197 198 199 200 201 202 203 204 205 206 207 208 209 210 211

Public Outlay Plan Purchasing Power of Rupee Purchasing Power Parity Quota Restrictions Regional Funds Request and Offers Revenue Forwards Revenue Load Factor S and D Safeguards Samurai Bonds Sectoral Loans Securities Selectivity Senior Bonds Sensex Services Shares Short Selling Funds Sick Unit SLR Social Security System Special 301 Spot Transactions Sterilisation Policy Stock Exchange Stock Funds Stock Index Stock Trading Subsidies Structural Adjustment Loans

66 66 66 67 62 67 67 67 71 70 51 83 67 70 51 69 71 68 34 67 67 67 70 74 21 69 61 68 70 77, 83

212 213 214 215 216 217 218 219 220 221 222 223 224 225 226 227 228 229 230 231 232 233 234 235 236 237 238 239 240 241

Structural Adjustment Policy Subordinated Bonds Subsides Super and Special 301 Swap Contracts Swaps Taxes The Bank for International Settlements The Basel Committee The Central Banking System The Genesis The International Organisation of Securities Commission The Power Structure Trims Trips UK Building Societies Unacted Universal Banking UNTC Urban Agglomeration Uruguay Round USTR Venture Capital VER Wider Band WIPO World Bank and India World Major International Fund Management/ Bank Mergers World of Currencies World Top Fund Managers

54 51 71 71 74 20 72 03 92-94 15 77 55 78 72 71 30 72 30 72 72 73 72 26 73 21 73 76 75 74 74

242 243 244

WPI WTO Zero Coupon Bonds

45 73, 86-91 51


Job seekers registered with employment

BALANCE OF PAYMENTS: records the total movement of goods, services and financial transactions between one country and the rest of the world. The balance of payments record is divided into two heads, current account and capital account. Balance-of-payment [BoP] is a statement of countrys trade and financial transactions with the rest of the world over a particular period of time, usually one year. This is an account of the net economic transactions made by a country with all other countries. The transactions include exports, imports, and transfer or receipt of funds and assets in various other forms. In our case, these would include, remittances by Indian workers employed abroad, outflow of Indian resources on account of profit and royalty for foreign capital and technology operating in India, and payment of interest and repayment of principal for our external borrowing. Indias BOP situation has mostly been adverse since Independence. To cover this deficit, either the country has to borrow commercially or to obtain aid from other countries. This entails continued economic dependence on and vulnerability to external forces and factors. Such slackening of industrial production at the global level and the consequent falling rate of return in the productive economy of the world compelled global finance capital to see other avenues to maintain their profit levels.

The enormous amounts of idle cash the Middle East gathered selling oil is one such classic example. These petro-dollars, as they were called, were parked in International Banks and needed to be invested or lent somewhere to pay interest to the owners of the money and earn commissions for the bankers. It was this money that became the source for the notorious third world debt from the late 1970s. From the 1980s huge amounts of finance capital began to be lent / to buy seed for sowing, invest in a factory or start a business. These risks were at least based on reality, real demand, real purchasing power, real products, real quality etc. With deregulation sweeping the major financial markets during the 1970s risk prone business soon became the chief source of financial involvement. Of the different strategies in the international financial market, non-bank financial involvement emerged as a major form of activity, pushing aside traditional operations of banks at the banking and industry level. As the booming financial flows were increasingly dissociated from the real sector with low growth rates of GDP in the OECD countries, tendencies arose of bank to finance myriads of activities including corporate mergers and acquisitions and real estate transactions. As returns on money capital could only be maintained by creation of debt, finance sought outlets beyond industry in particular because the latter was unable to absorb the growth in finances. The result was a proliferation of financial transactions, which continued on its own, without relation to the real sector. Speculation, involving a high degree or risk, generated the demand for a substantial part of financial flows. This has resulted in the stock markets being excessively volatile resulting in, what has come to be called, Casino Capitalism. Money trading also in interest rates, equity shares, commodity prices, foreign exchange rates and in derivatives [futures, options, etc] has reached gigantic proportions absorbing vast amounts of capital accumulation. In addition vast sums have also moved into the debt and bond markets. Not only that, with falling returns in Industry, finance capital has sought outlet through an unprecedented wave of mergers & Acquisitions [M & A], where big TNCs [Transnational Corporations] have swallowed up not only other smaller companies but also other TNCs of equal size. It is these unimaginable sums of money, which, during this period of globalizations, has gone to fund a speculative bubble the financial bubble away from the real productive economy. But, when the real economy went into a demand recession, this financial bubble also burst. THE BANK FOR INTERNATIONAL SETTLEMENTS: is the worlds oldest international financial institution, having been in operation since 1930. Located in Basle, Switzerland, BIS is an organisation of central banks and bank regulators. It serves as a forum for central bankers to discuss international regulatory standards and coordinate central bank policies. Consisting of central banks from developed countries, nearly all the European central banks as well as those of the U.S., Canada, Japan, Australia and South Africa are associated with the activities of the BIS. Operating under its auspices, the Basle Committee proposed guidelines for the measurement and assessment of the capital adequacy of banks operating globally. In 1988, these guidelines were accepted by the Group of Ten countries and the agreement was known as Basle Accord. However, the closure of the Bank of Credit and Commerce International (BCCI) in 1991 exposed the shortcomings of the Basle Accord.

Tariffs in GATT schedules, which cannot be changed without negotiations.

It can broadly be defined as that part of a countrys total economy which is associated with illegality in relation to economic activity. Sometimes the economic activity is itself illegal as in the case of smuggling or drug traffic. However, mostly it is the illegality associated with the legal economic activity which leads to black income generation. For example, in production, suppressing the figure of total output or the price at which the good is sold or not paying excise or sales taxes or the income tax. For the black economy to continue to function, it is essential that the businessmen form a nexus with the politician and the bureaucrat. Without this nexus, illegality cannot continue. It is generally found that only a small part of the gains from the illegal activity are shared by the business men with the politicians and the bureaucrats. In India, the black economy is a sordid example of how the cynical dictum, that it pays to be corrupt and dishonest, is actively nurtured by those in authority themselves. Black incomes generated in the black economy are largely property incomes and go to increase the share of the surplus incomes in the national income. Bribes are only a redistribution of some of this surplus to those in position of authority. Savings from black incomes are in the form of black wealth. This is in the form of undervalued property or inventories in industry, holding of gold or foreign exchange. Black economy subverts policy and leads to its failure. It has worsened the income distribution in the country and led to the fiscal and the BOP crisis. It has led to the lowering of the rate of growth of the economy to below what it could have been. It is also responsible for the lower rate of employment generation and hence for the rising unemployment and under employment. The Black economy is about 30% of the declared GDP. This at current prices would amount to Rs.1,80,000 crores. Loss of foreign exchange on account of illegal activities is of the order of around Rs.30,000 crores. BIND: tariffs which are frozen or fixed in GATT schedules and cannot be increased without negotiation of compensation elsewhere. BERNE CONVENTION: Founded in 1886 (and revised in 1928,1948) Governs copyright for literary and artistic works and related rights. There is also another copy right regime in the form of less stringent General convention on universal copy right 1952. CASH LOSS : Loss as computed without providing for depreciation. CURRENT ACCOUNT :deals with the payments and receipts for immediate transactions, such as the sale of goods and rendering of services. It is further subdivided into the merchandise or

visible account (also termed the trade account) comprising the movement of goods; and the invisible account, comprising the movement of services, transfers and investment income. Entries in this account are current in nature because they do not give rise to future claims. The balance of payments on the current account is the broadest measure of a countrys international trade because it includes financial transactions as well as trade in goods and services. A surplus on the current account represents an inflow of funds while a deficit represents an outflow of funds. The current account shows the countrys profit and loss in day-to-day dealings. It is made up of two headings. The visible trade balance [Trade Balance i.e., deficit or surplus] indicated the difference between the value of exports and imports of goods [raw materials and fuels, foodstuffs, semi-processed products and finished manufactures]. The Second group of transactions make up the invisible balance. These include earnings from payments for such services as banking, insurance and tourism. It also includes interest and profits on investments and loans, government receipts and spending on defence, overseas administration, etc. In addition to current account transactions there also currency flows into and out of the country related to capital items - investment monies spent by companies on new plant and the purchase of assets, borrowings by the government, and inter-bank /stock exchange dealings in sterling and foreign currency. The current balance and the investment and other capital flows, together with the balancing item, result in the BoP. This figure shows whether the country has incurred an overall surplus or deficit. India has huge current account deficits, which is balanced by the big inflow of foreign investments [FDIs & FIIs] and NRI deposits giving a surplus. But this surplus is illusory as the bulk of it comprises hot money by foreign investors, which can be removed overnight CAPITAL ACCOUNT deals with loans, investments, other transfers of financial assets and the creation of liabilities. Unlike current account entries, entries in the capital account indicate changes in future claims. It is further subdivided into long-term and short-term capital, the former relating to capital employed for investment purposes, the latter to bank advances, trade credit, etc. Long-term capital is again subdivided into direct investment capital and portfolio investment capital.



Currency ( notes and coins) Deposits with banks and other financial institutions Loans from Banks and other financial Institutions Certificates of Deposits ( CDs) Commercial Bills Government debt( e.g., Treasury bills) Maturing within one year Bonds issued by governments and their agencies Bonds issued by Industrial, commercial and financial corporations Bonds issued by banks Bonds issued by supra-national organisations (e.g., the


World Bank, the European Investment Bank) Equities issued by Industrial, commercial and financial corporations Equities issued by banks Equities issued in the context of the privatization of state-owned assets Loans which have been securitised (that is, repackaged as bonds) Derivatives (forwards, futures, options and swaps) Interest rate (money market) derivatives Bond derivatives Equity derivatives Credit derivatives Commodity derivatives All of the above All of the above, plus the markets in residential, industrial and commercial property

Source : Peter Wilburton, Debt and Delusion, Allen Lane The Penguin Press, 1999


In simplest terms, Capital Account Convertibility means free inflow and outflow of capital. CAC refers to the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. CAC already exists for non-residents and foreign investors in India. As per the Tarapore committee, CAC will have a different meaning for different entities for individuals, corporates, banks, investors, etc.

Anyone can borrow from NRIs and open accounts abroad. Any individual investor can subscribe to foreign currency deposits NRIs can repatriate their non-repatriable assets.

Companies can issue additional equity overseas without seeking prior permission from the RBI They can also issue dollar bonds or deposits They can invest in bonds of any currency Takeover of companies in foreign countries with investment upto $50 million allowed

Access to foreign currency loans upto one-year maturity made easier Banks can fund businesses overseas at their discretion Banks can accept deposits in foreign currency

Investment institutions can expand their horizon to even the New York Stock Exchange with overall ceiling going up to $2 billion FIIs now need not seek FOREX approval from the RBI every 5 years No more maturity restrictions for FII investment in debt.


Forex markets get a major boost with an expanded business Dealing no longer exclusive preserve of banks. Derivatives allowed. Government securities market becomes liberalised.


CAPITAL account liberalization (CAL) is the process through which countries liberalize their capital account by removing controls, taxes, subsidies and quantitative restrictions that affect capital account transactions. It involves the dismantling of all barriers on international financial transactions and the purchase and sale of financial or real assets across borders. With full CAL, companies and individuals (both residents and non-residents) can move their financial resources and assets from country to country without any restrictions.


Capital controls in the form of exchange controls were introduced in India during the outbreak of World War II. After the war, controls continued and were given a statutory backing by the enactment of foreign Exchange Regulation Act in 1947. This act was replaced in 1973 in the wake of sharp balance of payments crisis. In tune with the liberal economic policy regime, the country introduced current account convertibility in 1994 and satisfied the VIII schedule of the IMFs Articles of Agreement. By and large, the capital account is convertible for foreign investors and non-resident Indians (NRIs). Except for a handful of sectors, FDI is allowed in the most sectors of the economy and earlier restrictions (e.g., on ownership, payment of royalty fees, etc) have been gradually reduced. Indian financial markets were opened to investment by FIIs in September 1992 with certain restrictions. However, these restrictions have been eased since then. Still, domestic resident and companies are not allowed to invest abroad without permit and cannot operate in currency, stock and gilt market abroad. Recently, domestic companies have been allowed to raise capital from abroad through the issuance of GDR, and other debt instruments, but with certain restrictions in the form of prior approvals and ceilings. The move towards full capital account convertibility began with the setting up of a committee in 1997, headed by former RBI Deputy Governor, S .S Tarapore. The report of the committee recommended sweeping changes and suggested a three-year road map towards achieving full CAL. However, with a eruption of financial crises in South east Asia in 1997, the initial zeal to achieve full CAL subsided.

By facilitating outflow of capital legally from the country, CAL has the potential for creating a serious financial crisis. Thanks to control on the capital account, India was able to protect its economy from the contagion effects of the Asian crises. Instead of learning lessons from the South East Asian crises and consequently adopting policy measures to avert a similar crisis, the Indian Authorities still appear committed to CAL.

In an era where control and intervention have become synonymous with inefficiency and corruption, debates on the subject are beginning to suffer from severe buzzword fatigue. In this scenario, it is the need of the hour to re-examine some of the basic premises of neo-liberal policy and relate these to both economic theory and real world experiences. Capital controls, in this sense, provide an ideal setting for exploring the ramifications of the ongoing liberalisation and globalization processes. WHAT ARE CAPITAL CONTROLS? Capital controls may be defined as restrictions designed to affect the capital account of a countrys balance of payments. Put simply, capital controls imply measures that restrict or prohibit the cross border movement of capital including restrictions on both inflows and outflows. These would, in turn, include prohibitions; need for prior approval; authorization and notification; multiple currency practices; discriminatory taxes; and reserve requirements or interest penalties imposed by the authorities that regulate the conclusion or execution of transactions. The coverage of the regulations would apply to receipts as well as payments and to actions initiated by nonresidents and residents. Capital controls can be a combination of official, legal, and quasi-legal instruments. In other words, capital controls can be legal restrictions, strictly or loosely enforced; bureaucratic restrictions left to the discretion or regulation of the administrative unit or agency in charge; or social, customary restrictions that are essentially gentlemens agreements or cultural mores between corporations, businesses and financial institutions, and the government Capital controls can be quantity-based, price-based or regulatory. Quantity-based controls involve explicit limits or prohibitions on capital account transactions. Such quantity-based measures on inflows may include a ban on investment in money market instruments, limits on short-term borrowing, restrictions on certain types of securities that can be owned, etc. On outflows, quantity-based controls can take the form of an explicit moratorium. Malaysia has imposed quantity-based controls in September 1998. Price-based controls seek to alter the cost of capital transaction with a view to discouraging a certain class of flows and encouraging another set of flows. Price-based controls on inflows can take the form of a tax on stock market purchases, certain foreign exchange transactions, etc. Price-based controls on outflows can typically take the form of an exit tax. The imposition of capital gains tax in India is an example of price-based capital controls. Regulatory controls can be both price-based and quantity-based and such a policy package usually treats unremunerated reserve requirement is an example of regulatory controls on inflows. Reserve requirements can be imposed with differentiation between domestic and foreign currency to influence liquidity and to either encourage or discourage foreign currency deposits. The entire range of capital controls can be classified into four distinct categories:

Foreign exchange regulations (including exchange rate regime).

Quantitative and tax policies. Investment and credit regulations. Trade (commercial) restrictions.


Number of Countries Maintaining Controls Any form of capital control 119 Comprehensive controls 67 On outflows 67 On inflows 17 Foreign direct investment 107 Of non-residents 84 Of residents 35 Profit repatriation and capital liquidation 34 Taxes on capital transactions 9 Non-resident controlled enterprise 6 Portfolio investment 61 Of non-residents 30 Of residents 33 Security issuance by non-residents 15 Security issuance abroad by residents 6 Debt-to-equity conversion 2 Financial transactions 78 Of non-residents 41 Of residents 66 Trade-related financial transactions 7 Deposit requirements for borrowing from 2 abroad by residents Deposit accounts 83 Of non-residents in foreign exchange 37 Of non-residents in local currency 52 Of residents abroad 29 Of residents in foreign currency with domestic 23 banks Other capital transfers 70 Personal capital transfers 34 Blocked accounts 24 Real estate transactions of non-residents 23 Of residents 30
Source: capital account convertibility: review of experience and implications for IMF policies : occasional papers 131, IMF, October 1995


Foreign Exchange and Exchange Rate Regime

Inward Movements
Ceiling on incoming foreign currency; bank measures (reserve requirements on foreign liabilities, swaps between central bank and commercial banks, limits on banks net foreign and net foreign currency position, restrictions on new foreign bank deposits, etc.); surrender of export proceeds, and/or any incoming foreign exchange. On incoming financial transactions; on earning from residents foreign investment earnings; on incoming direct foreign investment. Direct foreign investment regulations (restrictions on percentage of equity, total amount per project, sectors allowed). Preferential allocation of and public guarantees on foreign credit; minimum maturity periods on foreign loans; interest rate restrictions on loans Import tariffs; import licenses required.

Outward Movements
Licenses for exporting currency and gold; licenses for owning or locally depositing foreign currency; import allowances; advance import deposits; bank measures (limitations on interest payments to foreigners, limits on banks net foreign and net foreign currency positions). Multiple and special exchange rates.

Taxes, Surcharges

On international financial transactions; on remittance of dividends, principal and profits to foreign investors.


Restrictions on domestic firms direct foreign investment and foreign lending. Credit controls (credit ceilings, preferential allocation, low interest rates or multiple interest rates).


Export incentives and subsidies; tariffs and licenses.


CAPITAL AND MONEY MARKET Shares or other securities of participating nature Bonds or other debt securities Money market instruments INFLOWS Purchase locally by nonresidents OUTFLOWS Sale/issue abroad by non-residents

Purchase abroad by residents Sale/issue abroad by nonresidents

Collective investment securities DERIVATIVES AND Purchase locally by OTHER residents INSTRUMENTS Sale/issue abroad by residents CREDIT To residents from nonOPERATIONS residents Commercial credits Financial credits Guarantees Sureties Financial backup facilities DIRECT Inward direct investment INVESTMENTS REAL ESTATE Purchase locally by nonTRANSACTIONS residents PERSONAL CAPITAL MOVEMENTS Loans, deposits, gifts, To residents from nonresidents Endowments, inheritances and Transfer by emigrants legacies Settlements of debts PROVISIONS Borrowing abroad SPECIFIC TO Non-resident deposits COMMERCIAL Investments in banks by BANKS non-residents PROVISIONS Limits on portfolio SPECIFIC TO invested INSTITUTIONAL locally INVESTORS

Sale/issue abroad by residents Purchase abroad by residents By residents to non-residents

Outward direct investment Liquidation of direct investment Sale locally by non-residents. Purchase abroad by residents By residents to non-residents Transfer abroad by emigrants

Deposits overseas Foreign loans Investment abroad Limits on securities issued by nonresidents and on portfolio invested abroad


Number of IMF member countries Controls Capital market securities Money market instruments Collective investment securities Derivatives and other instruments Commercial credits Financial credits Guarantees, sureties, and financial backup facilities Direct investment 184 127 111 102 82 110 114 88 143

Developing countries
157 112 102 97 77 107 112 86 126

Industrial countries
27 15 9 5 5 3 2 2 17

Liquidation of direct investment Real estate transactions Personal capital movements Provisions specific to: Commercial banks and other credit Institutions Institutional investors

54 128 64 152 68

54 115 61 137 54

0 13 3 15 14

It is very difficult to estimate the total amounts involved in capital flight as there is no accurate data available of these uncontrolled capital flows. However, attempts have been made by many economists and analysts to arrive at an estimate by analysing the errors and omissions entry in the annual balance of payments. The issue of capital flight has traditionally been important in the context of Latin American countries where this phenomenon was very dominant. It has been estimated that the total stock of capital owned by Latin Americans outside the Southern Hemisphere reached between $210 billion and $250 billion in 1991, up by more than $100 billion from 1984. In Mexico alone the estimated increase between in mid-1980s and the early 1990s was over $40 billion twice the official foreign exchange reserves held by that country in early 1994.

Recently, many economists in the Philippines have estimated that of every $100 which comes to the country, $25 go out in capital flight. In Thailand, the errors and omissions category averaged over $700 million in unaccounted capital flows between 1987 and 1991, and $430 million in unaccounted outflows during 1992-93. Similar trends have been found in the case of Indonesia, which witnessed outflows averaging nearly $1.5 billion for all but two years between 1987 and 1993.

Big corporate customers are not satisfied with interest rates at which you and I can invest our savings in Banks. Therefore a fiction is created in which the banks are allowed to pay more to them under the veil that it is the corporate clients that lend their funds to the Banks. Such a translation gets glorified as Certificate of Deposit. Reserve Bank of India has wilted in the face of pressure exerted on it and encouraged Banks to raise CDs upto 3% of the deposit base of banks-up from 1% some time ago. We have no quarrel on score if banks are able to squeeze some benefit out of this except that discrimination anyway is patent. The small man who was the darling of banks for lending is now elbowed out. He gets an inferior rate for his savings whereas corporate clients walk away with the cake. But what is annoying is that Banks are coughing up losses in undertaking this business. Certificate of Deposits raised say at 14% really cost the Bank around 16.5% because Certificate of Deposits are deposits and banks are required to keep 4.5% cash Reserves and 25% statutory

liquidity Reserves. No bank will be able to lend the funds so raised above this rate safely. So the certificate of Deposits business is loss making. Why then do the banks go after this business? Since banks have to keep CRR at 4.5% on which many banks default, banks are compelled to borrow from call money market. So if banks are able to raise money at 14% via CDs, lesser than the call money rates, they think, it is justified. In reality, this is not correct. Simply because CDs are deposits which in turn attract CRR and SLR whereas called funds need no reserves. One of the main forces that push banks to peddle CD, is the failure to grasp this difference and the consequent flirtation with a wrong feeling that CDs are profitable.

The commercial paper came as a result of the Vaghul Committee recommendations. It is introduced to enable private sector corporate institutions to play in the money market. But that is too plain and crude to gulp. In a polished version it is said for your satisfaction that Commercial paper is launched to broad-base the money market and to lessen that degree of administrative control over the market, on course to a fully market determined (free market) interest rates. Do you remember those few days when the interest rates on deposits were freed a few years ago. There was breast-beating by Banks and in came the administered rates and Banks were happy all over again. The commercial Paper is a swap arrangement under which a Quality borrower sells a Pro-Note called the commercial Paper for periods ranging from 90 to 180 days with an undertaking to buy it back at a premium of interest or whatever be the going interest rate. Here the seller contracts the buyer and by-pass the Banking system. In other words, those with surplus funds can lend it to those who need the money for short-term periods sans banks. The borrower can borrow at a rate of interest lesser than the Banks interest rate and the lender can realise more that the Banks deposit rate. Both stand benefited. Benefits are maximized. Banks are sidelined. If Banks are happy for being so sidelined, what is reason? They have forgotten the Basic position that banks collect deposits form the public and lend to those who need it and worthy of it. The fundamental principle of Banking is from intermediation between lenders and borrowers. While long term financing is not commercial banks cup of tea, and consequently has logic for securitisation, how can banks abdicate their duty to provide short term working capital finance. If you are to argue that this will free banks funds for other lendings, in effect the bank is substituting one borrower by another. In other words, there is an overall down grading of the banks lending portfolio, because top quality borrower is out and lower quality borrower is in. Thus what really takes place in a bank when it participates in the issue of commercial paper of one top quality borrower is that there is loss of earnings and overall deterioration of the loan portfolio. So there is loss to the Bank. Commercial Paper is fashionable in advanced countries that are allowing market forces to operate. How can this be suitable to Indian Banks who bask in the sunshine of R.B.I (regulating interest and lending rates) I.B.A. (who have recommended uniform charges for all bank services) FEDAI (who prescribe the level of charges for all foreign exchange services).


When a country approaches the IMF for a loan it has to fulfill certain criteria set by the IMF. These are called conditionalities. Their basic thrust is to promote the development of private sector in the economy and to get the economy opened up for the economies of advances countries. This enables the TNCs to enter these economies and promote the development of the advanced countries. Another aim is to force the country to devalue so that its products sell cheaper in the World economy and benefit the advanced countries. The government is required to lower its activities in the economy and the Public Sector is required to be severely pruned or even closed down. This raises the profitability of the private sector and enables the TNCs to enter the market of these economies. It also enables the TNCs to establish better control of these economies by undercutting their technological capabilities. The IMF and the World Bank are currently monitoring about 40 parameters of the Indian economy. The government is obliged to give quarterly data to the IMF and the Bank so that they are assured that their targets are being fulfilled. If the performance is not upto expectation, further assistance is cut off as has happened in the case of other countries. COUNTERACTING PARTY (CP) A country signatory to the GATT.

Most of the Indian banks have now a tie-up for credit card business with master charge, Visa are some such other brands. These cards have become status symbols and Banks are touting these cards with unusual gusto.

Credit cards enable the account holding approved client of the Bank to buy goods and services from a wide spectrum of Shops/ hotels/establishments. In turn, these shops send the bills to Bank who settle the same twice in a month. Of course, the Banks get a commission of 2 to 4% on the face value of the bills. The attraction of the card to the client stems because there is a delay between the client obtaining the goods/ services and the date of debit of the amount to his account by the Bank. The longer delay, the better for him. A Bank cannot pay and be out of the funds for long because it has to carry a floating interest-free advance. The commission can compensate for this. But when Banks pay and take a long time to get the accounts debited and reimbursed, the credit card business becomes a loss maker. On all purchases via cards, the card-issuing Bank chalks up a commission. In effect, this means the Bank is acting as a commission Agent for the 10,000 and odd establishments which accept the credit cards.

Committee on Trade and Development. This is a body within GATT which handles issues of interest to the Third World.


The central banks in the countries have the function of monitoring and regulating the countrys monetary and financial systems. They try to regulate the value of the countrys currency at home and in the international market. The bank issues currency and may trade gold or other currencies in exchange for its own. It also holds some form of money in reserve that it can use in making international transactions. With the globalisation of finance, central banks also cooperate with each other to protect the stability of the worlds currencies. In certain countries the central banks are still very much linked with the Government, while the global trend is towards giving more autonomy to the central banks. In fact, the IMF insists on giving more freedom to the central banks and in a few countries it has succeeded in putting its own nominees to head the central banks. Generally, a country has one central bank, for instance, Reserve Bank of India, in India. In some countries, there is more than one central bank, for instance, in the U.S., the Federal Reserve System has 12 separate banks around the nation, each with its own directors. The system is governed by a seven-member Federal Reserve Board, located at Washington. Following is the list of central banks in Asia: Australia Bangladesh Burma Cambodia China Fiji Hong Kong India Indonesia Japan Laos Malaysia Maldives Nepal New Zealand Papua New Guinea Pakistan Philippines Singapore Solomon Islands South Korea Sri Lanka Thailand Vietnam Reserve Bank of Austrialia Bangladesh Bank Union Bank of Burma National Bank of Cambodia Peoples Bank of China Reserve Bank of Fiji Hong Kong Monetary Authority (HKMA) is the defacto central bank Reserve Bank of India Bank of Indonesia Bank of Japan Banque dEtat de la RDP Lao Bank Negara Malaysia The Maldives Monetary Authority Nepal Rastra Bank Reserve Bank of New Zealand Bank of Papua New Guinea State Bank of Pakistan Central Bank of the Philippines The Monetary Authority of Singapore is the de facto central bank The Solomon Islands Monetary Authority Bank of Korea Bank of Ceylon Bank of Thailand State Bank of Vietnam


They comprise the erstwhile countries of the USSR-Armenia, Azerbaijan, Byelorussia, Estonia, Georgia, Kazakhstan, Kirghizia, Latvia, Lithuania, Moldova, Tajikistan, Ukraine, Uzbekistan.

The interest rate fixed to the bond. CRR : Cash reserve ratio is a percentage of their deposits that banks are supposed to maintain in liquid assets DEBT SERVICE RATIO : A countrys repayment obligations of principal and interest for a particular year on its external debt as a percentage of its exports of goods and services (i.e. its current receipts) in the year. DEFICIT, BUDGET : Excess of total budgetary expenditure (both on revenue and capital accounts) over total budgetary receipt (both on revenue and capital accounts).

DEFICIT, REVENUE : Excess of revenue expenditure over revenue receipts. DEFICIT, FISCAL : The difference between revenue receipts plus those capital receipts which are not borrowings and which finally accrue to the government and the total expenditure including loans, net of repayment. It indicates the total borrowing requirements of the government from all sources. It is the difference between what the government plans to spend in a particular year including debt repayments and total revenues it hopes to collect for this purpose from all its usual resources, excluding external and internal borrowings. The bigger the gap, the more the government has to borrow, or print money or both, to make both ends meet.

A shortfall in revenue in relation to the governments expenditure is called a deficit. It can be defined in several ways but the one most widely talked about today is the `fiscal deficit. It is the difference between what the government plans to spend in a particular year including debt repayments and the total revenues it hopes to collect for this purpose from all its usual sources, excluding external and internal borrowings. The bigger the gap, the more the government will have to borrow or print money or both, to make ends meet. Even though it is thought to cause inflation, this is not necessarily so and can be a stimulus for growth. Either way it results in an increase in the profits of the private sector. DIRECT TAXES : Primarily such taxes as (I) personal income tax, (ii) corporation tax, (iii) expenditure tax (iv) wealth tax (v) gift tax and (vi) interest tax.

Stands for Dunkel Draft Text. This is a 450 page document prepared by Mr. Arthur Dunkel, the Director General of GATT. It contains the so called compromise position between the various contracting parties. In effect, it contains the compromise position amongst the Advanced Western

Nations. It completely eliminates the mention of the position of the Third World Nations which till now was put in square brackets. It has been presented with a `take it or leave it proviso. In other words, countries not accepting this document would be left out of the multilateral trading system in the world. Those countries left out would have to come to bilateral settlements with their trading partners. For instance, India would have to negotiate separately with the US or Japan about its trade. Some argue that this would make things much more difficult.

This refers to a countrys inability to repay its past loans without incurring ever larger loans.. The ratio of net borrowings to the national incomes of the country rises continuously. The situation is not like that of a poor person getting deeper and deeper into debt to A the country gets indebted to those who have savings, namely the richer classes. The ratio of net borrowings to the national incomes of the country rises continuously. The situation is not unlike that of a poor person getting deeper and deeper into debt to the Sahukar the country gets indebted to those who have the savings, namely, the richer classes. A country can have two kinds of debt external and internal. The former refers to the amount of loans to be repaid to lenders abroad while the latter is the money owed to lending sources within the country. After depending for years on aid in the forms of grants and soft, i.e. low-interest and relatively unconditional loans, in the eighties India emerged as a major borrower of funds from commercial sources in international markets. The country has been forced to borrow by giving high interest and lot of other incentives to attract short term deposits in Indian banks from nonresident Indians. Official figures put the debt in 1990-91 at nearly Rs.99,500 crores. However, taking into account the Rs 20,000/- crore in NRI deposits, the Rs. 30,000 crores in the form of other short term borrowings and various other kinds of external liability of the government, total external debt exceeds a whopping Rs.1,75,000 crore or 70 billion dollars. Devaluation of the currency causes the external debt to rise without any additional money having been borrowed. The internal debt is today of the order of Rs.3,50,000 crores. This is largely the result of massive borrowings by the government in eighties. The interest burden on this has risen to become the single largest item in the current account budget of the government. In effect more and more money is being borrowed from the well off to be repaid to them. The rich obviously prefer the growth of borrowing to the collection of direct taxes.

Refers to the amount paid by a debtor nation annually to its external creditors on account of both the principal and accumulated interests.

This refers to a reduction in the value of national currency against foreign currencies. In India, recently the value of the Rupee was brought down by 22% vis--vis currencies like the US dollars, British Bound, German Mark and Japanese Yen. This step was part of the standard IMF prescription for debt ridden economies and is done in the name of making the domestic products cheaper for buyers abroad so as to promote exports and hence the inflow of foreign exchange with which to repay outstanding debts. But export and imports, being dependent on lot of other domestic and international factors, often do not respond favourably, and in the bargain the

devaluing country only ends up selling cheaper and purchasing dearer. In effect, the labour of the country stands devalued in relation to that of other countries.

Developed Market Economy Country


A derivative product is a contract, the value of which depends on (i.e., derived from) the price of some underlying asset (e.g. an interest level or stock market index). Financial derivatives are financial contracts whose value is based upon the value of other underlying financial assets such as stocks, bonds, mortgages or foreign exchange. They are contractual agreements for future exchange of assets whose present value are equal. However, the value of the derivatives will change over the term of the contract as market valuation change the value of each side of the contract. The key element in these derivatives is that one can buy and sell all the risk of an underlying asset without trading the asset itself. Trading in financial derivatives is also distanceless and borderless. Financial derivatives are either transacted OTC or traded at exchanges. There are specialist exchanges (e.g., London International Financial Futures Exchange) in which financial derivatives are traded. However, in recent years, the value of OTC instruments has increased sharply as compared to exchange-traded instruments. While exchange-traded instruments are strictly regulated, OTC contracts are informal agreements between two parties and therefore carry heavy risk. The main users of financial derivatives are banks, forex dealers, corporate treasurers, institutional investors and hedge funds. Recent experience shows that financial derivatives are largely used as tools to make profits from speculation and arbitrage rather than to reduce exposure to risk. From the nineties onwards, trade in derivatives has registered a rapid growth in terms of volume of trading and in the evolution of new and far more sophisticated instruments, giving rise to what is known as the derivatives of derivatives syndrome. Due to these developments, it becomes a difficult task to regulate financial derivatives both at the companys as well as state regulatory levels. Financial derivatives, therefore, are going to pose one of the greatest challenges for regulatory bodies in the 21st century. It is high time that regulatory bodies pay adequate attention so that an effective strategy to deal with the systemic risks posed by the financial derivatives can be chalked out. The three forms of financial derivatives are options, futures and swaps. Options are the rights (without obligation) to buy or sell a specific item such as stocks or currency for a preset price during a specified period of time. The option can be freely exercised or disregarded, with no obligation to transact. Where the right is to buy, the contract is termed a Call Option; where the right is to sell, it is termed a Put Option. The holder of the option is able to take advantage of a favourable movement in prices, losing only the premium payable for the option should prices move adversely. Trade in option contracts was long practiced between banks but developed after these began to be traded on the Philadelphia Stock Exchange in 1982; Currency options were introduced on the London International Financial Futures Exchange (LIFFE) and the London Stock Exchange in 1985. Options on three-month sterling futures were introduced on LIFFE in November 1987; trade in Japanese government bond futures began in July 1987. Chief centers for trade in options are the Chicago Board Options Exchange, the American Stock Exchange, and the European Options Exchange in Amsterdam and markets in Australia, France, Sweden and Switzerland.

Futures are contracts that commit both parties to a transaction in a financial instrument on a future date at a fixed price. Unlike an option, a futures contract involves a definite purchase or sale and not an option to buy or sell. Often futures are used to speculate in the financial markets and therefore considered risky. A forward contract differs from a futures contract in the sense that each forward contract is a once-only deal between the two parties, while futures contracts are in standard amounts traded on exchanges. Unlike forward contracts, futures are traded face to face at exchanges and are regulated by the authorities. Swaps are agreements in which two counter parties undertake to exchange payments within a specified time period. For example, a UK company may find it easy to raise a sterling loan when they really want to borrow Deutsche Marks; a German company may have exactly the opposite problem. A swap will enable them to exchange the currency they possess for the currency they need. Recent years have witnessed explosive growth in currency swaps and interest rate swaps. The first currency swap was between the World Bank and the IBM in 1981.

Interest Rate Controls are those measures that are applicable on both deposit and lending rates. As economic and financial activity is greatly influenced by interest rates, governments usually keep interest rates low in order to encourage investment. On the other hand, higher rates of interest tend to discourage investment and reduce the demand for money, giving a downward impetus to both employment and prices. Credit Controls are used by governments to ensure that credit is provided to key sectors of the economy (e.g., agriculture and export sectors in India). Credit controls can also be used to bar certain types of transactions such as real estate and stock market. In addition, banks and financial intermediaries are not permitted to decide freely to whom they wish to lend. Credit controls are exercised with the help of a variety of instruments including lending requirements and ceilings imposed on banks, compulsory loans at preferential interest rates and credit guarantees. Monetary Controls are those measures that regulate the size of the money supply in a country. These controls can be implemented with the help of various instruments like instructing banks to hold a certain percentage of their deposits in government bonds or non-interest bearing reserves at the central bank. In some countries (e.g., India and the UK), monetary control is a matter of government policy and the central bank acts in accordance with this. In other countries (e.g., Germany and the US), the central bank is fully independent of government policy. DOT: Stands for Dunkel Draft. Proposals made by Arthur Dunkel, Director General of GATT, on various issues in the Uruguay round of multi trade negotiations. It contains the compromise positions amongst the advanced western nations. It has been presented with a take it or leave it proviso. EXPECTATION OF LIFE AT BIRTH : Expected life-span of a newly born.


CURRENCY BOARD A currency board is a monetary authority, which fixes a currency to an anchor currency (usually dollar or German mark) at a specific rate, thereby eliminating the uncertainties of a floating currency. Under this system, every unit of local currency in circulation is supposed to be backed by the foreign currency. However, under this arrangement, a country loses all its autonomy and flexibility to pursue monetary policies, as it cannot set interest rates or inject liquidity into the economy. The exchange rate is immutable and everything else becomes variable.
DIRTY FLOAT occurs when governments attempt to influence exchange rates to prevent extreme

changes in exchange rates, which are otherwise flexible and allowed to float. Also called a managed float.
EXCHANGE RATE MECHANISM (ERM) The procedure used for fixing exchange rates within

the European Monetary System from 1979 to 1993. The ERM involved establishing a grid which provided upper and lower support points for each members currency versus every other members currency. When an exchange rate between two currencies approached a support point, the central banks of both countries were required to take action.
FIXED EXCHANGE RATES A system of exchange rate determination in which Governments try

to maintain exchange rates at selected official levels.

FLEXIBLE EXCHANGE RATES A system of exchange rates in which the rates are determined

by the forces of supply and demand without any intervention by governments or official bodies.
PEGGED EXCHANGE RATES Another term for fixed exchange rates, which are rates set by

Governments at selected, official levels.

STERILIZATION POLICY A policy of not allowing changes in foreign exchange reserves to

affect a countrys money supply, frustrating the ;automatic price adjustment mechanism. Also called neutralization policy.
WIDER BAND A compromise between fixed and flexible exchange rates which allows exchange

rates to fluctuate by a relatively large amount on either side of an official value. EEC : European Economic Community. They have common set of custom rules. They along with other European Nations are integrating their economies more closely from 1992. EXCHANGE RATE : It is the relationship between one countrys currency and that of another. For e.g. How many Rupees can a Dollar fetch. Earlier, this is used to be determined in relation to the amount of gold that each of the currencies could buy. However, the importance of gold has declined and now it is the trade of a country that determines the value of its currency. The exchange rate does not determine the inherent strength of a currency in relation to that of other currencies. There are also many items that not traded. If the country is importing more than it is exporting, it has a BOP deficit and it has to lower its currencys value in relation to that of its partners. The exchange rates do not determine the inherent strength of a currency in relation to that of other currencies. For instance, more than a 100 Yen can be obtained for a dollar even though a Japanese economy is supposed to be much stronger than the US economy.

There is another sense in which exchange rate may not represent the true strength of a currency. There are many items which are not traded, like labour. In India labour is very cheap as compared to the US economy for rupees 100 one can get a lot of labour services in India but in the US economy for the $ equivalent say $ 4 at the exchange rate one would get almost nothing as labour services. For example doctor services, legal services, domestic, education, clerical help in restaurants, handicrafts, transportations etc., That is why when foreigner comes to India they finds things cheap. EEC : European Economy Community. They have a common set of customs rules. They along with other European nations are integrating their economies more closely from 1992. EXPORT-LED GROWTH This is a doctrine which says that a nations economy can grow rapidly if only it can manage to raise its exports in a big way. The most commonly cited `success stories of this strategy are the four newly industralised `Asian Tigers Sough Korea, Taiwan, Singapore and Hong Kong whose rapid growth is attributed to their allowing exporters, both domestic and multinational a free hand along with liberal government incentives and support. India has tried its own version of this strategy by creating Export Processing Zones (EPZ) and Export Oriented Units (EOUs). These schemes have been miserable failures since the large internal market has proved to be too lucrative to business. Multinationals have shown no interest in exporting from India. Successful large exports from India would threaten their global profits.

Innovation in banking products was touted as a sound basis for the progress of banks by the Bank-bosses in the early 1980s. It is now clear that no much substance lies behind this. Since banks have become pale and slim, there is no use stepping on the innovative treadmill. The output of the innovative treadmill is pseudo new products-products that are made to measure to the same old line with minor differences in packaging such as deposits that pay monthly interest at discounted values. Those that caught on like the overdraft tethered to term deposits reduced the availability of free money for banks. Purchasing via credit cards is like issuing a cheque now and funding your account to meet the cheque after two months. The latest fad doing the rounds is factoring. The Reserve Bank of India has ruled that factoring should be undertaken only by separate subsidiaries formed by Banks. In other words Banks are stopped from doing factoring business directly; so put together a subsidiary and do the business. The 4 banks have hived off the territories/ areas so that there is no poaching. What is factoring? A manufacturing Company concentrates of producing quality products. 1. The partition arrangement is that the western Sector is for State Bank of India, the Southern to Canara Bank, the Northern to Punjab National Bank and the Eastern to Allahabad Bank. Factoring can cause a number of issues and problems for Banks, BFS and the customers alike;

1. The sale of the invoice may attract sales tax. The Indian legal scene is so bizarre and unset that it will take ages to get a clear verdict on the issue. Look at the scenario faced by leasing companies and flat buyers. 2. Where the invoices are sold with recourse the BFS are not providing any new services then the Bills Purchase facility provided by Banks now except a new name of the same service. The BFS are merely displacing Bank. 3. Where the invoices are sold without recourse, any of the following two will come about; a) In case of buyer is unable to pay, the BFS will adopt strong arm tactics or employ thugs to collect the money. This in turn, will bring about a reconsideration in the minds of the buyer about placing future orders on the company. Thus collecting a receivable fast through a BFS and increasing the cash flow is like killing the goose that laid the golden egg. b) If the buyer was a normal and regular payer there is no advantage as a whole; however, there is a disadvantage because the BFS who is a middleman is to be remunerated for his NIL value added services. 4. Banks have failed to make a mark in the collection of customer (purchaser) the manufacturers raises an invoice on him. The right to receive the amount of the invoices is assigned to the Bank's Factoring Subsidiary and sold to them either with or without recourse. this is the crux of "factoring". The purchase price of the invoice may be payable by EFS either in one shot (with a small discount by way of commission) or in two instalments-say 80% now and 20% later (with a small discount/commission). Since a Company may be having a number of buyers with different credit structured for each. The BFS buying the invoices is in fact taking over the entire portfolio of sales receivables of the manufacturing company. The sales book is looked after or "administered" by the BFS which is now called a factor. The BFS is therefore a glorified bill collector that will use strong arm tactics for recovery of the amount if need be. The bill purchase facility and advance against book debts that are in existence in Banks are now a form of twilight factoring in substance. The purpose of both is to raise cash immediately. Where the invoices are assigned irrevocably to the BFS, the BFS becomes the muscleman to collect the money. Thus it appears that the debut of factoring will bring about a surge in the bill culture which is being propagated with a missionary zeal by Reserve Bank of India. Their own backyards are stinking with shaky loans. They are clamoring for amendments to laws/legislation for more powers. If Banks had a fraction of the expertise for recovery as hire purchaser/finance companies have, they would not be smelling so much. 5. Since the entire sales ledger is administered by the BFS, client relationship between the manufacturer and the buyer is subject to vetting by the BFS. The BFS may also suggest deletion of names from the list of purchasers. This can maim the business perhaps.

6. The factors capacity to roll on with the different phases of the business cycles in an industry/area has to be kept in tact and certainly that would call for extra investment and duplication of work. 7. The BFS are constituted as per the recommendations of Vaghul/Kalyanasundaran Committee/s. These also chart a role for private sector factoring companies. With the concurrent functioning of these sorts of factoring companies, complications are sure to set in making things foggy. 8. More and more factoring business from companies would usher in an era of off balance sheet figures and this will make the companies financial affairs more and more concealed and difficult to evaluate. Lowly capitalised high risk-oriented business will become fashionable. 9. The sale ledger is a monthly lot where sales against advance payment received, supplied against letters of credit. Or though endowed with requisite expertise for recovery of loans, they are unable to effectively utilise the same due to management deficiency. Credit, guarantee etc., for featuring. Selling only those that are risk-prone to BFS would call for upkeep of negotiated agreements that are sure to run into difficulties sooner or later. 10. Cash rich big multinational companies can pay promptly whereas Cash starved small business would need time and adjustment. The individuality of specially cultivated and long standing relationship would disappear under the fiat of the BFS. The collection tactics would work only with small companies because they would shun adverse record payment due to paucity of funds. Big companies sitting on a pile of cash can delay payment because nobody would attribute the non-payment to want of cash. Here the factors would be helpless spectators. 11. Bill finance is an integral part of working capital finance which for big clients is worked out elaborately under Reserve Bank norms for MPBF, when a BFS operates the bill finance limits, the inter-changeability of the limits, would be under stress and credit discipline will suffer erosion. On the export sector unless section 18 of the Foreign Exchange Regulation Act 1973 is amended, the factor will become accountable for the repatriation of the export value declared. Besides a lot of subsidies have been thrown in by the Government/ RBI to the exporting community. So in exports, the BFS cannot survive without help. On the domestic side, as a result of the aforesaid reasons the shepherding of yet another 4 financial institutions for extending financial services would only increase the complexity of the financial system. The system is already groaning under the weight of numerous financial institutions and subsidiaries Merchant banking subsidiaries, Mutual funds. Housing subsidiaries, participation in leasing companies, and now entry into BFS. You will agree that Banks have to practice birth control atleast now. FOREST AREA WITH GOOD TREE COVER : All forest lands with 40% tree cover or more. FOREST COVER : All forest lands with 10% tree cover or more. FREIGHT TONNE KILOMETRES : Total goods tonnage multiplied by the number of kilometres over which they were moved.

FINANCIAL DERIVATIVES A major recent development in the globalisation of finance is the emergence of financial derivatives such as currencies and interest, stock and bond indexes, bonds and bills. A derivative product is a contract, the value of which depends on [i.e., is derived from] the price of some underlying asset [e.g., an interest level or stock market index]. The three types of financial derivatives are forwards, futures and swaps. The key element in these derivatives is that one can buy and sell all the risk of an underlying asset without trading the asset itself. On the other hand, options are the rights [without obligation] [ to buy or sell a specific item such as stocks or currency for a pre-set price during a specified period of time. Futures and options are different from stocks, bonds and mutual funds because they are zero sum markets. In other words, for every dollar somebody makes, somebody else loses a dollar. Trading of derivatives in raw materials and goods dates back to the nineteenth century, while financial derivatives started in 1972 with currency trading. Stock-index futures trading began in 1982, and trading in interest-rate futures started in 1988. With the globalisation of financial derivatives, the value of outstanding derivatives contracts is estimated to be over $500 trillion. In the last two decades, the fastest growing global financial markets have been futures and swaps. Apart from currency markets, these are now the largest markets in the world. Like banking and securities, trading in financial derivatives is also distanceless and borderless. The trading is mostly carried out by global securities houses and a number of financial derivatives instruments are traded simultaneously on several exchanges in a round-the-world, round-the-clock market. Speculators play an important role in the trading of financial derivatives. They keep buying and selling contracts depending on their perceptions of the movements of markets. Rumors play an important role in the decision making. Thus, derivatives markets tend to be very volatile and risk prone. With the globalisation of these markets, any major loss can have immediate world wide repercussions.

It is that part of the economy concerned with the transaction of financial bodies. Financial bodies provide money, transmission services and loan facilities, and influence the working in the real economy by acting as intermediaries in channeling savings and other funds into investment uses. The Financial System is the network of Financial bodies (banks, commercial banks, building societies, etc.,) land markets (money market, stock exchange) dealing in a variety of financial instruments (bank deposits, treasury Bills, stocks and shares, etc.) that are engaged in money transmission and the lending and borrowing of funds. Commercial Banks are banks that accept deposits of money from customers and provides them with a payments transmission service (cheques) together with savings and loan facilities. A commercial bank has the dual purpose of being able to meet currency withdrawals on demand and of putting its funds to profitable use. Merchant Banks are specialist institutions, which advises client companies on new shares and underwrites such issues (i.e. guarantees to buy up any shares which are not sold on the open market). They also advise companies in mergers and acquisitions. In America these banks have grown into monoliths dominating the financial world. Companies like Morgan Stanley, Merrill

Lynch, Goldman Sachs and Lehman Bros, are giants whose octopus-like claws stretch out in all directions of the financial markets. Venture Capital is any share capital or loans subscribed to a firm by financial specialists (for example, the venture-capital arms of the commercial banks and insurance companies), thus enabling the firm to undertake investments in processes and products which because of their novelty are rated as especially high-risk projects, and as such would not attract conventional finance. A Treasury Bill is a financial security issued through the discount market by the government as a means of borrowing money for short term periods of times [3 months]. Most Treasury Bills are purchased by commercial banks and held as part of their reserve-asset ratio.


FCNR are most welcome. The interest rates for these term deposits are fixed and revised periodically with the rates for currencies prevailing abroad. The Banks may incur losses if they do not manage ALM properly. When FCNR deposit if received so for US Dollar 1,000/-, it is purchased at prevailing notional rate say Rs.40/- per dollar. So Rs.40,000/- features as a deposit on which it maintains appropriate CRR and SLR etc. The deposit is renewed at maturity for a further term and let us say the notional rate then being Rs.50/- per Dollar. This time the Banks deposit is Rs.50,000/- and it has to keep CRR and SLR on this increased amount. In a reality not a rupee of deposit walks into the Bank. The Bank creates a fictional additional deposits of Rs.10,000/- in its books without any cash inflow. Such increase in deposit will create a decrease in lendable resources of the Bank by sterilising or eating up the existing funds towards additional reserves. Is it not necessary that Banks should wake up to this muddle and structure procedures that will get over this avoidable erosion of earnings.


Similar to customs union, a customs union formed under treaty of Rome. FOREIGN EXCHANGE-: These are foreign currencies that are exchanged for a countrys domestic currency in the financing of international trade and foreign investment.

It stands for Foreign Direct Investment. It means the investment by foreign nationals and companies in India. This is restricted at the moment and was allowed for reasons of national priorities. Under the new dispensation, this would be allowed in almost any area even if it is not

considered to be a priority. No national planning would then be possible since the priority of a foreign investor would not be the same as that of the country.

a comparison between FDI( foreign direct investment) AND PI(portfolio investment ):

There are substantial difference between Foreign Direct Investment and Portfolio Investments. In the case of FDI, investors exercise control over the management, while in the case of PI, investors only provide finance capital, and are not involved in management control. The investors are also different. In the case of PI, the investors base consists of institutional investors. For instance, Merrill Lynch, Morgan Stanley and Fidelity investments are involved in PI. While investors involved in FDI and TNCs, such as Shell, Enron, Coke, Nestle, etc. Usually, PI tend to be short-term, ranging from a few weeks to a couple of years. These investments can move out of the country as quickly as they came in because it is easy for portfolio investors to liquidate their investment by selling the stocks. Therefore, these financial flows are also known as hot money flows. On the other hand, FDI tends to have a long term investment period as it involves capital equipment, factories, etc., which TNCs cannot easily liquidate, otherwise, the sunk cost will be too high. Political stability is the single most important factor facilitating both FDI and PI flows. However, investors of PI are only motivated by the financial returns on their investments through capital gains and dividends. Therefore, they attach more importance to high disclosures standards and easy repatriation of capital. On the other hand, investors of FDI are more interested in the size and growth of market, labour and production costs and infrastructure. Such investors do not attach much importance to disclosure standards and case of capital repatriation. The PI flows are more volatile than FDI flows. In a recent study by UNCTAD, it was found that the total PI flows to emerging markets normally fluctuate more widely than total FDI flows. According to the study, PI flows were four times higher than FDI flows. This study found that in the five emerging markets of Malaysia, South Africa, Thailand, Turkey and Venezuela, the relative variance of PI flows is many times higher InstrumentsFDI flows. Foreign Exchange than that of


FX Transactions Derivatives Foreign exchange is traded over-the-counter (OTC) twenty-four hours a day. OTC transactions are those that take place between two counter parties located anywhere in the world via a telephone or electronically rather than traded on an exchange, the main methods of forex trading are via direct inter-bank using systems (e.g., Reuters Dealing 2000-1), voice brokers and electronic broking systems (e.g., Reuters Dealing 2000-2). Some forex instruments are also traded on exchanges such as currency futures at the Chicago Mercantile Exchange and currency options at the Philadelphia Stock Exchange. Currencies vs US$ Forward Outright Cross rates broad categories Transactions FX Swaps There are three of instruments and transactions in forex trading spot

transactions, forward transactions and derivatives (see diagram below). Spot transaction is a deal in which two counter parties exchange two different currencies at an agreed exchange rate for settlement
Synthetic Agreements for Foreign Exchange (SAFEs) Currency Futures Currency Swaps Currency Options

Spot FX

Forward FX

in two business days time. In 1998, spot transactions amounted to 40 percent of the daily turnover of foreign exchange, down from 44 per cent in 1995. Forward transactions involve purchase or sale of foreign exchange established now but with payment and delivery at a specified future date. These transactions are derived from spot forex and money market interest rates. The two types of forward forex transactions used widely in the few years, forward transactions have grown in importance relative to spot transactions. Of the $ 1.49 trillion daily turnover in foreign exchange in 1998, nearly $900 billion was traded in forward transactions, approximately 60 percent of the market. In 1995, its market share was 56 per cent. Derivative instruments, which are concerned with forward transactions of forex, include currency futures, currency swaps, currency options and Synthetic Agreements for Foreign Exchange. Forex markets are driven by a number of factors including relative interest rates, balance of payments, money supply, political factors and market sentiments. Rumors have a powerful impact on the forex market. The way the forex markets react to rumors could be summarized by the phrase: Buy the rumor, sell the fact! Speculation makes up the largest portion of trading in the forex market. The major participants in the forex market are banks as nearly two-thirds of daily foreign exchange transactions take place through interbank trading. Only a small portion of foreign exchange transactions directly involve non-financial customers who import and export goods and services. The rest of the transactions involve forex traders, forex dealers and securities firms. Although participants in the foreign exchange markets are spread all over the world, London is the largest foreign exchange trading centre, followed by New York, Tokyo and Singapore. The most actively traded currencies in the forex market are US Dollar, Deutsche Mark and Japanese Yen. These three currencies together constitute 69 per cent of the global forex trade. Much of the forex trading is carried out by a handful of dealers consisting of banks and institutional investors. According to Euro money, the top 10 dealers are Citibank, Deutsche Bank, Chase Manhattan,

Goldman Sachs, HSBC Midlands, JP Morgan, SBC War burg Dillon Read, Merrill Lynch, Natwest and Industrial Bank of Japan. Notes:

A $ 1000,000,000,000 BANK ON THE CARDS?

A trillion-dollar bank! In the past, it was almost impossible to imagine such a gigantic bank. Given the pace at which mega mergers are taking place in the banking industry these days, the world will soon witness not one but several trillion dollar banks. The French bank, Banque National de Paris (BNP) made a bid in early 1999 to buy two other French banks, namely, Society General and Paribas. Interestingly, both Society General and Paribas had just entered into a friendly merger when the BNP launched its bid. If the bid by BNP works out, it would create the worlds biggest bank, with assets over $ trillion . Some other recent mega mergers include Swiss Bank with Union Bank of Switzerland; Citicorp with Travelers Group; Nations Bank with Bank of America; and Deutsche Bank with Bankers Trust. Except BNP, other mergers could not produce a trillion-dollar bank though some are inching toward it. It appears that merger mania never stops, as it becomes a self-perpetuating cycle. One merger deal leads to rise in share price, which in turn, further provides the fuel for the next merger deal and so on, ad infinitum. In the race to the trillion-dollar mark, Japanese banks are also not lagging behind. Under a major financial restructuring plan announced in mid 1999, several mega mergers between Japanese banks are on the anvil, if these mega merger deals proceed smoothly, Japanese banks may again become the biggest banks in the world, as was the case a decade ago when they reigned. The proposed tie-up of three big Japanese banks Fuji Bank, Dai-Ichi Kangyo Bank and Industrial Bank of Japan would create the largest bank in the world in terms of assets worth $ 1.27 trillion. Similarly, the deal between Sumitomo and Sakura banks merger will create an entity worth $ 934 billion in assets. While mega mergers provide fodder for front-page stories in the newspapers, a simple fact is often ignored that mergers pose new challenges to regulatory authorities in terms of moral hazard. The complexity of big banks makes the task of managing risk more difficult. This became evident in 1998 when UBS suffered huge losses on account of bad deals in financial derivatives and lending to a hedge funds, LTCM. Recently, the BIS has come out with a critical study which found that mergers have failed to boost profits. Further, job cuts are imminent fallout of every merger deal. Deutsche Banks merger, for instance, with Bankers Trust was accompanied by a staggering downsizing of 5500 jobs. FINANCIAL INTERMEDIARY is an agent who deals with the general public on the one side and the financial markets on the other. The important function of financial intermediary is to bring together economic agents who wish to save with those who wish to invest. COMMERCIAL BANK is a commercial institution that accepts deposits and makes credit to private individuals, companies and other organisations. INVESTMENT BANK helps firms raise money in the financial markets. They underwrite issues by agreeing to buy unsold securities. They also advise their clients on mergers and acquisition.

UNIVERSAL BANKING involves not only services related to loans and savings but also involved in making investments in companies. Well developed in Germany, the Netherlands and Switzerland, universal banking system allows banks to act as investment banks and to provide a very wide range of other financial services to clients.
UK BUILDING SOCIETIES are involved in both lending and borrowing funds in the money

market since 1982. In their financial transactions, the building societies resemble high street Banks. The first building society to become a bank in the UK was the Abbey National.

Money is for making more Money in Capitalism. It has to, for otherwise, it steadily loses its value. Idle money buys lesser and lesser goods as it loses its value due to inflation. Thus, capital is for amassing more capital in capitalism. Traditionally, capital was invested in productive resources, human resources etc., to generate surplus value / profits, to accumulate more capital. When accumulated capital is lent for such purposes it becomes Finance Capital. As Capitalism developed increasing inequalities all around, this uneven development affected demand for various products, as the purchasing power did not keep pace with the ability to produce. Recurrent overproduction rendered Finance Capital idle. FLYING FOREX : Foreign exchange illegally siphoned away every year from the country to safe havens abroad. The four major routes through which this flight of capital takes place are a) cash transfers through hawala where foreign exchange is illegally bought and sold. b) Trade mis-invoicing which means both an under statement of the export earnings and over statement of import bill. c) Kick-backs or commissions paid into secret Bank accounts of agent for foreign companies. d) Transfer of funds through banks (like BCCI) from one country to another. Note:

According to study made by Department of Revenue intelligence on

The basis of figure for the period 1984 88 period, every year the country loses an estimated: $2,150 million of forex through hawala remittance. $1,200 million through under invoicing exports. $700 million through over invoicing imports. $400 million though payment by foreign tourist to unauthorised dealers. $50 millions through onward smuggling activities. It seems clearly catching flying forex is not on the Governments immediate agenda. They want a ready and adequate fund of foreign currency, which we may call floating forex to ensure uninterrupted import spree. FOREX RESERVES: how to determine ?

The CAC had suggested four parameters to judge the adequacy of foreign exchange reserves in India 1. Reserves should not be less than six months of imports. 2. Reserves should not be less than three months imports plus 50 % of annual debt service payments plus one months import and export 3. The net foreign exchange assets (NFA) to currency ratio should be not less than 70% and 4. The short term debt and port folio stock should not exceed 60% of reserves. GDP (Gross Domestic Product): a) The GDP is the total money value of all final goods and services produced in an economy over a one-year period. GDP can be measured by calculating the sum of the value added (i.e. by new value created through production and services) by each industry in producing the years output. There are also other methods of calculating the figure. The growth rate in the GDP is an important measure for estimating the health of an economy. So, for example, if the GDP increases from one year to the next by 5%, the growth rate for that year is 5%. That means that the value added in the given year through economic activity (industrial, agricultural and through service) is 5% more than what it was in the previous year. If there is a contraction of the economy, the GDP is minus. That means the value added during the current year is less than that in the previous year. The measure of total amount of goods and services produced within GNP the economy every year is obtained by computing the value NNP of the final output of goods and services at market prices. The word domestic is used to distinguish it from Gross National product (GNP) which apart from domestic production also includes the inflows and outflows of funds from the country in various other ways. If GNP is less than GDP means country is net loser in international transactions. Net National Product (NNP) is also called National Income. It is obtained by deducting from GNP the wear and tear of plant and equipment. These figures are (of course in white economy) are obtained by adding the income totals in various sectors of economy, like agriculture, industry etc. Due to poor data availability from unorganised sector, and from some off the fast growing sectors belonging to tertiary sector, the income figures may not very reliable. GROSS DOMESTIC PRODUCT (GDP) A measure of the total amount of goods and services produced within the economy every year. This is obtained by computing the value of the final output of goods and services at market prices. The word domestic is used to distinguish it from Gross National Product (GNP) which apart from domestic production also includes the inflows and outflows of funds from the country in various other ways. In 1989-90 Indias GDP at current market prices stood at Rs.4,42,769 crores, while the corresponding value of GNP was 3,92,524 crores (Rs.1,95,237 crores at 1980-91 prices). So our GNP is less than GDP showing that we are a net loser in international transactions. Another similar term is the Net National product or what is also called the National Income. These are obtained by deducting from the GNP the wear and tear of plant and equipment. In 1989-90, Indias national income at current prices was Rs.3,46,994 crores (Rs.1,78,798 crores at 1980-81 prices). It needs to be mentioned that the above figures are for the white economy only. Even these figures are obtained by adding the income totals in the various sectors of the economy, like agriculture, industry, etc. Due to poor data availability from the unorganised sectors of the

economy and from some of the fast growing sectors belonging to the tertiary sector of the economy, the income figures are not very reliable. GROSS CAPITAL FORMATION : Mainly investments in (I) construction, (ii) machinery and equipments and (iii) change in stock. GROSS DOMESTIC FIXED CAPITAL FORMATION is the total spending on Fixed Investment (plant, equipment, etc) in an economy over a one year period. This chiefly comprises of government investments, and private investments (both local and foreign). However, because of Capital Consumption (fixed capital lost due to wear and tear) the net domestic-fixed-capital formation may be considered less than the gross investment GROSS DOMESTIC PRODUCTS OR GDP AT FACTOR COST : Gross income generated within a country i.e. it excludes net incomes received from abroad. GDP AT MARKET PRICE : GDP at factor cost plus indirect taxes minus subsidies. GROSS DOMESTIC SAVINGS : Excess of current income over current expenditure. GROSS NATIONAL PRODUCT OR GNP AT FACTOR COST : Gross income generated from within the country as also net incomes received from abroad. It is expressed either `at current prices, i.e. at prices prevailing during the period to which the figures refer; or `at constant prices. i.e. at prices prevailing during a fixed base period in the past, irrespective of the period to which the figures refer. Thus, figures at constant prices discount the effect of inflation after the base period and measure the changes in real terms. Figures `at current prices are naturally influenced by inflation but are more useful for say, international for the same period. GNP AT MARKET PRICE : GNP at factor cost plus indirect taxes minus subsidies. GROSS OUTPUT : Ex-factory money value of the products manufactured including subsidies, if any, but excluding taxes and duties on sales.


Although their numbers are small, global macro funds are the largest hedge funds in terms of assets under management. The most famous of the global macro hedge fund managers is George Soros. His Quantum Fund, established in 1969 with just $4 million, now has an estimated value of $18 billion. Operating on a global scale, macro fund managers view the entire world as their playing field. They can invest anywhere and in any financial instrument equities, bonds, currencies or commodities. They monitor changes in global economies and hope to realize profits from significant shifts in global interest rates, important changes in countries economic policies, etc. A shift in government economic policy that affects interest rates, in turn, affects all financial instruments including currency, stock and bond markets. Macro fund managers speculate on such trends and profit by investing in financial instruments whose prices are most directly influenced by these trends. They extensively use leverage and derivatives to accentuate the impact of market moves. No doubt the returns can be high but so can the losses because leveraged directional

investments (which are not hedged) tend to make the largest impact on performance. That is why macro funds are considered a very high risk and volatile investment strategy. The most famous of Soross activities was in September 1992 when he took on the Bank of England. He bet $10 billion worth of sterling ( much of it was borrowed ) on the speculation that sterling was overvalued and would be devalued. In a futile attempt to save the sterling, the Bank of England raised the interest rates several times and spent an estimated 15 billion sterling to defend the currency. Still, they could not prevent the dropping of the Pound and subsequent pull out from the European Monetary Union. It is estimated that Soros and his investors made a net $2 billion on this bet. But these macro managers many a times also cause abrupt fall in profits. For instance, during the first quarter of 1994, hedge fund superstar Michael Steinhardt (whose funds produced an average annual return of 24 per cent over several decades) placed huge unhinged bets thinking that the European interest rates would decline, causing bonds to rise. Instead, his funds lost 29 per cent when the Federal Reserve raised interest rates in the US, causing European interest rates to rise. Global International Funds: similar to the macro funds, these fund managers also invest in international equity markets of the US, Europe and Asia. They follow what is known as bottom up approach they stock pick individual companies, looking at what they have to offer in their sector or what opportunities there are for buying or shorting. These funds are also extremely volatile. Emerging Markets Funds: These funds invest in equity or debt of emerging markets that tend to have higher inflation and volatile growth. The expected volatility of such funds is very high. Short Selling Funds: This strategy is based on finding overvalued companies and selling the shares of those companies. The investor does not own these shares. Anticipating that the share price of the company will fall, the investor borrows the shares from his broker. Ideally, when the share price does fall, the investor buys shares at the new, lower price and thus can replace, to the broker, the shares sold earlier, thus netting a gain. This strategy is also employed where the investor believes that the share price will fall due to problems in the company, etc. These funds are extremely volatile and risky. Market Neutral Funds: These funds tend to exploit perceived anomalies in the prices of different bonds by buying under-priced ones and selling short the overpriced ones. LTCM was a market neutral fund. These funds are also highly volatile. Aggressive Growth Funds: Invests in equities expected to experience acceleration in growth of earnings per share. These funds tend to be highly volatile. Event Driven Funds: Event driven managers take significant positions in a limited number of companies with special situations, that is, where companies situations are unusual offering quick profit opportunities (e.g., depressed stock, an event offering significant potential market interest, mergers and acquisitions, etc.). This is one of the few investment sectors where economic or market conditions are of marginal concern. Funds of Funds: This is a fund that mixes and matches the hedge funds and other pooled investments among many different funds or investment vehicles. These funds are the largest in number.

Acronym for the General Agreement on Tariffs and Trade It is an international forum meant ostensibly for promotion of world trade through a reduction of trade barriers and abolition of preferential trade agreements. The two major trade barriers are tariffs, like, customs duties which make imports uneconomical; and quotas which place physical restrictions on the volume of specific imports from specific countries. Developing countries need to protect their industries from competition offered by the industries of the more advanced countries. Further, they also need access to the markets of the advanced countries. In other words, to promote growth in the developing countries, an asymmetry has been accepted in the past. But like most other international bodies, GATT too has been virtually hijacked by the US, the biggest trading country in the world. The US is arm twisting other nations, especially those from the Third World, into opening up their domestic markets to American capital and commodities. The developmental needs of the Third World countries are now sought to be curbed. GATS General Agreement on Trade in Services. This is the new adjunct to GATT which till now only concerns itself with the trade in goods. In the Uruguay Round of negotiations the scope of GATT was sought to be widened to include services also. However, initially the negotiations were to be on parallel tracks but under pressure from the advanced nations, India and Brazil, have progressively backed down from 1987 onward. Since the battle for the Third World has been a down hill one, GATT is the end product of this defeat of the Third World nations. Under DDT there is possibility that GATS may have a separate legal status from GATT. However, this may not have much relevance for the Third World countries since they may not be allowed to stay out of this without losing their status in GATT.

Government securities like central loans and state loans. Includes government guaranteed bonds like that of IDBI. Gilts is the short form for gift-edged securities so called because they carry no risk at all. G77 This stands for the Group of 77- this includes the Third World countries. In many cases this group of countries was taking a common position on world matters and presenting its version of the picture. India was recognised as one of its leaders. Increasingly this group has lost coherence as country after country faced economic problems and fell in the lap of the advanced nations and the IMF and the World Bank. Cleverly the advanced nations created many groups under their own leadership and gave small concessions to agricultural exporters. This fragmented the Third World. At the Uruguay round of negotiations also started in Punta del Este., in September 1986, G77 accepted India as its leader but soon India was found to be backtracking and then the opposition to the position of the advanced nations simply started evaporating. As a consequence, today India

is unable to mobilise the G77 to oppose the DDT which would curtail the sovereignty of every Third World country. G.77 - this stands for Group of 77 this includes third world countries. At the Uruguay round of negotiations in 1986, G 77 accepted, India as its leader. But soon India backtracked and along with its opposition to position of the advanced countries simply started evaporating. As a consequence, today India is unable to mobilise the G 77 to oppose DDT, which is likely to curtail the sovereignty of every third world country.


Positive for
Short-term investments Casino economy creditors Institutional investors, speculators, currency traders and fund managers Professional and managerial people People with financial assets Global financial supermarket Offshore financial centers and funds Self-regulated markets Efficient markets Risk takers Promoting neo-liberal economic policies Promoting authoritarian regimes

Negative for
Long-term investments Real economy Debtors Small investors Workers and non-skilled labor People without financial assets National sovereignty National tax revenues Regulatory bodies Welfare state Stable financial system Promoting state intervention and public interest Promoting genuine democratization Environment

A currency which is easily tradable for goods and services and other currencies in any part of the world. For instance, the US dollar has universal acceptability as a hard currency. However, in recent years, the Japanese Yen is fast dislodging the dollar from its traditional position of global pre-eminence. The IMF, however, generally uses a combination or basket of currencies which is called a Special Drawing Right (SDR). The value of 1 SDR is approximately 1.35 US dollar. HOT MONEY Funds which flow into a country to take advantage of higher interest rates prevailing there. In India non-resident Indians have been depositing such hot money because of the government offering them special rates of interest and various concessions. The major danger with such

deposits is that often this money is borrowed from other banks abroad and is a front for Indian investors with illegal foreign exchange. These deposits can also be withdrawn at very short notice suddenly depleting the governments foreign exchange reserves. This can lead to a devaluation even if the countrys economy is otherwise doing well. India has had to face this problem in 1991.

The growing turbulence in the international financial markets in the 1990s has drawn attention to the existence and operations of hedge funds. There is no doubt that hedge funds have grown in popularity in recent years largely because of their outsized returns. But simultaneously hedge funds have been blamed for creating the ERM crisis in 1992, causing instability in the international bond market in 1994 and precipitating the South East Asian financial crisis in 1997. Due to lack of transparency in their operations very little information is available about them. The entire hedge fund industry is shrouded in mystery. In order to understand the intricacies of hedge funds, let us examine their basic characteristics. HEDGE FUND: There is no standard legal definition of a hedge fund. In fact, the term Hedge Fund is a misnomer because a large number of hedge funds do not hedge against risk at all. In simple terms, a hedge fund is a private investment partnership wherein investor assets are pooled for the purpose of investing in a variety of securities and derivatives. As they are private investment partnerships in the US, the securities and Exchange Commission (SEC) limits these entities to 99 investors, atleast 65 of whom must be accredited. Accredited investors are defined as investors having a net worth of at least $1 million. Hedge funds are open only to rich people who are also referred to as high-net-worth clients. By effectively using the existing loopholes in the regulatory system, many hedge fund managers structure the fund in such a way that they do not come under the purview of regulatory authorities. For instance, in the US, hedge funds are required to have less than 100 high-networth clients in order to make use of exemptions to regulations under the Securities Act of 1933, the securities Act of 1934, and the Investment Company Act of 1940. By and large, hedge funds are illiquid, requiring a commitment of money for a minimum period of one year with exit privileges thereafter on a quarterly basis. Unlike mutual funds, hedge funds are not regulated and are not publicly sold and purchased. Beyond a few disclosure and reporting requirements, hedge funds are largely unregulated investment instruments. By accepting investments only from institutional investors, companies and high-net-worth investors, hedge funds are exempted from various regulations. They are not required to publicly disclose data on the financial performance and transactions. There is no limit on the amount of leverage hedge funds can use or the size of any one investment.


Mutual funds have strict disclosure requirements and are relatively highly regulated. These regulations restrict the mutual funds from purchasing certain types of derivative instruments, leveraging, short selling, real estate and commodities. On the other hand, hedge funds are unregulated and therefore allow short selling and other strategies designed to accelerate performance.

Small investors can invest in mutual funds while hedge funds investors are only accredited investors, meaning folks with the substantial assets. The minimum initial investment in a mutual fund ranges between $1000 to $2000 while hedge funds require a minimum investment of $1 million. Mutual funds generally remunerate management based on a percentage of assets under management. Hedge funds always remunerate managers with performance relative incentive as well as a fixed fee. The future performance of mutual funds is dependent on the direction of the equity markets. While the future performance of hedge funds is not dependent of the direction of the equity markets. They make profits under all circumstances, whether market rise or fall. Mutual funds are measured on relative performance- that is, their performance is compared to a relevant index such as the standard and poors 500 index or to other mutual funds in their sector. While the performance of hedge funds is measured in terms of absolute returns.


Short sellers Emerging Markets Leveraged bonds International Macro Market Neutral Distressed Securities Quantitative Value Growth Opportunistic

Very High Risk Very High Risk High Risk High Risk High Risk High Risk Medium Risk Moderate Risk Moderate Risk Moderate Risk Moderate Risk


Hedge funds use a host of strategies. There are hedge funds for every category of equity, debt and money instruments. The strategies vary in terms of investment, returns, volatility and risk. There are funds that specialise in currencies, futures, arbitrage, securities of dispersed and bankrupt company and funds that trade securities using computer models. Many hedge funds bet on foreign currencies, mergers and acquisition and convertible securities. Others use short selling or bets, assuming that prices will fall to offset their securities holdings. They frequently use leverage in a effort to boost returns. The basic problem with these strategies is the enhancement of risk factor because they are extremely volatile and unpredictable Strategies such as short selling, program trading and

arbitrage are highly speculative in nature and therefore pose very high risks. This problem is compounded by the fact that most hedge funds managers do not hedge their risks. As hedge funds move billions of dollars in and out of the markets quickly and potentially gain whether markets rise or fall, they have a significant impact on the daily trading developments in the global stock, bonds and futures markets.


Although there is no clear set of investment sectors in which hedge funds invest, following are some of the important sectors in which a majority of them invest. They are: a) Global Macro Funds b) Global International Funds c) Emerging Market Funds d) Short Selling Funds e) Market Neutral Funds f) Aggressive Growth funds g) Event Driven Funds h) Funds of Funds the details of which has been explained under relevant heading.


The collapse of the Russian ruble during August 1998 proved fatal to several global hedge funds. Although many hedge funds have failed in the past, the failures in the aftermath of the Russian crisis were across the board from global macro funds to event driven funds. The fund managers made a mistake by underestimating Russias economic problems. Facing severe financial problems, Russia not only devalued the ruble but also defaulted on its debt. The hedge funds that had considerable exposure in the Russian financial markets suffered heavy losses. Hedge funds which did not have any exposure in Russia also suffered because the Russian turmoil sparked the flight to safety syndrome among the investors. The Quantum Fund, owned by George Soros, reportedly lost almost $2 billion. Five prominent hedge funds went bankrupt including market leaders IIIs High Risk Opportunity Fund and the McGinnis funds run by San Antonio Capital Management. The average losses in 1998 for all hedge funds are estimated to be 50 per cent of their equity. The failure of LTCM was spectacular and brought the financial crisis of Russia to the center of Wall Street.

History of Changes in the Exchange-Rate Mechamism

In these fifty years of history we find that the basis of fixing the international rate of the rupee is closely linked to the character of imperialist dominattion of our country. It can be divided into roughly three distinct phases. The first was from 1945 to 1975 where the rupee was set against the British pound. This was a period of carry-over of two centuries of British rule and the growing influence of other powers first the U.S. and then the Soviets as well. The second was from 1975 to 1991 where the rupee was pegged against a basket of currencies (whose composition was never made public). This was a period, when the gold standard had been scrapped in 1971 (where money had been pledged against gold, 35 for one ounce of gold); when the pound had declined irreversibly; and when India became more tied to Soviet Union with the rupee-ruble bilateral arrangements separately effecting India's trade relations. And, third, the post-1991

period, when only one super power existed n the world; and though declining in relation to the yen and mark, the dollar still constituted the bulk of international trade and finance. Initially, after the Second World War, the rupee was linked to British Pound under a fixed rate system. The RBI maintained the parity of the rupee, and bought and sold pound sterling at fixed rates. After the collapse of the Breton Woods system (of gold parity) in 1971, the pound continued to be the intervention currency, and the rupee's value against other currencies was determined by the pounds rates against them, in the international markets. In 1975, in a significant change, the rupee was linked to a basket of currencies. The RBI continued to use the sterling (pound) as the intervention currency and fix the rates in such a way that the value of the basket of currencies remained within a pre-set band. The basket formula was discontinued in June 1991. From July that year (when the rupee was devalued), the dollar replaced the pound as the international currency for India. In March 1992, a dual exchange rate was introduced, with some transactions being undertaken at RBI-determined rates and others at market rates. A year later, in 1993, the dual rate was abolished, and a single market-determined rate for the rupee was introduced. By its very definition, a market-determined rate precludes the maintenance foreign exchange rate parity. This also suggests that the RBI can neither appreciate nor depreciate the currency of its own free will but have to act in accordance with the market. Intervention is, of course possible, by either buying or selling dollars in the market. In classifying today's various exchange rate systems in the world, the IMF divides them into the following three, but no means watertight, categories: i) ii) Pegged to single currency (say the U.S.dollar or French franc) Flexible against a single currency or group of currencies. iii) More flexible (than the previous category) made up of currencies that are under "managed float or "float" independently.

Today the bulk of the major exchange rate systems come under the "managed float" category. This inevitably resulted from the exponential growth in world trade and the vast role assumed by currency traders and others who indulge in "non-trade foreign exchange transactions. The Indian exchange rate management also comes under that category. In other words, Indias forex (foreign exchange) rates are market-determined, with the RBI retaining the right to intervene. If we look at the history of devaluation of the rupee we find that the rupee which was about Rs.2.50 to the dollar in 1947 dropped to Rs.7.90 to the dollar by 1980-81. By June 1991 it had dropped to Rs.21 to the dollar. The 22% devaluation of the rupee in July 1991 took the rupee to Rs.26 to the dollar. By 1993, when the rupee was shifted to a market-related exchange rate, it was depreciated further to Rs.31.40 to the dollar. In mid-1995 it got depreciated once again and reached Rs.34.40 to the dollar. In August 1997, the rupee has began to slide once again reaching the figure of Rs.36.50 to the dollar by the first week of September, and expected to reach Rs.38 by March 1998. And if we were to go by the RBI suggestion of a 14% devaluation, the rupee should slide to over Rs.41 to the dollar and even more as is prevalent today. Having seen this historical process, let us now turns to see how this system of "management floats" exchange rate mechanism, actually operates in India.

Functioning of Exchange-rates

It is really quite simple; the currency, the rupee in India, is turned into a commodity, and just like any other commodity its rate is governed by the laws of supply and demand. So, if the quantum of dollars in the Indian market is high, and the demand is therefore lower than the supply, the value of the rupee appreciates and the rupee is said to be strong. On the other hand if the dollar stock is low and there is a scramble for the limited dollars, there is a run on the rupee, as more rupees will have to be paid for the limited available dollars, and the value of the rupee will drop. In this anarchy of the `free market' the RBI can intervene to bring order, either by releasing dollars or by mopping up surplus dollars from the market. But, in this era of `globalisation' just as the RBI can intervene, as it possesses a large stock of dollars, so can any international finance dealer intervene to speculate on the Indian stock exchange and in foreign exchange transactions. In fact these international speculators hold funds far in excess of what is held by third world central banks, and are therefore able to determine the value of currencies in the third world. This is what happened in Mexico in 1994-95 and a few months earlier in Thailand and Malaysia. It is also taking place in India. Take the case of India. The international dealers, known by the respectable term FIIs (Foreign Institutional Investors), had pumped in so much speculative capital into the stock exchange and money market, that there was a surfeit of dollars in the market. With this, the value of the rupee began to appreciate. But this was not allowed by the RBI, which mopped up vast quantities of dollars from the market and maintained the value of rupee. Without intervention rupee may have appreciated of course, but it would not be allowed by the imperialists. Then came the dramatic statement the pulling out of dollars of the international speculators, a run of the rupee, and its devaluation. But the dollar resources in the country are not only those of the FIIs. It is first and foremost through trades. Export means an inflow of dollars while import leads to outflow of dollars. It this balance of payments (BOP) crisis that led to devastations. What is meant by a BOP crisis? It is linked to two terms, a trade deficit and a current account deficit. If the value of imports exceeds exports it results in a trade deficit. If, for example, in a particular year, imports amount to "A" and exports to "B", then the trade deficit is A-B. But, besides trade, there are other immediate (or current) foreign exchange transactions either coming into the country or going out (as opposed to the capital sources like external loans, FIIs etc.) A major source of money going out of the country is dividends on MNC investments here. In a particular year take this amount to be "C". The major invisible earnings that flow into the country is through NRIs (Non-Resident Indians) working abroad. Indians working abroad send their savings into the country, while Indian businessmen abroad invest part of their profits in India. In a specific year, we shall assume the total `invisible' earnings to be "D". So the total trade plus the invisible income and drain from foreign dividends constitutes what is termed as the Deficit or Surplus on current account. So if B+D is less than A+C, then there is a current account deficit. On the other hand if exports plus invisible income (B+D) is more than imports plus MNC dividend income (A+C), there is a current account surplus. Now in all these third world countries there have been current account (and trade) deficits. It is these growing trade and current account deficits that led to a BOP crisis, where the government would have no foreign exchange to pay international commitments. The result; they would go begging to the IMF for loans to help the countries to meet the international commitments. The IMF would interfere with its 'assistance' package demanding harsh conditionalties on the part of the concerned government, including devaluation of their currencies. Obviously ostensibly, devaluation is supposed to boost export of commodities by diminishing

their value in the international market. Whereas in fact it only worsens the terms of trade, by deflating the value of exports and inflating the value of imports thereby is deepening the trade deficit. It is, in reality, nothing but a lever to rob the third world of its wealth and further deepen the crisis in these economies. What is today the biggest tragedy and also the greatest danger is that pliant third world governments are now planning their economies with large trade deficits and current account deficits. This is done on the pretext that the large FDI(Foreign Direct Investment that is capital used for industry) and FII inflows since the early 1990s compensate for these deficits. But, as we have seen, the bulk of inflows are those of FIIs or speculative capital, which can be withdrawn overnight. If the countries are functioning on current account deficits, with no solid stock of foreign exchange reserves the removal of such vast sums of speculative capital overnight plunges the economy into a BOP crisis. It is such `planning' that virtually plays into the schemes of international finance capital. It is important to understand this mechanism, as today crores and crores of loot from our country takes place through this minute exchange rate manipulations, of which devaluation is an extreme step. In the colonial days the British rulers got their officers and zamindari agents to brutally rack-rent the peasants and carry away the tributes. Then the robbery was naked; now it is far subtler. This has a double advantage' first, the quantum of tribute now taken away by the imperialists in often far larger than what the colonialists extracted; and second, the process of loot is indirect, the enemy is invisible. Earlier the ruthlessness of the zamindar and officials in extracting the wealth resulted in continuous peasant uprisings. Now, there is no direct target, which is immediately visible. Besides, these ruling elite within the country act as a buffer to cushion the people's attack.

Impact of Devaluation
Let us take an example What would be the impact of 14% devaluation. First, this would lead to a drop in value of the rupee by Rs.5, on the existing value, resulting in a steep increase in inflation within the country. Second, our foreign (external) debt would increase overnight by a massive Rs.50,000 crores. Third, our imports would cost much more, and particularly affected would be petroleum imports. The present huge price increase of petroleum products would then get diverted to pay for the increase in cost of imports and not to clear the oil pool deficit. Fourthly, the cost of exports would drop by 14%. In other words, we have to enormously increase the volume of exports to earn the existing dollar value. There will be a further deterioration in the terms of trade. And fifthly, international speculators, who transact billions of dollars each day in foreign exchange dealing will make a killing. They will withdraw their money now when the value is higher, and re-invest in India when the value of the rupee drops making windfall profits. This would be the disastrous results of the devaluation. Of course, this is not mentioned in the bourgeois media, which also plays an important role in covering up the anti-national policies of the government. They play to the imperialist tune whose motto now is `export or perish'. This entire export-led economic growth is the most dangerous quicksand, which sucks third world countries into their vice-like grip. It leads to a vicious circle of dependence-crisis-greater dependency-greater crisis... This entire process has been facilitated by the `freeing foreign exchange rate mechanism, to the extent where control over their own currencies by the governments of third world countries has virtually ceased to exist.

In fact, the imperialists, not satisfied with the existing freeing of the currency in India, and have demanded that the rupee may be made fully convertible on capital account-that is, removing all restriction in the flow of funds in its totality. In June 1997 another ex-deputy Governor of the RBI, S.S.Tarapore, presented his report on Capital Account Convertibility (CAC). With CAC implementation there will be absolutely no restriction on the flow of foreign funds in and out of the country. The steps taken in this direction since 1991 will have been completed.

Failure of Their Own Strategy

For all the governments emphasis of building of the economy on an export-import basis for which crores of subsidies have been granted, even this has not achieved significant success. In 1947, Indias exports were 2.4% of world exports. This declined to 1.2% in 1971, and even after the emphasis of liberalization in 1980s the percentage of Indian exports dropped further 0.4% of the total by 1991. Since, then there has been a barely perceptible increase. Besides, exports have continued to be concentrated on our traditional items where our natural wealth is siphoned off at cheap rates. In 1993-94, leather and leather products accounted for 6% of the countrys exports, agricultural products accounted for 18% of the total, gems and jewellery 18% and textile, cotton fabric and garments comprised as much as 40% of the total. That means, a bare 17% of exports was in manufactured goods. What great strategy was required to increase the exports of our traditional items, which was, in fact, much higher in 1947-as a proportion of world sales!!!.

In this generally pathetic scenario, a crisis developed while the growth rate of exports in dollar terms fell from 20.8% in 1995-96 to 4.1% in 1996-97. Also, there was a slow-down in import growth because of an industrial recession. Imports which grew by 23% in 1994-95 and 28% in 1995-96 dropped to 5% in 1996-97. In the first half of 1997 the situation worsened further. The trade deficit has been steadily rising from $2.3 billion in 1994-95 to $5.4 billion in 1996-97. This huge trade deficit has been offset by large inflows of foreign funds on capital account. Foreign investment in India increased from $5 billion in 1994-95 and has since increased. It is such a scenario which is fraught with danger where a big trade deficit is balanced by the highly volatile foreign investments-the bulk of which is today speculative. A withdrawal of the $5 billion (or even a large part of it) precipitates a crisis-a balance of payment crisis with no foreign exchange reserves left to meet the international commitments. But what happened in mid August 1997 was a little different. It was not initiated by the speculators but by our own ruling elites. The reason being that, due to a big drop in imports the current account deficits dropped to $3.7 billon in 1996-97 and foreign currency assets with the central bank had risen to a gigantic $29 billion by the end of June 1997 due to large inflows of foreign investments. Under such conditions the withdrawal of large funds by speculators need not have triggered an immediate crisis, so they got their agent to act. The imperialists could not tolerate the rupee appreciating, while the local big individuals found exports stagnating. With the engine of the growth process coming to a halt, the entire economy was in the thores of a crisis. So, they both conspired and the rupee is being artificially devalued. For India it is a no-win situation. If the current account deficit is high, it will fall prey to the whims and fancies of the international speculators. If the current account deficit is low and the rupee is strong, exports stagnate and the economy crashes. In either case we end up

deeper into the clutches of the imperialist monster. Such is the strategy and tragedy of Indias economic growth process today. INFLATION Inflation in simple terms is the rise in prices of various goods over a period of time. However, if everyones income went up by the amount of the prices, then no problem would arise except that in nominal terms things would seem more expensive. The difficulty arises when some people gain out of inflation. Typically in an inflation, the prices rise faster than the wages do. In other words, those who have property income like profits and rent, gain more than the others. Actually, the properties gain at the expense of the wage and salary earners. Through indexation of wages to prices, the workers try to protect themselves. However, this is usually not enough. Further, as soon as inflation levels reach into double digits, there is pressure to break this link. Finally, in India 90% of the work force is in the unorganized sectors and is unable to protect its income from the ravages of inflation. Basically inflation is caused due to two broad reasons: the cost push given to the prices of key inputs like petrol, coal, steel etc. By the government which translates into an escalation of prices all around, and increase in the supply of currency circulating in the economy resulting in too much money chasing too few goods. For example, the money supply in the economy is increased whenever the government faces a shortage of funds to balance its expenditure. The impetus for this comes either because some import prices have risen (like, petroleum goods) or margins of trade and industry have risen or there is a bottleneck in supply leading to increased margins (like, drought or floods or speculation). A close examination of the economy reveals a number of additional culprits: the indiscriminate increases in indirect taxes affecting prices of essential commodities, and the entry of vast amounts of black money in the trade of various goods and increased speculation in real estate.

IMF is the abbreviation for International Monetary Fund. The full name for the World Bank is the International Bank for Reconstruction and Development. As implied by their names, the two organisations have a formal difference in their functions. The Fund is more in the nature of general lending agency while the Bank arranges loans for specific projects and also monitors the development and working of such schemes. But the two are not only twins, they also work in tandem. The Combine has several ways of playing this game. Apart from crude methods like direct intervention and imposition of conditionalities, it also uses subtler but often more effective means like educating and training Third World economists and administrators who then independently steer their own economies along the Fund-Bank path. What is particularly galling about the Fund-Bank sermons to the developing countries is that the Combine maintains a totally different standard for the industrial powers. For example, since the mid-80s the US has emerged as the

worlds largest debtor nation running up an external debt of over $650 billion by 1990. Further, its internal debt is currently an astronomical $ 3,336 billion while since 1984 its trade deficit has averaged over $ 100 billion annually. And yet, as the Cuban leader Fidel Castro put is a few years ago, the IMF never sends its experts to the White House to correct its most incredible deficits despite its location just a few blocks away from the IMF headquarters in Washington. (See also page 73 82 for further informations) PRICE INDEX INDICES OF INFLATION: Different measures of inflation ought to be used depending on ones purpose. Actually the Government deliberately creates some confusion on this score. All price indices use a particular year as a base year. That means that rise or fall in prices are measured with reference to the price in that year. For example the base year used for the Wholesale price index is 1981 to 1982. Wholesale prices of all products in that year are treated as 100. If in 1981-82 the wholesale price of gur was Rs:2 a kg, and rose by 50 paise the following year, it would mean that the wholesale price index for gur would rise to 125 in 1982-83.(the corresponding method is used for prices for years before 1981-82, too; the index numbers would probably be less than 100 in the previous year, and so on for each previous year, since inflation is a permanent feature of free economies.) Different base years are used for different price indices, so one should not be confused by the figures in one index being higher than the figures in another index, for the same year( you can see how an index with the base year 1960-61 would have figures far higher today than one with the base year 1981-82); what matters is the growth rates. The WPI: The wholesale price index (WPI) covers all commodities i.e. primary goods, power/fuel, and manufactured goods. Some primary goods (agricultural, plantation, and mineral output) are bought by consumers (e.g. cereals), but many are not (e.g. minerals). Of the manufactured goods, intermediates (such as steel and cement) are only bought by producers, to be used in the course of production. And then there are consumer goods. But, for all of these WPI takes the wholesale prices. In all, WPI tracks the prices of 447 commodities. Each of these is given the different weightage in the index according to its importance. Imagine that the price of Washing Machine has remained at the same level for 2 years running (let us say the index of washing machine prices has remained at 260), but the index of edible oil prices has risen from 230 to 290. Naturally since edible oil plugs a much larger role in the economy than washing machines, when calculating the overall price index (on the basis of the indices of increase in each individual commodity), the weightage given to the index for edible oil prices will be greater. Hence the stability in the washing machine prices will not have much effect on the index, whereas the rising edible oil prices will.

The WPI is not intended to capture the effect of price rise on the consumer. So one should not be surprised when one finds that the weightage to food grains in the WPI is less than 8 (out of 100), and indeed to all food items only about 17; whereas, of course food makes up more than half the expenditure of the average consumers. Onions have a weight of only 0.16%, and potatoes 0.47%. For that reason, one needs a separate consumer price index. The CPI : there are in fact several Consumer Price Indices. Each tracks the RETAIL prices of goods and services, for a different group of people, because the consumption patterns of different groups differ. For Industrial workers (CPI-IW), a basket of 260 commodities is tracked; for urban Non-Manual Employees(CPI-UNME), 180 commodities. Here again, each commodity is given a different weightage, which differs from group index to group index. For example, the CPI-AL would give a greater weightage to food grains than the CPI-UNME, since a greater proportion of the agricultural laborers expenditure would go toward food grains, and he would be unlikely to buy the sort of items the office-goer would buy. These baskets and the weightages to each item have been determined on the basis of some surveys of consumption patterns. (It is reported that these surveys are very outdated, so they do not give a proper picture of consumption patterns- and therefore the CPI data do not give a proper picture of price rise. ) Further, the information about prices is supposed to be collected according to the places from which each section would purchase. Information also differs, naturally, from centre to centre around the country, the all-India figures declared are merely averages. Which is index should one use? The WPI is useful in certain contexts. For example, if one were working out the costs of setting up a factory over the course of several years, and further wished to calculate the costs of production and returns over several years, one would obviously not use the CPI. First, the basket of items in the CPI does not include the machinery, chemicals, and so on, secondly, the price of electricity in the CPI would be the summer tariffs, not the industrial tariffs; and so on. Here, obviously, one would turn to the WPI. (There is, further, a capital goods price index, which tracks specifically the prices of capital goods; this one uses in order to calculate the real growth in capital expenditure. And there is also a GDP deflator- an index of prices of every good and commodity included in the Gross Domestic Product, which is pretty close to the WPI. We use the DDP deflator to calculate the real GDP growth. Normally, however, when we refer to the rate of inflation in the economy, we mean the rise in retail prices, which is what directly affects people. In such a case, the correct measure would be the CPI for various sections. The consumer price index, in fact, is the measure normally used abroad when referring to inflation. However, the Indian government deliberately uses the WPI, because the figures for inflation in the WPI are on the average much lower than those in the CPI indices. There could be two reasons for this difference in rates between the WPI and CPI. First, prices of the items in the CPI might have risen more sharply than items excluded from it- this would mean that prices of mass consumption goods have risen more sharply than inputs for production. Secondly, the retail prices

of commodities might have grown more sharply than the wholesale prices, indicating that middlemen have taken bigger share.

Two Confusing Points

A source of confusion in understanding inflation data is the Governments use of point-to-point figures for inflation. That is, if bananas were Rs.10/- a dozen on July 1 last year and Rs.12/- a dozen on July 1 this year, the price rise is given as 20 per cent. However, it might be that bananas were Rs.14/- for most of this year, and have only fallen to Rs.12/- on July 1; so the rate of inflation for the whole year is not really captured by the point-to-point method. Or it might be that the price last July 1 might have been unusually high for that year (it might have been just Rs.8/- in June and August 1997). In that case the real price rise over the past year would not be captured by showing the increase of July 1, 1998, over July 1, 1997. A better measure would employ averages (e.g. Averages of three months over the previous years corresponding three months; or averages of point-to-point increases for all the months of the preceding year; etc) The use of point-to-point figures is one of the reasons why the inflation rate suddenly falls without any prices falling; the reason may be that there was steep price rise just preceding the corresponding date of the earlier year, on top of which the latest dates prices have not grown much. At the very least, the Government should calculate inflation rates by both methods, and give readers the choice. One more source of confusion is that the figures of inflation which we normally read in the press are only provisional; they are later revised, though the revised figures do not get blared in the headlines, and instead lie buried in some documents. The revised figures for inflation are generally higher than the provisional ones. (In fact, the Governments provisional calculations of inflation follow a questionable method; they take the provisional price index figure of today over the revised index figure of a year ago. As it turns out, if one instead takes the provisional index figure of today over the provisional index figure of a year ago, the inflation rate calculated there from is pretty close to the final, revised one.) Now let us look at the news items of July 20, 1998, which are based on the official hand-outs. They tell us that inflation touched a 71-week high of 7.59 per cent for the week ended July 4. But these are provisional figures, which are usually lower; the same item also tells us that the final figures are now available for the week ended May 9. We find that the final WPI inflation figure for that week is 6.6 per cent, whereas the provisional figure was only 6.1 per cent. More importantly, the figure for inflation in the CPI-IW is now available for the month of May. This turns out to be 10.5 per cent compared to a WPI rate of 6.4 per cent in the corresponding period. Note that the gap between the WPI and the CPI is more than four percentage points; and in fact, throughout 1996, 1997, and the first quarter of 1998, the gap has been of this order. (For example, the WPI point-to-point inflation of 1996-97 was 6.9 per cent, but CPI-IW was 10 per cent; CPI-UNME was 10.2 per cent; and CPI-AL was 10.5 per cent.) so we would be safe in assuming that when the CPI-IW inflation figures for July 1998 are finally calculated, they will show an inflation rate of around 11.5 to 12 per cent. In September 1998 it was revealed that CPIIW inflation figures for July 1998 were 14.8 per cent! In fact, the great talk last year of inflation having been brought under control, or down to five per cent or even four per cent, was just a grand hoax of using point-to-point WPI figures. Inflation in the CPI-IW (average of the months of each year) was as follows since the beginning of the IMF reforms:

1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98

13.5% 9.6 7.5 8.1 12.2 9.3 over 9

Thus the essential point is: If you want a figure for the current inflation rate, dont look for the WPI figures, but look for the latest CPI-IW figures available; then look for the gap, if any, between CPI-IW and WPI for that date; and make a guess, on that basis, of the current CPI-IW rate. Do the official indices reflect the real price rise? Even the Consumer Price Index may not reflect the real rate of inflation, as experienced by common people, for several reasons. First, the basket of commodities that is chosen for the purpose of measuring price rise may not reflect actual consumption patterns either the commodities may be different, or the weightage given to each commodity may be different. Secondly, the reporting of prices from various centers may be understated. A third reason is one that is particularly relevant now, when there is rapid price rise in essential commodities: During such a period, despite the higher prices, people cannot greatly reduce their consumption of such commodities (the term used is that demand is inelastic in relation to price changes); consequently, in their total basket of consumption, common people cut back more on other commodities. In that case, even if the consumption basket for CPI were initially correct, it would get rapidly outdated during such a period. Let us assume that food items have a weight of 60 out of 100 in a consumer price index; when prices of food rise rapidly, food items might actually consume 70 per cent of the expenditure of that section of consumers. but the inflation rate would still be calculated as if they only made up 60 per cent, and hence the official rate would understate the real consumer price inflation. This is one reason why people feel the official rates have little to do with the real rate they experience, and the impact of it on their lives. (Another reason is, of course, the fact that most common people are already having difficulty making ends meet. In such circumstances even a moderate price rise can push them over the edge into dire poverty.) False Explanations For Price Rise The IMF, World Bank and government have for some time been propounding the theory that price rise results from too much demand in the economy. Their answer therefore is to suppress demand by raising interest rates, whereupon companies will have to reduce their borrowing and therefore their purchases and investments, and will also have to squeeze the amount they spend on wages. Once companies cut their spending, and people cut their spending, demand will go down and prices will accordingly fall. How absurd this theory is becomes clear when you look at the current runaway price rise, there is a recession in industry, demand in the rural areas too is depressed because of poor agricultural performance, and yet prices are soaring. The real causes of price rise are inherent to the structure of our economy; a backward agriculture dominated by parasitical forces, where periodic shortfalls in production are bound to occur; a trade sector in the grip of big hoarder-speculators with access

to a vast pool of black money, who can capture the supply and manipulate prices upward; continuing dependence on imports of foreign goods and inflows of foreign capital, both of which render the economy vulnerable to price increases by foreign interests and the rupee vulnerable to devaluation; in many industrial commodities, a handful of big industries dominating the market, and hence easily colluding to fix prices; and so on. The governments of various hues occupying the seat of office at the Centre and in the states cannot control price rise because that would mean acting against those very sections that have brought them to power. INTELLECTUAL PROPERTY RIGHT (IPR) This refers to the view that inventions, research and development constitute intellectual property and any use of such work should entail payment of royalties or fees like in the case of actual material property. The advanced nations led by the United States have been insisting that all developing countries sign the treaty concluded at the Paris Convention which lays down the norms for protecting patents for expertise and technology developed in different parts of the world. India along with several other Third World nations was put on the Super 301 and Special 301 lists by the United States whereby exports from these countries were threatened with severe restrictions for allegedly not protecting the right of intellectual property of the Unites States. Signing the Paris Convention would mean that Indian farmers will have to pay royalty to the Americas for using high yielding variety seeds and Indian drug companies would have to shell out huge sums of money as patent fees for manufacturing even the simplest of medicines. While the U.S. makes a lot of noise about protecting its own intellectual property it keeps silent on the billions of dollars that Third World nations lose annually due to the westward migration of their professionals. May be it is time the Third World started demanding royalties from the West for the phenomenal siphoning off a resources and valuable knowledge during the entire colonial era and now the on-going brain drain in the age of neo-colonialism.

Bonds can be described as loans through which the borrowers get the cash they need, while the lenders earn interest. As investments in stock markets tend to be risky, investors prefer bonds which are considered to be safe as they provide a fixed income through regular payment of interest, and the repayment of principal amount is assured on the given maturity date. The term of any bond is fixed at the time of its issue, and it can range from a year to 30 years, or even more. Usually, if the term of a bond is longer, the returns are likely to be higher. Any corporation, or Government, or multilateral institution [for e.g., World Bank and ADB] can issue bonds to raise resources for different purposes. For instance, corporations issue bonds to finance the growth and development of their businesses in order to earn more profits. As Government are supposed to provide basic amenities and infrastructure [e.g., roads, drinking water and education] and their revenues, quite often, are not enough to cover such expenses, they borrow money through bonds. Multilateral institutions, such as the World Bank and ADB, also issue bonds to raise funds internationally to finance infrastructure and other projects in developing countries. In recent years, the composition of external financing of developing countries has changed due to the emergence of international bonds. These countries prefer raising funds through issuance of bonds rather than bank lending, which was the case in the 1980s. International bonds now

constitute the single largest source of debt financing in developing countries. The international bonds include Eurobonds, sovereign bonds, regional bonds and so on. The total turnover of international bonds was estimated to be $5.3 trillion in 1996. The largest single tranche Eurobond of $6 billion was floated by Mexico in 1996. In November 1996, Russia placed a $1 billion issue the largest ever debt sovereign issue. Recently, Enron Corporation has issued bonds to finance its first power project outside the US.

Bond ratings are carried out to inform the investors whether their investment in particular bonds are risky or not. At the global level, the best known services are Standard & Poors Corp. and Moodys Investors Service. These companies investigate the financial condition of a bond issuer as well as the macroeconomic conditions of the economy. Rating companies rank all types of international bonds. For instance, the ADB debt is rated triple A. These companies also rate countries to inform foreign investors about the prospects of investment in them. In India, three agencies, namely, ICRA, CRISIL and CARE are involved in the ratings of bonds and other financial instruments. Aaa AAA Best quality, with the smallest risk; issuers exceptionally stable and dependable. Aa AA High quality, with slightly higher degree of long term risk. A A High to medium quality, with many strong attributes, but somewhat vulnerable to changing economic conditions. Baa BBB Medium quality, currently adequate but perhaps unreliable over long term. Ba BB Some speculative element, with moderate security, but not well safeguarded. B B Able to pay now but at risk of default in the future. Caa CCC Poor quality, clear danger of default. Ca CC Highly speculative quality, often in default. C C Lowest rated, poor prospects of repayment though may still be paying. K Interest payments are in default. Apart from Latin America, bond markets are growing in the Asia - Pacific region as well. For instance, Japan has the largest bond market in the region, followed by Australia and New Zealand. Hong Kongs bond market is also well developed, while markets in South Korea, Malaysia and Thailand are in the developing stage. The important categories of bonds are described below: Domestic Bonds: These bonds are issued and sold within the economy.

Overseas Bonds: These bonds are issued in one country in its currency but sold in another country in the currency of that country. In fact, you can sometimes buy bonds issued in two countries at the same time and sold in a third currency. Eurobonds: These are standard international bonds with the following characteristics the currency of the bond is not that of the place of issue, the issuers of the bonds are foreign to the place of issue, and the bonds are not sold in the capital markets of one country but are distributed worldwide. Eurobonds floated by the Indian companies are commonly referred to as Foreign Currency Convertible Bonds [FCCBs]. FCCBs are basically equity linked debt

securities, to be converted into equity or depository receipts after a specific period. Thus, a holder of FCCBs has the option of either converting it into equity [normally at a predetermined formula and even a predetermined exchange rate], or retaining the bond. The FCCBs carry a fixed rate of interest and can be marketed conveniently. Yankee Bonds: are issued by an overseas borrower for U.S. investors. They are payable in dollars and registered with the U.S. Securities and Exchange Commission. Samurai Bonds: are yen-denominated bonds issued in Japan by overseas governments or companies. The bonds can be settled only in Japan, though they may be dual-currency issues. That means the payment and the interest are in yen, but the redemption is in another currency, such as the dollar or the Australian dollar. In a reverse dual-currency issue, the payment and redemption are in yen, but the interest is paid in another currency. Dragon Bonds: These bonds are launched and priced in Asia for non-Japanese Asian investors. Subordinated Bonds: These bonds are repaid by the issuer when other loan obligations have been met. Senior Bonds: These bonds carry stronger claims. Convertible Bonds: These bonds give investors the option to convert, or change their corporate bonds into company stock, instead of getting a cash repayment. The terms are set at issue; they include the date when the conversion can be made, and how much stock each bond can be exchanged for. Callable Bonds: Callable bonds do not always run their full term. The issuer may call the bond and pay off the debt before the maturity date. Issuers may call a bond if interest rates drop and after paying their outstanding bonds, they can issue another bond at the lower rate. Sometimes only part of an issue is redeemed. These bonds are also known as Redemption bonds. Zero Coupon Bonds: Since coupon, in bond terminology means interest a zero coupon by definition pays out no interest while the loan is maturing. Instead, the interest accrues, or builds up, and is paid in a lump sum at maturity. Investors prefer zero-coupon bonds because they get them at deep discount, [i.e., at prices lower than par value]. When the bond matures, the accrued interest and the original investment add up to the bonds par value. Issuers prefer such bonds because they can continue to use the loan money without paying regular interest. Inflation indexed Bonds: In the U.S. and recently in India also, these bonds are being issued. The bonds protect investors from the negative impacts of inflation as these are linked with the inflation rate, and their value remains constant irrespective of inflation. Investors generally prefer to invest in bonds which are issued in their own currency rather than in any foreign currency, which carries the risk of shifts in value due to depreciation and devaluation. In many countries, there are restrictions on the buying of domestic bonds. In other countries, for instance, any buyer can purchase the bonds. It has been estimated that at the end of 1995 about 26 percent of all privately held treasury bonds were held by non-U.S. investors, nearly 7 percent by Japanese investors.

IN 1997, the top 20 firms issued more than 4,600 international bonds, raising a total of $742 billion, up from $679 billion raised in 1996. Dollar-denominated bonds provided the biggest share of new issues some 48 percent of the total in 1997, up from 40 percent a year earlier. American investment banks dominated the bond issuance business. Out of the top ten international issuers, five were American Banks, two Swiss, two Dutch and one German Merrill Lyneh managed $ 57 billon of international bonds issues, while Morgan Stanley finished second in value terms.


AIM: As a watchdog ensures that loans of private Banks will be repaid and countries should not be allowed to default the repayments. Founder: 1944 at Bretton woods in 1944 Members : 155 (likely to increase due to changes in Eastern Europe and disintegration of Soviet Union) Voting : It does not follow the rule of one country, one vote system. It operates on the system of weighted voting. Votes are allocated according to amount of money each country has paid into the fund, which is known as Quota. Each member country is allotted 250 votes plus one additional vote of each 100,000 SDR's of its quota. SDR: The special drawing rights, the unit account for all fund transactions consists of a weighted basket of five major currencies (US dollar, yen franc, DM, Pound Sterling). India's quota in the fund is $ 2.9 billion. Distribution of votes : Country USA UK West Germany France Japan China India Votes in % 19.3 6.7 5.8 4.8 4.6 2.6 2.2

The table shows that lion share of votes is taken by five industrialised countries, led by USA. Thus USA can block any major changes in policies because such a change would require 85 % majority. Loan :

The fund only lends money to its members experiencing BOP difficulties. It is not a development institution. Development is the concern of its sister agency, the WB. But both work in tandem. It attaches stiff conditions to granting of loans also uses subtler but often more effective means like educating and training their world economists and administrators who 'independently steer their own economics along FUND - BANK path. Reserve Tranche : It is equal to the difference between country's quota in the fund and funds holding of the country's currency. It can be drawn at any time without conditions, without charges, and need not be returned. Credit tranche : Borrowings begin with first credit tranche (25 % of quota). This tranche is not stringently conditioned. But the next three credit tranches may only be withdrawn if the country concerned has agreed to a stabilisation programme with the IMF and signed a standby arrangement or extended arrangements. The Government of the country concerned has to sign a letter of intent committing to wide ranging economic changes. Standby permit borrowings to be made over a year and extended arrangements in 3 years. Example : India borrowed $ 2.2 billion loan as standby agreement. It will be released in six quarterly instalments over 18 months period for eg. each quarterly instalment would fetch India a loan of $ 366.7 million. BSF : BUFFER STOCK FACILITY This facility is meant to help members to build international buffer stock of primary commodities countries are allowed to borrow 45% of quota under this facility. CCFF : COMPENSATORY AND CONTINGENT FINANCING FACILITY : Money under this made available to members who are facing BOP crisis due to circumstances beyond their control such as drought, flood, fall in commodity prices, increase in import cost etc., Access limit of this facility is 122% of quota. The 'contingent' part of this facility enables countries to implement the adjustment programme. Example : IMF approved 635 $ million to India to September '91 under this facility. SAF : STRUCTURAL ADJUSTMENT FACILITY: Created in 1986 for use by low-income countries. This facility provides BOP assistance on concessional terms with repayment beginning five and half year disbursement. Overall access limit is 70% of quota. The member countries have to prepare 'policy frame work paper' with the assistance of INF and WB, which details 'structural reforms' the country intends to make in the coming years. SAF : (ENHANCED STRUCTURAL ADJUSTMENT FACILITY) Created in 1987 with same purpose of SAF. It has a maximum drawing limit of 250-350% of the quota. Like SAF, member countries are required to prepare policy frame - work paper under the ESAF and submit to the Executive Board of IMF and WB.

EFF : EXTENDED FUND FACILITY Under this facility, loans are given over a 3-4 year period to members implementing IMF's SAP. It has an upper drawing limit of 140% of quota. Example : India had requested IMF to convert $ 2.2 billion standby credit into EFF which means a bigger loan between $ 5 to 7 billion. INTERNATIONAL RESERVES or FOREIGN EXCHANGE RESERVES are monetary assets that are used to settle Balance of payment deficits between countries. International reserves comprise chiefly gold and foreign exchange [particularly in US dollars].

In the last half of 1998 and the first half of 1999, Investors caught up in Internet mania drove Internet stocks up to 400 percent, while the S & P 500 Index and the Dow Jones Industrial Average increased 18.9 percent. While the Internet boom is real, its valuation was insane. In 1999, Anthony B. Perkins calculated that the 133 Internet companies that went public since Netscape in 19895 could be overvalued by as much as $230 billion. Thus the market valuation of Internet companies & Dot.Com Companies began to be referred to as the Internet Bubble about to burst. A 50 percent plus meltdown was predicted. It was worse when the bubble actually burst. First the facts. According to International Data Corp. [IDC], some 160 million people around the world are logged on to the internet,; by 2003 IDC expects that figure to mushroom to 500 million. At least 30 percent of U.S. companies are represented on the World Wide Web. Advertisement on the internet more than doubled in 1998 to $1.92 billion, for the first time surpassing the amount spent on outdoor advertising such ass billboards. This was expected to grow to $8 billion by the year 2002. Such Expectations of Usage & income coupled with the notion that the value of any network increases by the square of the number of people using it Fueled an unprecedented spiral of market valuation and rush of investments to the Internet companies. By 1999, the market wealth creation [notional value] by the internet [$236 billion] on an equivalent basis exceeded that created by the PC [$2214 billion] Industry. In 1998 alone the venture capital industry raised 139 new funds and invested over $17 billion in new capital startups the biggest jump in the history of venture capital. This led to a public mania of investing in Internet company stocks by borrowings on their credit cards. As the stock prices escalated, so did consumer spending and debt. Yahoos share price jumped 584 percent, Amazon jumped 966 percent AOL jumped 586 per cent. Then, 95% of the dot com companies failed. The bubble burst. In the year since April 2000, the technology heavy NASDAQ stock exchange alone lost $ 2 trillion in value.

According to NASSCOM, there are over eighty thousand India related websites that have sucked in investments of over $5 billion and ICRA predicts that only around 20 major Indian internet companies will survive in the next four to five years. ICOR or Incremental Capital Output Ratio : ICOR is the ratio of additional capital invested to the additional output during a particular year or over a period of time (i.e. the Five-Year Plan Period). In other words, it indicates the units of additional capital required to be invested for one unit of additional production. INDIRECT TAXES : Primarily such taxes and duties as (I) duties on imports or exports of goods and services, (ii) excise duties, (iii) Sales tax, (iv) entertainment taxes and (v) purchase taxes. INFACT MORTALITY RATE : Number of infants dying under one year of age in a year per 1,000 live births in the same year. THE INTERNATIONAL ORGANISATION OF SECURITIES COMMISSIONS (IOSCO) is an association of securities market regulatory bodies (e.g. SEBI in India) at the international level. The organisation has 134 members. The main purpose of IOSCO is to promote standardised practices across the world to facilitate better supervision by regulators. It also provided opinions on matters related to market regulation through its various committees. LIBERALISATION This is the term used to describe the process of removing curbs and controls on domestic and foreign industry in the economy. Initiated by Mrs.Indira Gandhi in the early eighties after the first IMF loan, this policy was pursued vigorously by Rajiv Gandhi from 1985. While the removal of red tape and bureaucratic controls over the economy is always welcome in India, this has meant basically a) unrestricted freedom for domestic big business houses and foreign TNCs to reap super-profits b) for the social elite to buy all the consumer goods they want with borrowed foreign exchange and c) letting the common people sink in the mire of unemployment and poverty. MNCs and TNCS TNC : A transnational corporation (TNC) is an industrial corporation which belongs to a single nation state but has operations beyond its own national borders i.e., it operates in two or more countries but is owned by the monopolists of a single country. MNC : Multinational Corporations (MNC) on the other hand are industrial corporations which are owned by capitalists of more than one country. NOTE: 1) Almost all corporations of US and Japan are TNC in character. In contrast Europe has both MNCs as well as TNCs.

2) MNC should be actually used to describe those global corporations (not all) that have significant amount of capital of more than one country. In this sense most of the global corporations should be called TNCs. 3) Out of 500 global corporations, the majority of TNCs belong to six or seven countries US, Japan, Germany, France, Switzerland, UK and Netherlands. 4) Trade wars between US and Japan between US and EC are actually dictated by TNCs based in the US on one hand and those of based on Japan and EC on the other hand. 5) It was only in Western Europe that MNCs have emerged as phenomenon in some sectors from mid 1960s. this was due to following imperatives. (a) in certain industries such as space and air craft, the amount of capital outlays required is so huge and the risk of technological obsolescence so great that further development are impossible on a national scale, for e.g., the grandiose. European space project ELDO depended upon collaboration between all European capital powers. (b) To stand up to fierce international competition esp. from American industry, requires furious pace of technological innovations which the traditional national finance group cannot maintain. Risks and capital outlays are so great that a single mistake could render some of the investments banks and holding companies insolvent. But international amalgamation at continental level would reduce overhead costs and risks for the individual capital. (c) The American monopolies are of such huge dimensions that no single European country can think of building such giant corporation by itself. (d) Consequently, given the relatively small size of the individual monopolies in Western Europe visa-vis American wide mergers were an imperative if the financial and productive units inside EECs countries had to double or triple that size failing which there existed even the danger of the national units being wiped out in the cut throat competition with the partners across atlantic. (e) It is these mergers that had speeded up Europe-wide merger and collaborations in the past quarter of the century and had increased the size of EEC to twelve countries from six. (f) Through such mergers the dependence of western Europe on America, a feature in 1950-60 has undergone qualitative change and European monopolies have emerged as competitors to America and Japan in the world market, but the process is far from complete. (g) The emergence of powerful MNCs in Western Europe along with the huge German, French, Dutch, Italian, Swiss TNCs has given rise to more serious competition with TNCs of US and Japan at the international level.

NOTE : MNCs and TNCs have turnover larger than the gross national product of many third world nations. For e.g., ITT one of largest Us multinational has 700 subsidiaries in 67 countries on 6 continents and alone accounts for one third of USAs balance of payments. Will depict the control 3 to 6 TNCs control over world commodity trade. ESTIMATED SHARE OF COMMODITY TRADE CONTROLLED BY TRANSNATIONAL CORPORATION (PER CENT) COMMODITY FOODS & BEVERAGES Wheat Maize Sugar Coffee Rice Cocoa beans Tea Bananas AGRICULTURAL RAW MATERIALS Timber (no coniferous) Cotton Hides and Skins Tobacco Natural rubber Jute & Jute products Minerals & metals copper Iron ore Bauxite & aluminum Tin Phosphate rock 90 85-90 25 85-90 70-75 85-90 80-85 90-95 80-85 75-80 50-60 85-90 85-90 60 85-90 70 85 80 70-75 PROPORTION OF GLOBAL EXPORTS MARKETED BY 3 TO 6 LARGEST TNCS

Source : Global Economic Prospects & the Developing Countries, 1994, World Bank,

P.41 ( today their control will even more )

Used in GATT for UN classification as least developed country. LITERACY RATIO : Number of literate persons i.e. those with formal or non-formal education who, in the least, are able to read and write with understanding in any language as a percentage of total population.

The 49 countries with an average per capita income of about $ 1 a day, known as the least developed countries, continued to suffer from low prices for their commodity exports, rising

protectionism in Western markets, high prices for imported food and for oil imports, declining foreign aid, and, in sub-Saharan Africa, lower per-capita food production because of unwise economic policies and devastating drought.

The 49 LDCs
Afghanistan, Angola, Bangladesh, Benin, Bhutan, Burkina Faso, Burundi, Cambodia, Cape Verde, Central African Republic, Chad, Comoros, Democratic Republic of Congo, Djibouti, Equatorial Guinea, Eritrea, Ethiopia, Gambia, Guinea, Guinea Bissau, Haiti Kiribati, Laos Peoples Democratic Republic, Lesotho, Liberia, Madagascar, Malawi, Maldives, Mali, Mauritania, Mozambique, Myanmar, Nepal, Niger, Rwanda, Samoa, Sao Tome and Principe, Senegal, Sierra Leone, Solomon Islands, Somalia, Sudan, Togo, Tuvalu, Uganda, United Republic of Tanzania, Vanuatu, Yemen, Zambia. MONEY MARKETS : Covering all short-term financial products directly linked to the interest rate like treasury bill, certificates of deposit and commercial paper. Includes inter-bank call money as well. Even capital market instruments like bonds and units have been included in the ambit of the money market because they were being converted into synthetic short-term assets through buyback deals. MONEY SUPPLY : Total quantity of money in existence at a given time. Two measures of money supply are commonly used, viz., M1 and M3. MONEY SUPPLY (M1) : Mainly (I) currency notes and coins in circulation with the public (but not those held by banks), (ii) deposits in current account and (iii) about 86% of the deposits in the savings bank accounts. MONEY SUPPLY (M3) : Includes M1 and in addition (I) the fixed deposits and (ii) the remaining 14% of savings bank deposits with banks.

Marshall, George C., (1880-1959), general of the army and U.S. Army Chief of staff during World War II (1939-45) and later U.S. Secretary of state (1947-49) and of defense (1950-51). The European Recovery Program he proposed in 1947 became known as the Marshall Plan. He received the Nobel Prize for Peace in 1953. He was sworn in as chief of staff of the U.S. Army on September 1, 1939, the day World War II began with Germanys invasion of Poland. For the next six years, Marshall directed the raising of new divisions, the training of troops, the development of new weapons and equipment, and the selection of top commanders. When he entered office, the United States forces consisted of fewer than 200,000 officers and men. Under his direction it expanded in less than four years to a well-trained and well-equipped force of 8,30,000. Also significant during his secretaryship were the provision of aid to Greece and Turkey, the recognition of Israel, and the initial discussions that led to the establishment of the North Atlantic Treaty Organization (NATO) . In 1945, Truman, the then President of U.S./A., reaffirmed Americas commitment to a strong, united and democratic China: and dispatched Marshall to seek a truce and a coalition government between Chang Kai-sheks Nationalists at Chungking and Mao Zedongs Communists in Yenan. Then, in 1950, when he was nearly 70, Truman called him to the post of secretary of defense, in which he helped prepare the armed forces for the Korean War by increasing troop strength and material production and by raising morale.

In other words this military general, responsible for the butchery of millions, was the father of the Marshall Plan. Marshall Plan, formally EUROPEAN RECOVERY PROGRAM (April 1948-December 1951) was the U.S. sponsored program designed to rehabilitate the economies of 17 western and southern European nations in order to create stable condition in which democratic institutions could survive. The United States feared that the poverty, unemployment, and dislocation of the postwar period were reinforcing the appeal of communist parties to voters in western Europe. On June 5, 1947, in an address at Harvard University, Secretary of State George C. Marshall advanced the idea of a European self-help program, to be financed by the United States in order to counter the communist threat. On the basis of a unified plan for western European economic reconstruction presented by a committee representing 16 countries, the U.S. Congress authorized the establishment of the European Recovery Program. Aid was originally offered to almost all the European countries, including those under military occupation by the U.S.S.R. The U.S.S.R. early on withdrew from participation in the plan, however, and was soon followed by the other eastern European nations under its influence. This left the following countries to participate in the plan : Austria, Belgium, Denmark, France, Greece, Iceland, Ireland, Italy, Luxembourg, The Netherlands, Norway, Portugal, Sweden, Switzerland, Turkey, the United Kingdom, and western Germany. MFA : MFA - Acronym for Multifibre Arrangement. This was first negotiated in 1974 and enables the advanced countries to impose quotas on the imports of textiles and clothing from the Third World countries. This is an exception to GATT rules of free trade to suit the developed world. Multifibre agreement enables advances countries to impose quotas on import of textile and clothing from third world countries. MFA - most favoured Nation countries outside GATT get this treatment so that they face the same tariffs as other CPs face. Amongst CPs no discrimination is allowed.

Stands for Most Favoured Nation. Countries outside of GATT get this treatment from those in GATT so that they face the same tariffs as other CPs face. Amongst CPs no discrimination is allowed. Whatever concessional terms are offered to one CP have to be offered to others as well. MTN Multilateral Trade Negotiations or trade rounds. Like the Uruguay Round (See GATS) MTO Stands for Multilateral Trade Organisation. The proposal to establish this is contained in the DDT. It would be the successor to GATT. It would provide the common institutional framework for the conduct of trade relations between the members of MTO in matters relating to GATT, GATS, TRIPS and TRIMS. It would provide for cross retaliation say from TRIPS to goods. This would legitimise Special 301 of the USA.

MULTINATIONALS (MNCs or TNCs) These are giant size companies with assets and production bases spread over nations outside their parent country. Many of the multinational corporations, or MNCs as they are commonly called, today have turnovers larger than the gross national products of many third world nations. For example ITT one of the largest US multinationals has 700 subsidiaries in 67 countries on 6 continents and alone accounts for one third of USAs balance of payments. MUTUAL FUNDS In simple terms, a mutual fund is a collection of stocks, bonds or other securities owned by a group of investors and managed by professional investment company. Also known as UNIT TRUSTS, these funds offer better returns to investors as the professional investment company keep regular track of markets. Rather than investing individually, investors prefer putting their money into mutual funds through which they have more buying power. Mutual funds are created by investment companies [which are known as mutual fund companies or managers], brokerage houses and banks, which offer a whole range of funds to suit the investors choice. As many of these funds are global in nature and denominated in different currencies, one may find the U.S. based funds investing in the Asia-Pacific region, and Hong Kong based funds investing in Latin America. Most funds diversify their holdings by buying a wide variety of investments which helps in offsetting losses from some investments by gains in other investments. In mid-1996, there were more than 36,000 funds available world-wide. These included more than 7,500 in the U.S., and thousands in Hong Kong, which is Asias fund management capital. By 1994, pension funds, insurance companies, and mutual funds in the OECD countries had grown to $20 trillion. It has been estimated by the World Bank that in 1996 $34 billion in external flows went directly to domestic stock markets of developing countries through pension funds, mutual funds, hedge funds, * and other investment vehicles. The big recipients are Latin American and Asian countries as well as the Czech Republic, Poland and Russia. The biggest mutual fund industry is based in the U.S., which has nearly $42 trillion in assets. According to the Investment Company Institute, around 15-20 percent of it comes from pension schemes funded through voluntary deductions from employees pay and contributions by the employees. It has been estimated that nearly $21 billion are provided by these schemes to fund managers. So for, the international exposure of pension funds is lower than that of mutual funds, except in Japan and the U.S. These funds hold about $70 billion of emerging market assets. Nonetheless, pension funds hold about $70 billion of emerging market assets. Nonetheless, pension funds are fast becoming an important source of investments despite the fact that these are heavily regulated, less globalised and more oriented towards long-term investments. However, with the growing trend of privatization of pension schemes in the developed countries, pension funds are likely to be a major force in the demand for portfolio equities from developing countries. As with mutual funds, most pension fund investments in emerging markets are in the form of portfolio equities. Broadly, mutual funds can be divided into three main categories: Stock Funds: These are invested in stocks; Bonds Funds like bonds, these funds provide regular income to investors; and

Money Market Funds Quite similar to savings accounts in the Bank. For every rupee you put in, you get a rupee back, plus the interest your money earns from the investments the fund makes. Since these funds are usually price-stable, some investors prefer them to stock or bond funds. There are other types of funds, some of which are briefly described below: Open-End Funds Under such funds, an investor can buy as many shares he/she wants. As investors put money into it, the fund grows. Closed-End Funds Closed-end funds resemble stocks in the way they are traded. While these funds do invest in a variety of securities, they raise money only once, offer only a fixed number of shares and are traded on a stock exchange. The market price of a closed-end fund fluctuates in response to investor demand as well as to changes in the value of its holdings. These funds are also known as Exchange Traded Funds or Over the Counter Funds. Global Funds These funds are invested in various stock or bond markets in the world. By spreading investments throughout the world, these funds can balance risk by owning securities in both volatile and stable markets. Regional Funds These funds are concentrated in several countries of particular geographical region, for instance, Thailand and Philippines in Southeast Asia, or Chile and Argentina in Latin America. Since countries in different geographical regions provide diverse returns on investments, these funds aim to capitalize on this diversity. Country Funds These funds allow investors to concentrate their investments in a single overseas country, even countries whose markets are closed on non-resident individual investors. When a fund does well, other funds are set up for the same country by the fund companies. In recent years, many Indian funds have been created by the global fund companies. By buying stocks and bonds in a single country, investors can profit from the strength of an established economy. For this reasons, country funds were very popular in Southeast Asian countries in the early 1990s. Offshore Funds These funds are, quite often, based in tax havens in order to benefit from liberal tax regimes offered in such places.

GLOBAL DEPOSITORY RECEIPT The GDRs are negotiable instruments meant for raising equity in the international financial markets. They are created by overseas depository banks which are authorized by issuing companies to issue GDRs outside the country. They can be listed in any overseas stock exchange and many be purchased and transferred by non-residents in foreign currency. The cost of acquiring shares through the GDR route is cheaper because they are issued at a discount on the market price. A number of international equity offers, particularly from some Asian markets, have increasingly used GDRs, where legal restrictions and closed markets have prevented the free trading of equities. A company interested in issuing GDRs will issue shares to a foreign depository, in turn, issues GDRs to investors. GDRs remain the most preferred from of foreign equity investments by the U.S. investors.

The issuer issuing the shares has to pay dividends to the depository in the domestic currency. The depository has to then convert the domestic currency into foreign currency for onward payment to the receipt holder. In India, many companies have issued GDRs in recent years.


In recent years, new financial instruments to finance large infrastructure projects [e.g. power plants, toll roads, etc.,] in developing countries have come up. These financial packages may have combination of equity [both FDI and FPI] and debt [both bonds and loans]. They can be financed by both private and official sources. Quite often, such projects are based on the principles of build operate transfer [BOT], or build own-operate transfer [BOOT], or build own operate [BOO] Increasingly, such projects have sovereign guarantee from the governments as well as noncommercial guarantees from MIGA and other bodies. In many countries including India, a number of projects financed through a combination of such instruments are coming up, especially in the large infrastructure projects. At the global level, an estimated $5 billion have been raised through these instruments to finance large infrastructure projects in developing countries. NON-RESIDENT INDIANS They are people of Indian origin living abroad and engaged as employees, professionals or businessmen. The government is recent years has identified NRIs as a potential source of investment in the country and offered a number of incentives, whereby they can deposit any amount of funds in Indian banks without any questions being asked about the origin of the money. While genuine and patriotic-minded NRIs should no doubt be encouraged to contribute to national development, in actual practice many NRIs are nothing but fronts for Indians with black money or for smooth operators abroad looking for concessional NRI avenues to enter the lucrative Indian market. NATIONAL TREATMENT Concept of requiring that imported goods, once they have passed customs be treated no less favourably than domestically produced goods. They are not to be subject to higher internal taxes or more demanding regulations standards etc., than domestic goods. Developed countries have now extended this application of this concept to services, foreign suppliers (firm/individuals) and foreign capital even before they cross the border and come into a country Imported goods are required to be treated on par with those produced within the domestic economy. For instance, additional taxes etc., cannot be imposed. The advanced nations would like this treatment to be given to their capital, services and goods even before they enter their economy. Thus, Third World would not be able to protect its markets against onslaught from the advanced nations.. NDP AT MARKET PRICE : NDP at Factor Cost plus indirect taxes minus subsidies. NET DOMESTIC SAVINGS : Gross domestic savings minus the value of depreciation on fixed assets. NET OUTPUT OR VALUE ADDED : Obtained by deducting from the gross output both depreciation as well as the total value of inputs such as fuels and raw materials.

NET WORTH : Paid-up Capital plus free reserves. NATIONAL INCOME OR NET NATIONAL PRODUCT OR NNP AT FACTOR COST : Gross national product minus the value of depreciation on fixed assets. NNP AT MARKET PRICE : NNP at factor cost plus indirect taxes minus subsidies. NET CAPITAL FORMATION: Gross capital formation minus the value depreciation on fixed assets such as land, plant and machinery. NET DOMESTIC PRODUCT OR NDP AT FACTOR COST : Gross domestic product minus the value of depreciation on fixed assets ORGANISED SECTOR : All establishments in the public sector and all non-agricultural establishments in the private sector employing 10 or more workers. OECD : Organisation for Economic Co-operation and Development whose member are developed market economy countries. Economic Co-operation and Development Organization [OECD], is an international organization founded in 1961 to stimulate economic progress and world trade. Members in the late 1990s include Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Medico, The Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. The convention establishing the OECD was signed on Dec. 14, 1960, by 18 European countries, the Unite States, and Canada and went into effect on Sep.30, 1961. It represented an extension of the Organisation for European Economic Co-operation (OEEC), set up in 1948 to coordinate efforts in restoring Europes economy under the Marshall Plan.

Multilateral economic treaty for the protection of industrial property, dealing with patents, trade marks, and designs founded in 1883 by 13 members, mainly the imperial powers and their satellites. PBR : PLANT BREEDERS `RIGHTS. PER-CAPITA INCOME is the national income of a country divided by the population. This gives the average income for every man, woman and child in a country if it were all shared out equally. But the distribution of income is not equal, so the per-capita income is not a good indicator of living standards of the people. PASSENGER KILOMETERS : Total number of passengers multiplied by the number of kilometers over which they were carried.

PASSENGER LOAD FACTOR : Ratio of passengers kilometers performed to available seat kilometers a measure of capacity utilisation. Poverty line : Expenditure required for a daily calorie intake of 2,400 per person in rural areas and 2,100 in urban areas. This expenditure is officially estimated at Rs.228.9 per capita per month in rural areas and Rs.264.1 in urban areas at 1993-94 prices.


Portfolio management is undertaken by banks only for big corporate customers flush with funds and therefore this is a cousin of the Certificate of Deposit. Banks assure the companies a return far greater than the going (RBI) prescribed interest rates for deposits and then deploy these funds in the call money market or in other avenues and try to make a turn. Banks take up the position that these are clients funds invested by them and therefore these funds are not in the nature of deposits. The idea behind this rigmarole is that if they are deposits banks must keep CRR and SLR there against. But labelling them something other than deposits these banks are escaping from the reserve requirement. The banks e extolling the idea that these are hand on funds and hence do not need any reserve-backing. Thus on own opinion basis, in concert, banks were delighted infracting from the regulations of RBI. All this was accelerating the deterioration in the asset portfolio of banks. A minimum period of 1 year was the time horizon for PM.S But banks have side-stepped this too. PMS is a costly measure of acquiring bank deposits and naturally increase the burden of interest payment; at the same time the bank flouts RBI regulations consciously. POVERTY LINE Poverty in India has been defined as that situation in which an individual fails to earn income sufficient for bare means of subsistence. Poverty line is a cut off point used to quantify the extent of poverty. One indication used is the calories of nutritional intake of a person with a cut off point calculated as 2250 calories per person per day. Using such narrow criteria the Indian government has been claiming that the percentage of poor in the total population has been steadily declining. The absurdity of considering nutritional intake alone as a criteria to determine poverty is evidence from the fact that the other vital inputs such as shelter and clothing have not been taken into account.

PRIMARY AND SECONDARY MARKET: When a company issues shares, it does so for a specific amount. Investors can apply for these shares. Depending on how many people apply, and for how much, the would-be investor may or may not get allocated some shares. Sometimes, if an issue is oversubscribed, the company may decide to increase the size of the issue to accommodate the additional investors. All this activity is called the primary market. Later on, the shareholder can sell his/her shares to any other person. The shares of the major companies are bought and sold on the stock market every day. All this activity is called the secondary market.

The same phrases are also used in the case of debt instruments such as debentures issued by companies or Government securities issued by the Reserve Bank. The initial issue is called the primary market, and the subsequent sale and re-sale is called the secondary market. These markets are not physically limited to a specific spot (the sale might take place between two persons talking on the telephone); the term is used to describe a type of activity. PRIVATE CONSUMPTION EXPENDITURE: Largely household expenditure in the domestic market on durable (except land) as well as non-durable consumer goods. PRIVATE INVESTMENT (PLAN) : Private sectors fixed investment i.e. in land, plant and machinery, etc., PUBLIC DEBT : A part of the total borrowings by the Union Government which include such items as market loans, special bearer bonds, treasury bills and special loans and securities issued by the Reserve Bank. It also includes the outstanding external debt. However, it does not include the following items of borrowings (other liabilities) viz. (I) small savings (ii) provident funds, (iii) other accounts, reserve funds and deposits. The aggregate borrowings by the Union Government comprising the public debt and these other borrowings are generally known as `net liabilities of the Government. PUBLIC DEBT : is the national debt and other miscellaneous debt contractual repayments of principal on a loan along with any administrative charges borne by the borrower. PUBLIC OUTLAY (PLAN) : Government sectors fixed investment and current expenditure. THE PURCHASING POWER PARITY (PPP) : It is defined as the number of units of a countrys currency required to buy the same amount of goods and services in the domestic market as one dollar would buy in the USA. According to the latest calculation of per capital GNP and overall GDP of the World Bank based on PPP. Indias per capital GDP in 1994 has been estimated at $ 1,280 (PPP) and it is the fifth largest country in terms of GDP with about $ 1.17 trillion (PPP), preceded by the USA ( $ 1.59 tn), China (almost $ 3 tn), Japan ($2.64 tn) and Germany ($1.59 tn), in that order. PURCHASING POWER OF RUPEE : It is calculated with reference to a base period and is broadly the reverse of the rise (or fall) in consumer prices since then. For example, if the consumer price index has risen over 15 times between, say 1960 and 1995, the purchasing power of the rupee is said to have fallen to 6.6 paise in 1995 in terms of its value in 1960.

PROTECTION : The practice of imposition of barriers by Government through tariffs or

quotas to restrict inflow of imports into domestic economy. While the developed countries are pressurising developing nations through forums like GATT AND IMF into opening up their markets, they themselves are zealously guarding their own domestic barriers behind increasingly protectionist barriers. PDO : The Public Debt Office of the Reserve Bank of India. In ledgers earmarked for each bank, the PDO records transactions between banks in government securities. Each kind of security transaction is recorded separately.

REVENUE LOAD FACTOR : Ratio of revenue-yielding tonne kilometres performed to available tonne kilometers-a measure of capacity utilisation. READY FORWARD : Known worldwide as repurchase options or repos. The Reserve Bank of Indias records refer to it as buyback. It involves selling securities with the purpose of buying them back after a short period of time, usually at a slightly higher price. The seller thereby creates temporary liquidity for himself for which he pays the higher price. DOUBLE READY FORWARD : Simultaneous buying and selling of two sets of securities with the buyback options created by both the parities. The sellers objective could be to create liquidity by selling one kind of security (normal ready forward) and at the same time buying some other kind for the portfolio. PROTECTIONISM: The practice of imposition of barriers by a government through tariffs or quotas to restrict inflow of imports into the domestic economy. While the developed countries are pressuring developing nations through forums like GATT and IMF into opening up their markets, they themselves are zealously guarding their own domestic markets behind increasingly projectionist barriers. QR: stands for Quota Restrictions, See Protectionism.
REQUESTS AND OFFERS: In trade negotiations concessions are usually negotiated bilaterally

amongst CPs. the result of this is later required to be extended to all the CPs through MFN. SICK UNIT: An industrial company (being a company registered for not less than seven years)which has at the end of any financial year accumulated losses equal to or exceeding its entire net worth and has also suffered cash losses in such financial year and the financial year immediately preceding such financial year.

SOCIAL SECURITY SYSTEM : In the developed countries shoes who are unemployed get
a minimum unemployment pay, which allows the individual to survive. Though these facilities arte also being drastically cut, the social security system in these countries are incomparable with what exists in third world countries like India. Besides, with greater general wealth in these imperialist countries, built from the loot of the backward countries, the ability of the individual to cushion loss of income through job cuts is much more. In the underdeveloped countries there is no social security system, and loss of income can mean starvation and death. Besides, with the generally low levels of earnings capacity, the ability to cushion sudden job losses etc., is fast reducing. In addition, with saving systems being looted by the powerful [like the NBFCs, UTI and even banks] and interest rates being drastically cut, savings are vanishing adding to the already existing insecurities in life. SLR : Statutory liquidity ratio is a percentage of their deposits that banks are supposed to mandatorily invest in approved securities mainly state and central loans. It used to be 38.5 percent and is now down to 30 percent. SECURITIES : In common usage in India, a coverall term denoting bonds, not equities, stands for bonds issued by the public sector companies like the National Thermal Power Corporation, the Indian Railways Finance Corporation etc., Central and State Government loans (for instance

11.5 percent central loan that matures in 2010). Sometimes also loosely used for units of the Unit Trust of India.

SHARES : Financial Securities issued by a joint-stock company as a means of raising long-term

capital are called shares. The Shareholders of a company are its legal owners and are entitled to a share in the profits. Shares are traded on the Stock Exchange. The share price is determined by supply and demand. The face value of the share certificate is the price at which company sells it, at the time of a new issue. If the company does well (or due to speculation) the market value of the share certificate on the stock exchange rises well above its face value. If it does badly the price drops. Shareholders are individuals who contribute funds to finance a joint-stock company in return for shares in that company. There are two main type of shareholders: (a) holders of Ordinary shares (equity these comprise the major shareholders) and are entitled to a dividend, based on the companys profits; (b) holders of Preference Shares, who are entitled to fixed dividend (like an interest payment), no matter what the profit or loss of the company. In case of bankruptcy, they have the first claim on the assets of the company. The Share Capital is the money employed in a joint-stock company that has been subscribed by the shareholders of the company. in the form of Ordinary Shares (equity) and Preference Shares and which will remain as a permanent source of finance as long as the company remains in existence. Market Capitalisation is the market value (not the face value) of the share capital as quoted on the stock exchange. Of late this has become the basis for the valuation of companies and not its asset value. This is an irrational method of valuation, as the value fluctuates enormously, depending on many factors, like speculative trading on the stock exchange. An example was the market capitalization of DOT companies, which reached dizzying heights, unconnected with the real value of the companies or the profits earned. These crashed, when the speculative bubble burst. The Stock Index is the number quoted on a stock exchange at a given time, indicating the fluctuations in the value of the shares. Index numberings are normally set by using a cut-off date, giving the value of 100 on that date. At a future date, an increase in value of the share price by, say, 20%, would mean that the index will rise to 120. If a week later it drops by, say, 10% the index would fall to 108. So, for example, the BSE index hovers around 3000 to 6000 depending on the value of the shares on a particular day. A bear condition is said to exist when the index is low or falling; while a bull condition is said to exist when the index is high or rising. If there is heavy selling, demand drops and the index falls. If there is heavy buying, by say FIIs, there is heavy demand and the index can be artificially boosted. With Foreign Institutional Investors (FIIs) dominating the Bombay Stock Exchange, through the huge funds at their disposal, they are able to manipulate the stock exchange index through large-scale buying and selling on the stock market. They thereby make windfall profits through speculative achievements on the Indian stock markets.
What is Sensex?

The performance of any stock market-whether it is going up or down is reported in an Index or Average. The index or average serves as on important tool for measuring the overall health of the stock market. In most countries, there is more than one Index.

The Index or Average is known by different names in different countries. For instance, one of the well known and most widely reported Index of Bombay Stock Exchange is Sensitive Index [popularly known as Sensex] Similarly, in other countries, the popular and widely reported Index are Nikkei in Tokyo. Hang Seng in Hong Kong Composite in Jakarata, Manila, Seoul and Kuala Lumpur; Dow Jones Industrial Average, Standard & Poors 500 Index and Nasdaq Composite Index in U.S. Stock Exchange: This is a Market that deals in long-term company securities (stocks and shares) and government securities (bonds). The stock exchange performs two principal functions. It provides (a) a primary or new issue market where new capital for investment and other purposes can be raised by the issue of financial securities; (b) a secondary market for dealing in existing securities, which facilitates the easy transferability of securities from seller to buyer. The stock exchange thus occupies an important position in the bourgeois financial system by providing a mechanism for converting individual savings into investments for use by companies. In India the two major stock exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange at Delhi. Of late, most cities in the country also have stock exchanges. SGL : The subsidiary general ledger maintained by the PDO in which government security transactions are recorded. As described above, the SGL will show the balance standing in the name of a particular bank in a particular security. SGL note : Banks dont exchange securities physically when they buy and sell. The selling bank issues SGL notes to the buying bank which then presents these notes to the PDO which posts them in the SGLs. BR : Bank receipts are issued by the selling bank, signifying that it has received money and is holding the securities in trust for the buyer. BRs are supposed to be non-transferable and to be discharged after the securities are delivered. A BULL : mean stock exchange speculator who buys shares in belief that prices will rise and that he will be able to sell them again at profit. A BEAR : means stock exchange speculator who sell shares in belief that prices will fall and that he will be able to buy them back at low prices thus making profit.

This is a form of company where a number of people contribute funds to finance a FIRM in return for SHARES in the company. Joint stock companies are able to raise funds by issuing shares to large number of SHAREHOLDERS and thus able to raise more capital to finance their operations than could a sole proprietor or even a partnership. Once a joint-stock company is formed it becomes a separate legal entity from its shareholders, able to enter into contracts with suppliers and customers. This is a convenient ruse of the bourgeois system where the owner of the company can absolve himself of all fraudulent activities, acting through the company. Jointstock companies are managed by the board of directors, supposedly appointed by the

shareholders, but in fact appointed either by the promoter (i.e. the person who starts the company) or those who control bulk shares of the company. The directors report the progress of the company to the shareholders at an ANNUAL GENERAL MEETING. There are two types of joint-stock companies:
a) Private Company. Where the maximum number of shareholders is limited to 50 and the

shares the company issues cannot be bought and sold at the stock exchange. companies carry the term Limited (Ltd) after their name.


b) Public Company. Where there are a minimum of 7 shareholders; but otherwise such a company can have an unlimited number of shareholders. Shares in a public company can be bought and sold on the stock exchange and so can be bought by the public. Most big firms are public companies, as in this way they are able to corner vast amounts of money (savings) from thousands of people. Though the shareholders are the official owners of the company, it is the management that effectively controls the company. SPECIAL 301: A class in United States Omnibus trade and competitiveness Act 1988, under which India is threatened with retaliatory action, if she does not amend her patent laws to suit US interests. If India refused to succumb, the US, might slap 100% or higher countervailing duty on Indian Exports to US, devastating this Nations export earnings. In short, a throwback to extra territorial law.


Stock trading goes on nearly 24 hours a day, on dozens of different exchanges in different countries in different time zones. As the trading ends in one city, activity shifts to a market in another city. Before the New York markets close, for instance, trading begins in Wellington; and two hours after Tokyo closes, London markets open. With two and a half hours to go in London, trading resumes in New York. The globalisation process has made it easier for institutional investors to trade simultaneously on different exchanges. SAFEGUARDS Article XIX of GATT permits a CP to protect a specified domestic industry from dumping by other countries. This is an emergency provision. SELECTIVITY When safeguards are applied to an individual supplier and not to all importers. S AND D Special and Differential Treatment. This allows a special treatment to the developing countries under Part IV of the General Agreement. Specially section 18 of this allows for exemptions when a nation is faced with a BOP crises. Under DDT this is sought to be diluted by making its application stringent and only for the poorest countries. India will not be able to use it.

SUPER AND SPECIAL 301 These are provisions in the US law which allow the US to engage in coercive negotiations with the object of achieving its purpose, namely, increasing access to the markets of other countries. Countries which were supposed to be acting in a manner detrimental to the US interest could be retaliated against under these provisions. For instance, if India did not comply with allowing better access to US goods, under Super 301, US wanted other countries to give access to its services like banking and insurance. GATT was found to be very slow in opening up markets and so these provisions were supposed to increase access to US goods and services before GATT could be sorted out. This was used effectively by the US against the leaders of opposition from the Third World, to break their unity. These have been effectively used against India, China and Brazil to split them up and soften them. These measures are against the GATT rules of Standstill and Roll Back but no nation has dared to complain against the US in GATT. SERVICES These include a whole array of governmental and private activities in the fields of administration, law and order, defence, construction, banking, insurance, education, culture, advertising, media, tourism and the like. the original role of the service sector was that of lubricant for the economic machine moving on the wheels of agriculture and industry. However, in India there has been a totally disproportionate swelling of the services sector with little relation to the actual requirements of the economy and society. And again within the service sector basic needs like housing, health care, education and social welfare get the least attention while administration, defence and internal security corner the lion's share of funds. SUBSIDIES Subsidies are compensatory payments made by government agencies to produces and traders of goods and services level. For example the Fertiliser subsidy paid to fertilizer manufacturers is supposed to enable them to sell the product at below production costs to farmers. Scrapping of subsidies has always been a standard prescription of the IMF. But the real problem is that the bulk of subsidies in India are not properly targeted. For example, not even half of the total subsidy on education is spent on primary education. Only 20% of the subsidy on health services and one-third of the subsidy on water supply to continue. Sanitation and housing flow to the rural sector which houses 75% of the overall population majority of whom are below the poverty line. TRIMS Acronym for Trade Related Investment Measures. Under this, the advanced nations want removal of hindrances to the flow of their capital to the Third world nations. Thus foreign capital would not be required to earn foreign exchange or indigenous technology and it cannot be told to use local raw materials. It would not be required to transfer technology to the Third World. DDT considers these kinds of restrictions as "trade distorting" hence is asking for their removal from the laws of the Third World. Indian government under pressure has already reduced FERA to nothing. It will make nonsense of Planning in India since TNC priorities may not be those of the government. It will mean end to the backward area programmes to promote investments there.

TRIPS Stands for Trade Related Intellectual Property Rights (See Intellectual Property Rights). Third World countries need technology for their development and to catch up with the advanced nations. Even today's advanced nations like Japan and Germany had not protected IPR during their development stage. Now the advances nations want much greater protection to their technologies and in the process make the Third World countries permanently dependent on them Under TRIPS retaliation would be possible against the countries considered to be giving inadequate protection by the standards of the advanced nations. TAXES They are of two types - direct and indirect. The former is levied on wealth or income and the latter collected through excise duties and sales taxes on products and customs duties on import. Direct taxes are paid only by about 5 million individuals in the country. Only 25% of these (in 1986-87) have salary as the major sources of income and they contributed only 5% of the direct taxes. These taxes are then collected mostly from those having property. Indirect taxes through the increased prices of items of day to day consumption pinch the pockets of not only the common man but even the destitute.. In India 85% of tax revenue is done from Indirect taxes (which through increase the prices of items of day-to-day consumption. Pinch the pockets of common man including destitutes), but only 25% have salary as major sources of income and they contribute 5% of direct taxes. In contrast, most countries of world collect 50% or more of their tax revenue from direct taxes. UNACTED : United Nations conference on trade and development. UNTC : UN center on transnational corporation. USTR : US Trade representatives. URBAN AGGLOMERATION : A main town/city together with smaller towns which can be considered as urbanised and contiguous to the main town/city. RECORDED FOREST AREA : All lands classes as forest under any legal enactment.

URUGUAY ROUND : Eight round of multi-national trade negotiations held under the
auspicious of GATT, since the round was launched in Punta del Este (in Sept 1986) in Uruguay it bears the name Uruguay round even if meetings of this found is held in Geneva or elsewhere. VER : Voluntary Export Restraint: a bilateral arrangement of dubious GATT validity in which the exporting country undertakes to limit exports of a particular product to a particular market. WIPO : World Intellectual property organisation. WTO : World Trade Organisation super GATT have powers to institute a dispute settlement system (DSS) and arbitration machinery.


A currencys value what it is worth in relation to other currencies depends on how attractive it is in the marketplace. If demand for the currency is high its price will increase relative to other currencies. However, changes in the political environment (e.g. war, civil unrest, etc.) or economic run-down due to high inflation and trade deficits can cause a stable currency to fall, as investors tend to convert their currencies into foreign currencies considered to be more stable. This raises the value of the foreign currency. World currencies are traded regularly in the glob al

foreign exchange market. Although three currencies U.S dollar, German mark and Japanese yen dominate the worlds currency trade, the prospects of any one of these to become the sole international currency seem to be remote.
EUROCURRENCY Any major currency on deposit in banks outside the country of origin is

known as Eurocurrency, such as Eurodollars or Euroyen. The money can earn interest, be used to make investments, settle transactions between trading partners, or be loaned. Eurocurrency is popular in part because it is useful in international trade, where bills have to be paid in a specific currency.
CURRENCY TRADING The trading goes on round the clock, throughout whats known as the

global trading day, which begins when the New Zealand market opens and runs through the end of New York trading. Published rates are updated regularly. A good profit can be made within split seconds and on small differences in prices. Currency trading is carried out in the following three different ways: Spot Transactions: In spot transactions, the trade occurs immediately and is settled within two days. Spot transactions take place in an over-the-counter market, rather than at a central location such as an exchange. Trading is handled on the telephone or electronically through a network controlled by banks or other corporations. Though they account for less than half of the total currency turnover, spot transactions are big money deals, with minimum trade of $1 million. Forward Transactions and Swap Contracts: Forward transactions and foreign exchange swaps are contracts to exchange currency at an agreed upon price at a future date.


(in $ billion)
Fund Managers Union Bank of Switzerland Kampo Fidelity Axa Barclays Merrill/MercuryAsset Mgmt. Credit Suisse Prudential Insurance Nippon Zurich Country Switzerland Japan U.S France Britain U.S Switzerland U.S. Japan Switzerland Assets 920 798 516 496 385 382 378 333 332 312

1 As of third quarter 1997 2 The Japanese Postal Insurance system 3 Including Winterthur 4 Included Scudder, Kemper and Threadneadle Asset Management

World Top Mutual Fund Managers in U.S.

(by assets under management in $ billion as on August 31, 1997) Fidelity Investments Vanguard Group Capital Research & Management Merrill Lynch Asset Management Franklin/Templeton & Mutual Series Putnam Funds Federated Investors AIM/Invesco Dreyfus Corp./Mellon Bank Morgan Stanley, Dean Witten Smith Barney IDS Mutual Fund Group SEI Financial Services T.Rowe Price Oppenheimer Funds/Mass Mutual Does not include TIAA-CREF 521.9 310.6 227.1 187.9 165.2 161.0 101.3 93.9 88.5 87.0 86.6 85.0 84.0 82.4 80.3 *Part of Capital Group

World Major International Fund Management/ Bank Mergers ($bn)

Duetsche Bank/Morgan Grenfell Franklin/Templeton SBC/Brinson Partners ING/Barings Commerzbank/Jupiter Tyndall Zurinch Insurance/Kemper SBC/Warburg Dresdner/Kleinwort Benson Barclays Bank/Wells Fargo Nikko NatWest/Gartmore Morgan Stanley/Van Kampen American Capital NatWest/Greenwich Capital Holdings Franklin Templeton/Mutual Series AXA/Union des Assurances de Paris Invesco/AIM Management Group Morgan Stanley/Dean Witten Discover Nations Bank/Montgomery Securities J.P. Morgan/American Century Nov.89 Aug.92 Aug.94 Mar.95 April95 April95 May95 June95 June95 Feb.96 June96 June96 June96 Nov.96 Nov.96 Feb.97 July97 Aug.97 1.4 0.9 0.8 -1.4 0.3 2.0 1.4 1.6 0.4 0.7 0.8 0.6 6.1 7.8 1.6 10.0 1.2 0.9


The World Bank was originally set up as the International bank for Reconstruction and Development (IBRD). Born in a conference held at Breton Woods, New Hampshire, U.S.A. in July 1944, along with its twin, the International Monetary Fund (IMF). Together they came to be known as the Bretton Woods sisters. The conference that brought forth the two sisters, was actually taking place at a very significant time, World War II had just ended.

WORLD BANK It is a sister organisation of IMF. The governing structures of IMF and World Bank are similar. The annual meetings are held jointly. Both have their head quarters in Washington. Founded : 1944 Members : 158 (likely to increase due to changes in EE, and disintegration of USSR) Voting : Like IMF, WB also uses weighted system of voting. Each country has 250 votes plus one additional vote for each share of the value of US $ 100,000 each. Distribution : Country USA Japan Germany UK France China India Votes in % 19.63 9.43 7.29 6.99 4.76 2.55 2.55 % GP (Global Population) 5 2.40 1.20 1.10 1.00 21.00 16.00

The Biggest shareholder gets most of votes on the powerful Executive Board. Industrialised countries (over 60% of votes) have an effective say on policy matters. One representative from each member country sit on the Bank's Board of Governors, though day to/day decisions of the Bank are made by 22 Executive Directors who reside permanently at Banks headquarters in Washington. Five are appointed by members holding greatest amount of shares (Germany, France, Japan, UK and USA) while 17 are elected by a group of countries. At present India is an elected executive Director of the Bank. Loans : The majority of loans that Bank makes are financed with borrowing from international capital market, not from the contributions on the international capital markets. In 1988 its borrowings amounted to $ 84.5 billions since its inception, the Bank has earned huge profits every year. Project Loans : Traditionally, the World Bank gives loans to specific project in member countries for e.g.: Loans to Narmada, hydro electric dam project in India, coal mining projects, transportation projects, like roads, agricultural, telecommunication, industrial and urban development project. Sectoral Adjustment Loans :

These loans have been given more and more by the Bank in 1980 as countries in the third world grapple with increasing debt. Although these loans are still project loans but only a part of the money is used to meet the costs of specific projects while rest goes to support policy changes in relevant sector. For instance, a part of loan for energy sector would be used in some specific projects say a thermal power, but the rest will be disbursed against changes in policies of the energy sector such as cut in subsidy for electricity greater role of private companies in exploration and development of natural gas, oil etc., such sector wise policy changes are distinctive feature of sector adjustment loans STRUCTURAL ADJUSTMENT LOANS : (SAL) These loans are completely disconnected from projects are disbursed quickly in return to major economic policy changes at national level similar to IMF loans. SAL programme requires the borrowing country to make policy reforms, although these tend to be more fundamental institutional changes than short term arrangements of IMF. These loans are designed to support a greater reliance on market forces, cuts in Government price interventions, subsidies, greater reliance on private sector, than public sector and liberalised trade policy

Europe was the major theatre of war, which had been devastated. In contrast, the United States of America was the only country at the end of the war that still had its productive capacity intact and could also compensate others lacking such capacities. Its economy and position was therefore, the strongest in the new dispensation. The founders envisioned two primary functions in the post-War era. The reconstruction of Europe and guaranteeing private banks project loans to poorer countries. As an agent of reconstruction, the Bank was stillborn. What war shattered Europe needed was not interestbearing loans for projects but rapidly disbursing grants and concessional loans for balance of payment support and desperately needed imports to meet their basic needs. In all, the Bank advanced only four loans for reconstruction totaling US$497 million. It was the US-initiated Marshall Plan, not the Bank that was the engine of European reconstruction, disbursing $41 billion by 1953. The World Bank and the IMF were designed primarily by officials of the US government with inputs from the British delegation to the Bretton Woods Conference. The IBRDs headquarter was located in the USA because its charter specified that the principal office of the Bank shall be located in the territory of the member holding the greatest number of shares. At the time of founding, USA was the largest shareholder (37%) among the member nations. Significantly, the choice of Washington D.C. over New York city to headquarters it was considered a victory for the US position that the World Bank and the IMF should be subject to close control by national governments over the arguments by British economist Lord Keynes that the institutions should operate as autonomous institutions, divorced from the vicissitudes of national policies. Initially they had exclusive but closely related responsibilities. The IMF was supposed to provide short-term finance to countries facing a crisis of foreign exchange. The World Bank, however, was to rebuild the shattered economies by financing long-term and medium-term development by providing specific project loans for building highways, laying rail-tracks, building power plants, etc.


The WB and IMF have similar governing structures, located at a common venue in Washington. The jointly held annual meeting is a family get-together of sorts. The Governing structure of the Bank is not democratic. It is not based on the principle of


Though, they are different institutions, there are several reasons to believe that they are inseparable twins: . membership in the IMF is a prerequisite for membership in the WB; . annual meetings of the IMF & WB are held jointly . their governing structures are similar. In fact there is some overlapping in the membership of the Executive Board; . these two institutions share the same perception and paradigm of development one country one vote, but the one dollar, one vote system. Votes are weighted according to the amount of money each country puts into the Bank. Each country has 250 votes plus one additional vote for every share that it holds, each worth US $ 1,00,000. Members buy shares by subscribing money to the Bank. For any amendment in the rule requires 85% of the votes. The US being the largest shareholder with 19.63% votes can veto any amendment. While, China and India together have only 5.10% of the total votes, despite representing 36% of the worlds population. The rich countries have effective say in policy matters.

The World Bank has the following organisational structures:

Under the World Banks Articles of Agreement, all of the Banks powers are vested in a Board of Governors, which has one representative from each member country. A nations Governor typically is that countrys Minister of Finance or equivalent, acting ex-officio. While certain important decisions are reserved for the Board of Governors, it meets only once a year. Regular and routine operations are conducted by its Executive Directors { EDs}and the President.

As provided for in the Articles of Agreement, the board consists of 22 EDs, with alternates. The five countries having the largest number of shares of capital stock ( currently USA, Japan, Germany, France and United Kingdom), each have a permanently appointed Executive Director, while the remaining Executive Directors are elected by the governors representing the other member countries. While the Executive Directors owe allegiance to the Banks Articles of Agreement, they also are subject to the wishes of the Governments they represent.


The world Bank president is the Chairman of the Board of Executive Directors and serves as the chief of the Banks operating staff. The president is appointed by the Executive Directors. The President conducts, under the direction of the executive directors, the ordinary business of the Bank. All the presidents of World Bank have been Americans, reflecting the initial and continuing influence of the United States on the Bank.


The Officers and staff of the world Bank are divided into six regional groups, along with various administrative sectors. The regional groupings are 1.Africa; 2.East Asia and the Pacific; 3.South Asia; 4. Europe and Central Caribbean. Each country group is headed by a Bank vice president. In addition to the regional groupings, there are nine operational sections covering such areas as accounting, economics and personnel, and a number of international field offices. The World Banks legal department is separate from the regional groups, but its Lawyers are assigned to a specific country or operational sections within regional groups. Votes in the WB Country % of total votes USA 19.63 Japan 9.43 Germany 7.29 UK 6.99 France 4.76 China 2.55 India 2.55


Like a Hindu god, the Bank has 4 arms the International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA), the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA) IBRD Founded :1944 Members: 176 Function: The International Bank for Reconstruction and Development (IBRD) lends money at near-market rates to developing countries. According to its own literature, it lends money to help reduce poverty and to finance investments that contribute to economic growth. In 1993, the IBRD approved $ 16.9 billion in loans to 45 countries. Loans are divided between structural adjustment program loans, sector loans and project loans. The payback period is 15 to 20 years. All IBRD loans are guaranteed by creditor governments, through appropriations decided by their individual governments. Consequently, World Bank bonds enjoy the security of triple A ratings, signaling very low risk. Most IBRD funds come directly from bond sales.

Activities in India: Nearly 51% of the total Bank lending to India is by IBRD loans. This includes various developmental projects like Nathpa Jhakri Project, National Dairy Project and Upper Krishna Irrigation II Project. IDA Founded: 1960 Members: 150 Purpose: Concessional loans to poor countries. Function: Gives 90% loans to poorer countries in the fields of agriculture and rural development. It generally finances a larger percentage of total project costs than the Bank. In 1988, IDA lent US$ 4.5 billion for 99 projects and adjustment programmes, amounting about 23% of total Bank lending. The IDA requires frequent infusions of new contributions and is extremely vulnerable to shifts in the political climate for aid. The bank holds IDA replenishment discussions approximately every three years, with a round just completed, which is referred to as IDA 10.(IDA 9 was in 1989, and IDA 11 is expected to be held in 1996). IDA takes presently an opportunity to raise human rights concerns in the Bank in a bilateral context. Activities in India: The structural adjustment programme and Subarnarekha dam are examples of IDA credits in India. The national renewal fund in India is funded by IDA support. IFC Founded: 1956 Members: 153 Purpose: IFC backs loans for private sector investment in member countries without guarantees of repayment by the concerned member government. The IFC was established to assist the economic development of less developed countries by promoting growth in the private sector of their economies and helping to mobilize domestic and foreign capital for this purpose. Membership in the IBRD is a pre-requisite for membership in the IFC. Legally and financially, the IFC and the IBRD are separate entities. The IFC has its own operating and legal staff, but draws upon the Bank for administrative and other services. Function: Bulk of its money comes from capital subscription of its member. It has the same directors as those from the Bank and operates on a weighted voting system. Mot of the IFCs AUSTERITY mining, energy, tourism investments are in manufacturing followed byBEGINS AT HOME! and public utilities. . The Ex-world Bank President, Mr.Lewis Preston received one billion dollars in 57 as Activities in India: Since 1959, the IFC has invested about Rs.90,00,000 ( $3,00,000)companies salary in India, in shipping, iron and steel, chemicals, fertilisers, building and industrial operatingand perks every year. equipment, etc. The TISCO modernisation plan and the Chandil Iron Project in Bihar are a few . The World Bank earned a profit of Rs.2,100 crore in the first half of 1993. examples. . For every dollar the US government has paid into the World Bank, the US private Sector has received $1.19 in contracts for Bank financed Projects. . There was a net transfer from all borrower countries of about $2 billion to the World Bank in 1992. . World Bank directors recently approved a 6.2% increase in staff remuneration ( Salary + benefits) to an average of US$ 1,23,000. This increase in wages comes in face of decreasing performances as evaluated by internal and external reports.

Source: The World Bank (1993)


3) MIGA : Founded in 1988, Member 104 Purpose : To encourage the flow of private foreign investment to developing countries by guaranteeing the investments of foreign corporation against risks, such as civil war, host Government currency restrictions, Nationalisation etc., NOTE 1 : India is pressurised to become a member of MIGA NOTE 2 : The President and Board of Directors of all these four "Arms" are same those of World Bank. Purpose: To encourage the flow of private foreign investment to the developing countries by guaranteeing the investments of foreign cooperation against risks such as civil war, host government currency restrictions, nationalisation, etc. MIGA also offers investors guarantees against non-commercial risks, advises developing member governments on the design and implementation of policies, programs and procedures related to foreign investments; and sponsors a dialogue between the international business community and host governments on investment issues. Function: The President and Board of Directors of MIGA are the same as those of the World Bank. Activities in India: In 1993, India became a member of the MIGA. The Loan Cycle Bank projects are identified in an ongoing process within a broad based framework evolved by the Bank staff and representatives of a recipient countrys government on the problems and needs of that country. The following is a description of the IBRD project loans or IDA credit process: Identification Stage: The idea of a project often arises out of existing work in the recipient country. Its part of a continuing dialogue between Bank staff and representatives of the recipient

countrys government. A frequent aim is to identify projects that will help remove bottlenecks and other constraints. But in consonance with the Banks reputation as a slow, lumbering institution, the identification stage can take over a year. Preparation Stage: This stage begins after a projects incorporation in the countrys lending program. Its purpose is to define objectives, identity issues & problems, and set a timetable for further processing. Preparation considers the full range of technical, institutional, economic and financial conditions necessary to achieve the projects objectives. It often involves economic and sociological studies and feasibility studies regarding particular solutions proposed. This work normally takes one to two years. Appraisal Stage: The appraisal stage is its sole responsibility. It involves an evaluation of the technical, institutional, economic and financial aspects of the project. The appraisal report sets forth findings & recommendations for terms & conditions of the loan. Since the Bank staff is closely involved in its identification and preparation, appraisals rarely result in rejection. Negotiation and Board Approval: This stage involves the drafting and negotiation of the legal documents which deal with all of the issues raised prior to and during appraisal. On completion of negotiations, the appraisal report , amended to reflect the consensus reached is presented to the Board of Executive Directors together with the Presidents Report and the proposed loan documents. Implementation Stage: Responsibility for project implementations is that of the borrower. The Banks role is to supervise implementation to ensure conforming to project specification. In 1992, two internal bank reviews identified important problems in project implementation and its evaluation by the Bank. The June 1992 report of the Morse Commission established to investigate the Sardar Sarovar Dam in the Narmada Valley of India, found serious flaws in the projects resettlement & rehabilitation besides its environmental impact. The September 1992 report of the Portfolio Management Task force headed by Willi Waperhans confirmed on a broader basis many of the findings of the Morse Commission. Evaluation State: The final step in the project cycle is an expost audit by the Operations Evaluations Department (OED), a division of the Bank which is separate from the operating staff and reports directly to the Executive Directors. After the Bank funds have been fully disbursed, the Bank project staff prepare a completion report.

These loans have been increasingly given by the bank in 1980s as countries in the third world grapple with debt problems. Although these loans are still project oriented, only a part of the money is used to meet the costs of specific projects while the rest goes to support policy changes in the relevant sector. For instance, a part of the loan for the energy sector would be used in some specific project say a thermal power project but the rest will be disbursed against changes in the policies of the energy sector such as cut in subsidy for electricity, greater role for private companies in exploration and development of natural gas and oil etc. Such sector-wise policy changes are the distinctive feature of sectoral adjustment loans.


These loans are completely delinked from projects and disbursed quickly against commitment to carry out major economic policy changes. As in the case of IMF loans, the SAL programmes require the borrowing country to make policy reforms, albeit fundamental institutional changes. The World Bank has given more SAL loans in the 1980s and is committed to providing more loans of this kind during the 1990s. In 1988, 27% of total bank lending was in the form of SAL. In December 1991, India received US $8 billion from the World Bank under the Structural adjustment loan. These loans are designed to support a greater reliance on market forces, cuts in government price interventions and subsidies, greater reliance on private sector as compared to the public sector and a liberalised trade policy.

The Bank claims to be neutral and decisions are taken on the basis of pure economics. In reality its an excuse to enthusiastically support corrupt, rightwing regimes and colonial governments. As per the 1947 agreement, the World Bank functions as an independent agency of the United Nations. It is required to conduct its activities in consonance with decisions of the United Nations. In December 1965, the UN assembly passed two resolutions calling upon the World Bank to deny any assistance to the governments of South Africa and Portugal because of their respective apartheid and colonial policies in Africa. But, the Bank refused to comply with the UN resolutions and continued to approve loans to both South Africa and Portugal. In 1947, the Bank sanctioned a loan of $195 million to Netherlands which had then unleashed a war against anti-colonial nationalists in Indonesia. When Chiles left-wing government of Salvador Allende was elected in 1971, the Bank effectively stopped all loans. Funding was resumed shortly after the 1973 CIA backed military coup.

World Bank and ADB: Lenders or Borrowers

In the eyes of the general public, the World Bank and the ADB are seen as generous lenders who lend money to third world countries to support developmental projects. In fact, both these institutions are borrowers too,. The ADB, which has 56 countries as members, raises money through international debt offerings. For instance, in early 1998, the ADB launched a $ 387 million bond for the Hong Kong domestic market, the proceeds of which will be used to augment its lending resources. Similarly, the World Bank raises money by issuing bonds to individuals, institutions and governments in more than 100 countries. The bonds are guaranteed by the governments of the 178 countries who are members of the Bank, and who technically own it.

In 1992, IBRD and IDA lending reached a combined total of $21.7 billion. The Banks assistance to the poorest countries totaled $ 10 billion: $4.8 billion from IBRD 5.2 billion from IDA. The structural adjustment lending amounted to $5.8 billion or 27% of all the assistance in 1992. India was the top recipient of IDA credit and second of IBRD credit.


1950s 60s : Basic infrastructure (energy, telecommunications, mining and commercial farms) 1970s : Equity (education, population, health, nutrition, urban development, water REPORT CARD OF THE BANK supply and sewage); development of finance companies and small enterprises; : $312 bn : 7000 :2 : 1%

.Amount of money lent by the World Bank since adjustment lending 1980s : Non project lending or structural 1947 . Number of employees at the World Bank 1990s : Poverty reduction . Percentage of employees that are in the Environmental Department . Amount of total World Bank energy expenditures used on efficiency and conservation

. 1987, the Bank projects which the World Bank to the relocation : In Number of combined lending of had successful populationenergy sector was 21%. 0 Most of it financed big hydroelectric dam projects (such as Narmada and Subamarekha in India), coal .Percentage of Bank projects involving forced relocation which did not have resettlement experts : 75% .Percentage of 1991 World Bank projects deemed as unsatisfactory in the Banks internal report . Percentage of World Bank presidents who were US citizens : 37.5 : 100

which assesses the degree to which the goals and estimates set forth in the appraisal have been met. The OED prepares an audit report and both the audit and completion reports are submitted to the Executive Directors.

The World Bank has three types of loan facilities listed below:

Traditionally, the World Bank has been giving loans to specific projects of the member countries.

mining projects, transportation projects lime roads, agricultural, telecommunications, industrial and urban development projects.

World Trade Organisation (WTO)

What is the WTO?

The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the worlds trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business. Location: Geneva, Switzerland Established: 1 January 1995 Created by: Uruguay Round negotiations (1986-94) Membership: 147 countries (on 23 April 2004) Budget: 162 million Swiss francs for 2004 Secretariat staff: 600 Head: Supachai Panitchpakdi (director-general) Functions: Administering WTO trade agreements Forum for trade negotiations Handling trade disputes Monitoring national trade policies Technical assistance and training for developing countries Cooperation with other international organizations Ministerial Conferences The topmost decision-making body of the WTO is the Ministerial Conference, which has to meet at least every two years. It brings together all members of the WTO, all of which are countries or customs unions. The Ministerial Conference can take decisions on all matters under any of the multilateral trade agreements. WTO Director-General Dr. Supachai Panitchpakdi is Director-General of the World He took up his appointment on 1 September 2002 for three years Trade Organization.

Dr. Supachai began his professional career at the Bank of Thailand in 1974, working initially in the Research Department. Later, he moved to other divisions, including the International Finance Division and the Financial Institutions Supervision Department. In 1986, Dr. Supachai relinquished his post as the Director of the Financial Institutions Supervision Department to run for Parliament. Therafter, he was appointed Deputy Minister of Finance After dissolution of Parliament in 1988, Dr. Supachai was appointed Director and Advisor, and subsequently President, of the Thai Military Bank. In 1992, he was appointed Senator and led a sub-committee to draw up Thailand's Seventh National Economic and Social Development Plan (1992-1996).

Returning to politics in 1992, Dr. Supachai became Deputy Prime Minister entrusted with oversight of the country's economic and trade policy making. He held the position of Deputy Prime Minister until 1995. In 1993, he convinced the public and the private sectors on the need for Thailand to accept the Uruguay Round package and consequently helped steer its ratification through Parliament. Dr. Supachai represented Thailand at the signing ceremony of the Uruguay

Round Agreement in Marrakesh and he has ensured his government's full and faithful implementation of its obligations under the World Trade Organization (WTO. Dr. Supachai was the first to push for the formation of the Asia Europe Meeting (ASEM) that draws together heads of governments from Asia and Europe to foster closer ties between the nations of the two continents. He first proposed the formation of ASEM at the East Asia Economic Forum in Singapore in 1992. Following the change of government in November 1997 in the wake of Thailand's financial crisis, Dr. Supachai was appointed Deputy Prime Minister in charge of economic policies, and Minister of Commerce. In 2000, Dr. Supachai was awarded the Nikkei Asia Prize (Regional Growth).In 2001, he was appointed Visiting Professor of the International Institute for Management Development in Lausanne. Resolving Of Disputes WTOs procedure for resolving trade quarrels under the Dispute Settlement Understanding is vital for enforcing the rules and therefore for ensuring that trade flows smoothly. A dispute arises when a member government believes another member government is violating an agreement or a commitment that it has made in the WTO. The authors of these agreements are the member governments themselves the agreements are the outcome of negotiations among members. Ultimate responsibility for settling disputes also lies with member governments, through the Dispute Settlement Body Members and Observers 147 members on 23 April 2004, with dates of membership Albania 8 September 2000 Angola 23 November 1996 Antigua and Barbuda 1 January 1995 Argentina 1 January 1995 Armenia 5 February 2003 Australia 1 January 1995 Austria 1 January 1995 Bahrain, Kingdom of 1 January 1995 Bangladesh 1 January 1995 Barbados 1 January 1995 Belgium 1 January 1995 Belize 1 January 1995 Benin 22 February 1996 Bolivia 12 September 1995 Botswana 31 May 1995 Brazil 1 January 1995 Brunei Darussalam 1 January 1995 Bulgaria 1 December 1996 Burkina Faso 3 June 1995 Burundi 23 July 1995 Cameroon 13 December 1995 Canada 1 January 1995 Central African Republic 31 May 1995 Chad 19 October 1996 Chile 1 January 1995 China 11 December 2001

Colombia 30 April 1995 Congo 27 March 1997 Costa Rica 1 January 1995 Cte d'Ivoire 1 January 1995 Croatia 30 November 2000 Cuba 20 April 1995 Cyprus 30 July 1995 Czech Republic 1 January 1995 Democratic Republic of the Congo 1 January 1997 Denmark 1 January 1995 Djibouti 31 May 1995 Dominica 1 January 1995 Dominican Republic 9 March 1995 Ecuador 21 January 1996 Egypt 30 June 1995 El Salvador 7 May 1995 Estonia 13 November 1999 European Communities 1 January 1995 Fiji 14 January 1996 Finland 1 January 1995 Former Yugoslav Republic of Macedonia (FYROM) 4 April 2003 France 1 January 1995 Gabon 1 January 1995 The Gambia 23 October 1996 Georgia 14 June 2000 Germany 1 January 1995 Ghana 1 January 1995 Greece 1 January 1995 Grenada 22 February 1996 Guatemala 21 July 1995 Guinea 25 October 1995 Guinea Bissau 31 May 1995 Guyana 1 January 1995 Haiti 30 January 1996 Honduras 1 January 1995 Hong Kong, China 1 January 1995 Hungary 1 January 1995 Iceland 1 January 1995 India 1 January 1995 Indonesia 1 January 1995 Ireland 1 January 1995 Israel 21 April 1995 Italy 1 January 1995 Jamaica 9 March 1995 Japan 1 January 1995 Jordan 11 April 2000 Kenya 1 January 1995 Korea, Republic of 1 January 1995 Kuwait 1 January 1995 Kyrgyz Republic 20 December 1998 Latvia 10 February 1999

Lesotho 31 May 1995 Liechtenstein 1 September 1995 Lithuania 31 May 2001 Luxembourg 1 January 1995 Macao, China 1 January 1995 Madagascar 17 November 1995 Malawi 31 May 1995 Malaysia 1 January 1995 Maldives 31 May 1995 Mali 31 May 1995 Malta 1 January 1995 Mauritania 31 May 1995 Mauritius 1 January 1995 Mexico 1 January 1995 Moldova 26 July 2001 Mongolia 29 January 1997 Morocco 1 January 1995 Mozambique 26 August 1995 Myanmar 1 January 1995 Namibia 1 January 1995 Nepal 23 April 2004 Netherlands For the Kingdom in Europe and for the Netherlands Antilles 1 January 1995 New Zealand 1 January 1995 Nicaragua 3 September 1995 Niger 13 December 1996 Nigeria 1 January 1995 Norway 1 January 1995 Oman 9 November 2000 Pakistan 1 January 1995 Panama 6 September 1997 Papua New Guinea 9 June 1996 Paraguay 1 January 1995 Peru 1 January 1995 Philippines 1 January 1995 Poland 1 July 1995 Portugal 1 January 1995 Qatar13 January 1996 Romania 1January 1995 Rwanda 22 May 1996 Saint Kitts and Nevis 21 February 1996 Saint Lucia 1 January 1995 Saint Vincent & the Grenadines 1 January 1995 Senegal 1 January 1995 Sierra Leone 23 July 1995 Singapore 1 January 1995 Slovak Republic 1 January 1995 Slovenia 30 July 1995 Solomon Islands 26 July 1996 South Africa 1 January 1995 Spain 1 January 1995 Sri Lanka 1 January 1995

Suriname 1 January 1995 Swaziland 1 January 1995 Sweden 1 January 1995 Switzerland 1 July 1995 Chinese Taipei 1 January 2002 Tanzania 1 January 1995 Thailand 1 January 1995 Togo 31 May 1995 Trinidad and Tobago 1 March 1995 Tunisia 29 March 1995 Turkey 26 March 1995 Uganda 1 January 1995 United Arab Emirates 10 April 1996 United Kingdom 1 January 1995 United States of America 1 January 1995 Uruguay 1 January 1995 Venezuela 1 January 1995 Zambia 1 January 1995 Zimbabwe 5 March 1995 Observer governments Algeria Andorra Azerbaijan Bahamas Belarus Bhutan Bosnia and Herzegovina Cambodia Cape Verde Equatorial Guinea Ethiopia Holy See (Vatican) Iraq Kazakhstan Lao People's Democratic Republic Lebanese Republic Russian Federation Samoa Sao Tome and Principe Saudi Arabia Serbia and Montenegro Seychelles Sudan Tajikistan Tonga Ukraine Uzbekistan Vanuatu

Viet Nam Yemen Note: With the exception of the Holy See, observers must start accession negotiations within five years of becoming observers. International organizations observers to General Council: (observers in other councils and committees differ) United Nations (UN) United Nations Conference on Trade and Development (UNCTAD) International Monetary Fund (IMF) World Bank Food and Agricultural Organization (FAO) World Intellectual Property Organization (WIPO) Organization for Economic Co-operation and Development (OECD)

The Basel Committee

History of the Basel Committee and its Membership (February 2004)

The Basel Committee was established by the central-bank Governors of the Group of Ten countries at the end of 1974, meets regularly four times a year. It has about thirty technical working groups and task forces which also meet regularly. The Committee's members come from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, United Kingdom and United States. Countries are represented by their central bank and also by the authority with formal responsibility for the prudential supervision of banking business where this is not the central bank. The present Chairman of the Committee is Mr Jaime Caruana, Governor of the Bank of Spain, who succeeded Mr William J McDonough on 1 May 2003. The Committee does not possess any formal supranational supervisory authority, and its conclusions do not, and were never intended to, have legal force. Rather, it formulates broad supervisory standards and guidelines and recommends statements of best practice in the expectation that individual authorities will take steps to implement them through detailed arrangements - statutory or otherwise - which are best suited to their own national systems. In this way, the Committee encourages convergence towards common approaches and common standards without attempting detailed harmonisation of member countries' supervisory techniques. The Committee reports to the central bank Governors of the Group of Ten countries and seeks the Governors' endorsement for its major initiatives. In addition, however, since the Committee contains representatives from institutions which are not central banks, the decisions it takes carry the commitment of many national authorities outside the central banking fraternity. These decisions cover a very wide range of financial issues. One important objective of the Committee's work has been to close gaps in international supervisory coverage in pursuit of two basic principles: that no foreign banking establishment should escape supervision; and that supervision should be adequate. To achieve this, the Committee has issued a long series of documents since 1975. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accord. This system provided for the implementation of a credit risk measurement framework with a minimum capital standard of 8% by end-1992. Since 1988, this framework has been progressively introduced not only in member countries but also in virtually all other countries with active international banks. In June 1999, the Committee issued a proposal for a New Capital Adequacy Framework to replace the 1988 Accord. The proposed capital framework consists of three pillars: minimum capital requirements, which seek to refine the standardised rules set forth in the 1988 Accord; supervisory review of an institution's internal assessment process and capital adequacy; and effective use of disclosure to strengthen market discipline as a complement to supervisory efforts. Following extensive interaction with banks and industry groups, a final consultative document, taking into account comments and incorporating further work performed by the Committee, was issued in April 2003, with a view to introducing the new framework at end-2006. Over the past few years, the Committee has moved more aggressively to promote sound supervisory standards worldwide. In close collaboration with many non-G-10 supervisory authorities, the Committee in 1997 developed a set of "Core Principles for Effective Banking Supervision", which provides a comprehensive blueprint for an effective supervisory system. To facilitate implementation and assessment, the Committee in October 1999 developed the "Core Principles Methodology".

In order to enable a wider group of countries to be associated with the work being pursued in Basel, the Committee has always encouraged contacts and cooperation between its members and other banking supervisory authorities. It circulates to supervisors throughout the world published and unpublished papers. In many cases, supervisory authorities in non-G-10 countries have seen fit publicly to associate themselves with the Committee's initiatives. Contacts have been further strengthened by an International Conference of Banking Supervisors which takes place every two years. The next ICBS will be held in Madrid in September 2004. The Committee's Secretariat is provided by the Bank for International Settlements in Basel. The twelve person Secretariat is mainly staffed by professional supervisors on temporary secondment from member institutions. In addition to undertaking the secretarial work for the Committee and its many expert sub-committees, it stands ready to give advice to supervisory authorities in all countries.

Basel II (Revised International Capital Framework)

Central bank governors and the heads of bank supervisory authorities in the Group of Ten (G10) countries issued a press release and endorsed the publication of International Convergence of Capital Measurement and Capital Standards: a Revised Framework, the new capital adequacy framework commonly known as Basel II. The governors and supervisors met at the Bank for International Settlements in Basel, Switzerland, to review the text prepared by the Basel Committee on Banking Supervision.

Institutions represented on the Basel Committee on Banking Supervision

Belgium: National Bank of Belgium Banking and Finance Commission Canada: Bank of Canada Office of the Superintendent of Financial Institutions France: Banking Commission, Bank of France Germany: Deutsche Bundesbank German Financial Supervisory Authority (BAFin) Italy: Bank of Italy Japan: Bank of Japan Financial Supervisory Agency Luxembourg: Surveillance Commission for the Financial Sector Netherlands: The Netherlands Bank Spain Bank of Spain Sweden: Sveriges Riksbank The Swedish Financial Supervisory Authority Switzerland: Swiss National Bank Swiss Federal Banking Commission United Kingdom: Bank of England Financial Services Authority United States: Federal Reserve Board Federal Reserve Bank of New York Office of the Comptroller of the Currency Federal Deposit Insurance Corporation Secretariat: Bank for International Settlements


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02 Asset Reconstruction Company or Fund 03 Asset-Liability Mismatch 04 Balance of Trade: Real Effective Exchange Rate 05 BOP 06 Call Money Market 07 Capital Account Convertibility 08 Capital Adequacy 09 Capital Adequacy Ration (CAR) 10 Captial Controls 11 Cash Reserve Ratio 12 Certificate of Deposit 13 Consumer Price Index (CPI) 14 Cost of Capital 15 Deposit Insurance 16 Dynamics of Inflation 17 Fiscal Deficit 18 Fiscal Policy 19 Home Banking 20 Investment Banks 21 LIBOR 22 Lien 23 M2

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M3 M4 Marking to Market MI

97 97 96 97

28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45

Micro Credit Monetary Policy MPBF Non Performing Loans Non-Performing Assets Norms of Capital Adequacy PC Banking Primary Dealer Reserve Preemption Securitization Special Drawing Rights (SDRs) Statutory Liquidity Ration (SLR) Telebanking Tire II Capital Venture Capital Wholesale Price Index (WPI) Yield Yield Curve

96 96 97 97 97 97 97 97 98 98 98 98 98 98 98 98 98 98


Asset Reconstruction Company or Fund: An entity (either as a company or a fund) sponsored by a Bank/financial institution, which will buy out the NPAs of the sponsors. Asset-Liability Mismatch: The maturity of an asset and the maturity period of a liability may not be the same. It results in a mismatch, which is known as Asset-Liability Mismatch.

Balance of Trade: Real Effective Exchange Rate: REER suggests that since the exchange rate is a relative price it should move in line with the inflation rate differential between a country and its trading partners. BOP: The description of financial transactions between a country and us trading partners. The categories include goods (merchandise), services and investment capital. Call Money Market: The call money market forms a part of the national money market, where day-to-day surplus funds, mostly of Banks are traded. The call money loans are of very shortterm in nature and the maturity period of these loans varies from 1 to 15 days. Capital Account Convertibility: It refers to the freedom, from exchange control (quantitative controls, taxes and subsidies) applicable to transactions in the capital and financial accounts of the balance of payment. Capital Adequacy : The strength of an organisation depends on the availability of its own funds to withstand the possible losses This is measured by finding the proportion of capital to the Assets of a Bank adjusted to the risk level. The capital structure of the Banks consists of equity and debt. Banks are highly leveraged financial institutions which can affect a Banks viability. Furthermore, Banks have considerable potential liabilities that are not exported on financial statement. Such liabilities are referred to as off-balance-sheet obligations and include commitments related to letters of credit and obligations on agreements such as swaps, cap and floors. These factors raise regulatory concerns about the adequacy of the capital of a Bank to deal with the potential insolvency of a Bank. The ability of the Banks to withstand risks involved in the business. This is ensured by maintaining sufficient capital in the form Tier-I and Tier-II capital as compared to the risk weighted assets Capital Adequacy Ration (CAR): Ratio of the sum of Tier-I and Tier-II capital to the risk weighted assets. Tier-I capital consists of the equity share capital and free reserves minus investments in subsidiaries, whereas Tier-II capital includes subordinated debt, preference capital and revolution reserves, Risk weighted-assets refer to the weighted aggregate of funded and nonfunded items. The value of each item or asset shall be multiplied by the relevant weights to produce risk-adjusted value of the assets. Captial Controls: The controls imposed by a Government and/or Central Bank restraining the movement of capital funds (both inflows and outflows). Cash Reserve Ratio:The cash, which Banks to maintain with RBI as a percentage of their demand and time liabilities. This is to ensure the safety and liquidity of the deposits with the Banks.

Certificate of Deposit: A receipt for the deposit of funds in a Bank. Certificates of deposit (CDs) are several types: Demand CDs, Time CDs, Variable rate CDs, Variable interest CDs. Consumer Price Index (CPI): An index constituting the prices of the commodities that are consumed. The index benchmark for measuring the rise/fall in prices and its effect on consumers. Base year will be fixed.

Cost of Capital: The minimum rate of return a firm must earn on its investment in order to satisfy the expectations of investors who provide funds to the firm. Deposit Insurance: A mechanism where a depositor receives his/her money from an insurance agency in case of a Bank liquidities. In India Deposit Insurance and Credit Guarantee Corporation (DICOC) provides such cover subject to a maximum of Rs.1,00,000 per depositor per Bank. Fiscal Deficit: Total receipts plus borrowings and other liabilities minus total expenditure. Fiscal Policy: The coordinated policy of a Government with respect to taxation, the public debt, public expenditures and fiscal management, with an objective, for example of attempting to stabilize national income of the economy. Home Banking: The representatives of a Bank approach the customer for select activities instead of customers visiting the Bank.

The Dynamics of Inflation

Expansionary Policy
Increase in M3 Leads to Capacity expansion Interest rates go down Greater Credit off-take More goods and services available Interest rates go up Lesser credit off-take

Tight Policy
Decrease in Money Supply Expansion plans held back Production Starts falling

Out put increases

Reserve Bank of India's Monetary Policy

Less goods and services

But demand does not grow at the same rate

Supply is greater than demand

Demand does not fall with falling supply

Deamand is greater than supply

Price move down

Prices move up

Investment Banks: Institutions which raise funds in capital markets and then provide financing. Often in the form of equity. LIBOR: London Inter-Bank Offer-Rate Lien: A lien is a right which a person, to whom a sum of money is owed by another, is given in law over the goods of that other to secure payment of the sum owned. Lien may be possessory, i.e., exercisable only so long as the goods are in the possession of the claimant and equitable, i.e., enforceable irrespective of the possession by the creditor.

Marking to Market: Adjustment of margin accounts to reflect daily charges in the values of contracts against which margins are held. Micro Credit: It is the credit in small amounts given basically to villagers, poor people, agricultural workers etc. Monetary Policy: Any policy relating the supply or use of money in the economy. The coordinated adaptation of the credit control powers of the monetary authorities of a country exercised through the central Bank upon the Banking system, pursuant to a policy, e.g., of ease or restraint, relative to the economic situation. MPBF: (Maximum Permissible Bank Finance), the maximum amount of working capital a company can raise from a Bank. M1: Currency with public + demand deposits with the Banking system + Other deposits with the RBI. M2: M1 + Post Office Saving Bank Deposits. M3: M! + Time deposits with the Banking System. M4: M3 + Total Post Office Deposits (excluding National Savings Certificates), (Currency with the public is the difference between the currency in circulation and the currency with commercial Banks). NPA: Non-Performing Asset (NPA) is an asset on which the Bank failed to recover interest and/or principal from the borrower and such default continued beyond specified period. NPA: Called Non-Performing Assets, these are the loans given by a Bank or a financial institution, where the borrower defaults or delays payment of interest and principal amounts for more than two quarters. Non-Performing Assets: Assets on which interest payment is due and is not received by the Bank/financial institution for two quarters. Non Performing Loans: Loans that are two quarters past due or more are described as non performing loans by Banks and Bank examiners.

Norms of Capital Adequacy: Banks are required to maintain unimpaired minimum capital funds equivalent to the prescribed level of the aggregate of the risk-weighted assets and other exposures on an ongoing basis. All Banks with international presence had to achieve the norm of 8 percent as early as possible and in any case by March 31, 1994. Foreign Banks operating in India had to achieve this norm by March 31, 1993 and other Banks a capital adequacy norm of 4 percent by March 31, 1993. (Tier 1 or core capital having been set at not less than 50 percent of total capital) and 8 percent norm by March 31, 1996. The total of Tire 11 elements were limited to a maximum of 100 percent of total Tire 1 elements for the purpose of compliance with the norms. Banks were activised to review the existing levels of capital funds vis--vis, the prescribed level and plan to

increase the capital funds in a phased manner to achieve the prescribed ratio by the end of the period stipulated. PC Banking: The customers are connected to the Bank usually under wide area network so that Banking transactions can be done. Primary Dealer: One who is authorised to deal in the money market by RBI and it obliged to underwrite Government Securities. Reserve Preemption: The Central Bank of a country does prescribe that the Banks should keep a certain percentage of their liabilities in specified instruments as a part of their attempt to monitor Banking system. This process is known as Reserve Preemption. In India, RBI stipulates that Banks should keep a certain percentage of their Net Demand and Time Liability in specified assets. These percentages are known as Cash Reserve Ratio and Statutory Liquidity Ratio. Securitization :The pooling and repackaging of similar loans into marketable securities that can be sold to investors. Illiquid assets will be converted into liquid assets by the conversion of longer duration cash flows into shorter ones. The rating of a company is based on all the items present in a balance sheet with a reasonable judgement on the quality of these assets. Special Drawing Rights (SDRs): Reserves at, and created by, IMF and allocated by making ledger entries in countries accounts at the IMF. Used for meeting imbalances in the balance of payments and assisting developing nations. Difference between exports and imports. Statutory Liquidity Ration (SLR): It is the reserve that is set aside by the Banks in cash, gold, or other unencumbered approved securities. This reserve has to be mandatorily maintained by the Banks under Section 24(2A) of the Banking Regulation Act 1949 as amended by the Banking Laws (Amendment) Act, 1983. This reserve which invests in approved securities is supposed to act as a buffer in case of a run on the Bank. Telebanking: The customer can instruct the Bank over in respect of certain transactions such as transfer of funds inquiring for balance, asking for statement of account, etc. Tire II Capital: Undisclosed reserves, revaluation reserves, general provisions and general loan loss reserves, hybrid debt equity instruments and subordinated term debt available to absorb losses. Venture Capital: Capital invested in a project in which there is a substantial element of risk (but with above average prospect of reward), especially money invested in a new business in exchange for share in the business. Wholesale Price Index (WPI): A similar index constituting a larger sample of commodities that represent overall rise/fall in wholesale prices. Base year will be fixed. Yield: Yield is the return earned by the investor or shareholder on his investment. Yield Curve: The curve that depicts the yield of bonds with differing maturities.




Page No.

01 Abnormal profit 02 Absolute advantage 03 Accelerator mechanism 04 Accelerator principle 05 Active labour market policies 06 Ad valorem tax 07 Advertising 08 Aggregate demand 09 Aggregate demand curve 10 Aggregate expenditure 11 Aggregate supply 12 Aggregate supply curve 13 Allocative efficiency 14 Automatic stabilizer 15 Average fixed costs 16 Average propensity to consume 17 Average propensity to save 18 Average revenue product 19 Average variable costs 20 Axes 21 Balance of payments accounts 22 Balance of trade 23 Balanced budget

112 112 112 112 112 112 112 112 113 113 113 113 113 113 113 113 113 113 113 113 114 114 114

24 25 26 27 28

Barriers to entry Base interest rate Base year Bentham, Jeremy Bilateral monopoly

114 114 114 114 114

29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57

Black economy Board of directors Boulding Kenneth Ewart Buffer stocks Capital Capital Account Capital consumption Capital consumption allowance Capital goods Capital input Capital scrapping Capitalism Capitalist class Cartel Central bank Ceteris paribus Chamberlain Edward Change in demand Choice Circular flow Classical economics Closed economy Collusion Comparative advantage Competition Competitive firm Complements Concentration ratio Constant dollars

114 115 115 115 115 115 115 115 115 115 115 115 116 116 116 116 116 116 116 116 116 116 116 117 117 117 117 117 117

58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79

Consumer confidence Consumer surplus Consumer surplus Consumption Consumption function Consumption spending Contestable markets Coordinates Corporation Cost push inflation Cross elasticity Cross-elasticity of demand Crowding out Current account Current account balance Current dollar Cyclical fluctuations Deflation Deflationary gap Demand Demand deficient unemployment Demand pull inflation

117 117 117 118 118 118 117 118 118 118 118 118 118 118 118 118 119 119 119 119 119 119

80 81 82 83 84 85 86

Depreciation Deregualtion Development economics Diminishing returns Direct taxes Diseconomics of scale Disposable income

119 119 119 119 119 120 120

87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107

Dissaving Domar Evsey David Downs Anthony Dumping Economic recession Economic rent Economies of scale Effective demand Elasticity Elasticity of demand Elasticity of labour supply Elasticity of supply Entrepreneurship Envelope curve Equilibrium condition Equilibrium price Equilibrium quantity Equity Excess reserve Exchange rate Explicit cost

120 120 120 120 120 120 121 121 121 121 121 121 121 121 121 121 121 121 121 122 122



122 146 122 122 122 122 122 122

108 (a) Evolution of Money 109 110 111 112 113 114

Factors of production Fiat money Firms Fiscal policy Fixed capital formation Fixed costs

115 116 117 118

Fixed exchange rate Fixed investment Flexible labour market Floating exchange rate

122 122 122 123 146 123 123 123 123 123 123 123 123 123 124 147 148 124 124 124

118 (a) Foreign Exchange History 119 120 121 122 123 124 125 126 127 128

Foreign exchange rate market Forward exchange rate Free rider problem Frictional employment Friedman Milton Functional distribution of income General equilibrium Giffen goods Gini coefficient Government spending

128 (a) Gold Standard 128 (b) Gold Special Standard, Gold Bullion Standard, Gold Exchange Standard 129 130 131

Graph Gross Domestic Product Gross Domestic Product deflator

132 133 134 135 136 137 138 139 140

Gross investment Gross national expenditure Gross national product Harrod Sir Roy F Hicks John R. High powered money Hirsch Fred Horizontal integration Household savings ratio

124 124 124 124 124 125 125 125 125

141 142 143 144 145 146 147 148 149 150 151 152 153 154 155 156 157 158 159 160 161 162 163 164 165 166

Human capital Imperfect competition Income effect Income elasticity Income elasticity of demand Increasing returns to scale Index of sustainable economic welfare Indifference curve Indifference theory Indirect taxes Indirect taxes Industry Infant industry argument Inferior good Inferior goods Inflation Inflationary gap Integration of firms Interest Interest rate Internal expansion Inventories Investing Investment spending Investment spending Involuntary employment

125 125 126 125 126 125 125 126 126 126 125 126 126 126 127 127 126 126 127 127 126 127 127 126 127 127 145 127 127 127

166(a) International Trade 167 168 169

J curve effect Jevons William Stanley Keynes John Maynard

170 171 172 173 174 175 176 177 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 195 196 197 198 199

Keynesian consumption function Keynesian growth models Keynesian macroeconomics Labour Labour force survey Labour supply Laissez-faire Land Law of diminishing returns Leibenstein Harvey Lender of last resort Lenin Lerner Abba P. Liabilities Life-cycle hypothesis Long run Long run average costs Long run costs Long run growth Lorenz curve Luxuries M0 (Narrow Money) M4 (Broad Money) Macroeconomics Majority goods Malthus Thomas Managed floating exchange rate Marginal analysis Marginal benefit Marginal cost

128 128 128 128 128 128 128 128 128 128 129 129 129 129 129 129 129 129 129 130 130 133 133 130 130 130 130 130 130 131

200 201 202 203 204 205 206 207 208 209 210 211 212 213 214 215 216 217 218 219 220 221 222 223 224 225 226 227 228 229

Marginal physical product Marginal product Marginal propensity to consume Marginal propensity to save Marginal revenue Marginal revenue product Marginal utility Market Market demand Market failure Market share Marshall Alfred Marx Karl Maximum prices Median voter theorem Mercantilism Minimum efficient scale Minimum prices Minimum wage Minority goods Mishan Ezra Joshua Monetarism Monetary base Monetary policy Money Money Monopolistic competition Monopoly Monopsonistic firm Monopsony

131 131 131 131 131 131 131 131 131 131 131 131 132 132 132 132 132 132 132 132 133 133 133 133 133 133 133 133 133 133

230 231 232 233 234 235 236 237 238 239 240 241 242 243 244 245 246 247 248 249 250 251 252 253 254 255 256 257 258 259

Multiplier Multiplier effect MBB Thomas National Income National Income (GDP) Deflator Natural Increase Natural rate of unemployment Necessities Net exports Net immigration Net investment New deal Niskanen William Arthur Normal goods Normal profit Official settlements account Oligopoly Open economy Open market operations Opportunity cost Pareto optimality Pareto Vilfredo Partnership Patents Per capita income Per capita income Perfect competition Perfect discrimination Permanent income hypothesis Personal distribution

134 134 134 134 134 134 134 135 135 135 135 134 135 135 135 135 135 135 135 136 136 136 136 136 136 136 136 136 136 136

260 261 262 263 264 265 266 267 268 269 270 271 272 273 274 275 276 277 278 279 280 281 282 283 284 285 286 287 288 289

Planning curve Pollution regulation Pollution taxes Portfolio Theory Positional goods Positive externalities Posner Richard A Price Price discrimination Price elasticity of demand Price elasticity of supply Price leadership Price wars Principle of diminishing marginal utility Principle of diminishing returns Private goods Privatization Producer surplus Product differentiation Product possibilities Production possibility curve Productive efficiency Profit Progressive taxes Property rights Proportional taxes Public goods Public interest Public sector net cash requirement Purchasing power parity

137 137 137 137 137 137 137 138 137 & 138 138 137 137 137 138 138 138 138 138 138 138 138 138 138 138 138 138 139 139 139 139

290 291 292 293 294 295 296 297 298 299 300 301 302 303

Quantity theory of money Quasi rent Quota Rational behaviour Real balance effect Real exchange rate Real GDP/GNP Real income Real wage unemployment Redistribution policy Regressive taxes Regulation Relative prices Rent-seeking

139 139 139 139 140 139 140 140 140 140 140 140 140 141

304 305 306 307 308 309 310 311 312 313 314 315 316 317 318

Resources Retail price index Ricardo David Risk Robinson Joan RPIX RPIY Saving Saving function Scarcity Schedule Schumpeter Jospeh Seasonal unemployment Secular change Semi fixed exchange rate

141 140 141 141 141 140 140 141 141 141 142 142 141-142 142 141

319 320 321 322 323 324 325 326 327 328 329 330 331 332

Shareholder Short run Simple money multiplier Single proprietorship Size distribution of income Smith Adam Social cost Social Darwinists Spencer Herbert Stalin Joseph Vissarianovich Stationary rate Stigler George Structural unemployment Subsidies

142 142 142 142 142 142 143 143 143 143 143 143 143 144 144 144 144 144 144 144 144 145 144 144 145 144 145 145 145 145

332(a) Substitutes 333 334 335 336 337 338 339 340

Substitute goods Substitution effect Sunk costs Supernatural profit Supply Tariff Tastes / Technology / Tort Tax

340 (a) Trade Unions 341 342 343 344 345 346

Total factor productivity Transfer earnings Transfer payments Unemployment Utilitarian Utility


This is an alphabetical list of important terms, concepts and names you will generally find in speeches and writings on economics. You will find them useful when you will study topics in economics. A good glossary always comes handy for the study of Economics.

Absolute advantage. In international trade theory a country which has an absolute advantage in producing a good is able to produce that good more efficiently (more output per unit of input) than any other country. Abnormal profit. Any profit in excess of normal profit. Also known as supernormal profit. When firms are enjoying abnormal profits in an industry there is an incentive for other producers to enter the industry to try to acquire some of this profit for themselves. Monopolists are able to maintain abnormal profit in the long run through the use of barriers to entry. Accelerator principle. In macroeconomic models the accelerator principle relates changes in the rate of real output growth to the level of desired investment spending (investment demand) in the economy. A decline in the rate of real GDP growth, for example, will cause the amount of investment demand to decrease (the investment demand curve will shift to the left). Accelerator mechanism. The accelerator model is based on the assumption of a stable (or fixed) capital to output ratio. It stresses that planned investment is demand induced. That is the demand for new plant and machinery comes from the demand for final goods and services. If expected demand (output) is higher than the present capacity of the firm then additional plant and equipment may be required. Thus investment is a function of the rate of change in national income. A slowdown in the growth of demand may actually cause the demand for planned capital

investment to fall. In an economic recession, cut backs in investment demand and the closure of plants and factories may cause capital scrapping. Active labour market policies. Policies designed to improve the working of the labour market and reduce the rate of unemployment without causing wage inflation. Measures include government sponsored training schemes, measures to improve the flow of information on job vacancies, public sector construction projects and direct employment subsidies. Advalorem tax. An indirect lax based on a percentage of the sales price of a good or service. Advertising. Persuasive advertising seeks to reinforce consumer loyalty for a particular brand by increasing the perceived differentiation between good X and substitute products. Aggregate demand. Aggregate demand is the total demand made by all members of the society for all goods and services.

Aggregate supply. Aggregate supply (AS) shows the total supply of goods and services that (firms are able to produce at each and every price level. At low levels of output when there is plenty of spare productive capacity, firms can easily expand output to meet increases in demand resulting in a relatively elastic AS curve. However, as the economy approaches full employment (or full capacity), labour and raw material shortages mean that it becomes more difficult for firms to expand production to meet rising demand. As a result, the AS curve becomes more inelastic. Aggregate demand curve. In macroeconomic theory the aggregate demand curve relates the level of real national income (GDP) demanded (the total quantity of goods and services demanded) to the price level (as measured by the GDP deflator). Aggregate expenditure. In macroeconomic theory aggregate expenditure is the total amount of desired spending by consumers, governments, private investors and foreign buyers (net of spending on imports) at each level of real national income (GDP). Aggregate supply curve. In macroeconomic theory the short run aggregate supply curve relates the total quantity of goods and services supplied and the price level (as measured by the GDP deflator) celeris paribus. The long run aggregate supply curve is a vertical line at the full employment (capacity output) level of real national income (GDP). Allocative efficiency. Allocative efficiency is achieved when the value consumers place on a good or service (reflected in the price they are willing to pay) equals the cost of the resources used up in providing the product. Thus the condition required is that price = marginal cost (or P=MC). Automatic stabilizer. Government spending programs which respond to changes in the level of national income in such a way as to offset those changes. For example, unemployment insurance benefits typically rise when the economy enters a recession, and decline when prosperity returns.

Average fixed costs. In the theory of the firm fixed costs are costs of production which are constant whatever the level of output. Average fixed costs are total fixed costs divided by the number of units of output, that is, fixed cost per unit of output. Average propensity to consume. Average propensity to consume (ape) = Total consumption divided by total income. Average propensity to save. Average propensity to save (aps) = Total savings divided by total income (also known as the Household Saving Ratio) Average revenue product. In the theory of factor pricing, average revenue product is total revenue divided by the number of units of the factor employed. Average variable costs. In the theory of the firm total variable cost divided by the number of units of output. Axes. The fixed lines on a graph which carry the scales against which the coordinates are plotted.

Balanced budget. When the governments expenditure = government revenue. In most years the government runs either a budget deficit or a budget surplus. Balance of payments accounts. A record of all transactions involving a countrys exports and imports of goods and services, borrowing and lending. Balance of trade. A record of a countrys exports and imports of goods and services. Barriers to entry. For supernormal profits to be maintained the existing monopolist must prevent the entry of new firms / products. This can be done though barriers to entry. These are the mechanisms by which potential competitors are blocked. Monopolies can then enjoy economic profits in the long run because their market share has not been diluted by rival firms. See also sunk costs, price wars and patents. Markets where there are few structural entry barriers are known as contestable markets. Base Interest rate. The base rate of interest is set by the Bank of England. The Bank was given operational independence in May of 1997. Each month the Monetary Policy Committee meets to discuss the economic situation and decide the level of base interest rates for the coming month. Base year. In calculating price indexes, values in the current year are compared to values in some arbitrarily chosen earlier or base year. Bentham, Jeremy (1748-1832). Founder of the school of utilitarian philosophy, Bentham accepted much of Adam Smiths work on economics but believed Smith wrong in assuming that there was a necessary identity of private and social interests. Bentham spent much of his life designing social institutions which he thought would bring all such interests into harmony with one another. He developed the concepts of utility, pain and pleasure into what he called a

felicific calculus by which it was possible to establish, for example, that the evil of a crime is proportionate to the number of people banned by it and that the punishment should be based not on motive, but the amount of social pain, or disutility, caused by the offence. His life was remarkable not only for his intellectual achievements in the fields of law, economics and social reform, but for his eccentricity which carried over even into death. In return for leaving his considerable estate to the University of London, Bentham induced the University to keep his embalmed remains on hand to attend meetings when utilitarian philosophy would be discussed. Bilateral monopoly. A market where there is both a single seller (monopoly) and a single buyer (monopsony). This makes the determination of market price and output uncertain - much depends on the relative bargaining strength of buyer and seller in the market. Black economy. Economic activity that generates spending and income which is not declared for income tax and VAT purposes. The Black economy is strongest in the service sector and tends to be concentrated in areas of below average economic prosperity. The existence (and growth) of the black economy suggests that official indicators of income and spending may understate the true standard of living. See also index of sustainable economic welfare and measuring living standards. Board of directors. Individuals chosen by shareholders in a corporation to administer the affairs of the business. Boulding, Kenneth Ewart. An American economist whose work covers both mainstream and radical forms of economic theory. Boulding was born in Liverpool, England in 1910. He taught at the University of Michigan from 1949 to 1967,and subsequently at the University of Colorado, retiring in 1980. His publications reflect the broad range of his academic interests and contain frequent criticisms of orthodox economics. Boulding has advocated the integration of economic with biological concepts and he has urged that economic policy should be evaluated on the basis of a larger normative theory of evaluative judgment rather than on economic criteria alone. Buffer stocks. In agricultural markets the government uses buffer stocks and other forms of intervention to keep prices within a fixed band. If the price is falling towards its floor, the government will purchase a quantity of the commodity and add it to its stockpile. Conversely, when the price is rising towards its ceiling the government will sell some of its stockpile on the open market. In this way supply and demand are manipulated to keep price within its specified range.

Capital. Usually used in the real sense in economics to refer to machinery and equipment, structures and inventories, that is, produced goods for use in further production. Distinguished from financial capital, meaning funds winch are available to finance the production or acquisition of real capital. Capital account. That part of the balance of payments accounts which records a countrys lending and borrowing transactions.

Capital consumption allowance. In national income accounting the capital consumption allowance records the amount by which the capital stock has been used up or depreciated during the accounting period. May also be called simply depreciation. Capital consumption. The using up of real capital by not maintaining or replacing it as it wears out. Capital goods. Unlike goods intended to be consumed, capital goods are used to produce other goods. Machinery in a factory would be an example of capital goods. Capital input. The capital input refers to the machinery, equipment, and inventories, that is, produced goods for use in further production. Distinguished from financial capital, meaning funds which are available lo finance the production or acquisition of real capital. Capital scrapping. When a fall in gross fixed investment leads to a fall in the existing capital stock. In the long run, it can have a negative effect on the aggregate supply-side capacity of the economy Capitalism. A system of economic organization characterized by the private ownership of the means of production, private property, and largely market-based control over the production and distribution of goods and services. Capitalist class. Those members of society who own the capital stock, often used in a pejorative sense by Marxists and other socialist critics of capitalism. Cartel A producer cartel seeks to maximise joint profits in a market by engaging in price fixing. This can be achieved by controlling market output. Central bank. An agency empowered by a government to manage a countrys monetary and financial institutions, issue and maintain the domestic currency, and handle the official reserves of foreign exchange. Primarily a bank for banks. Cetcris paribus. The demand curve is drawn assuming ceteris paribus; that is, all other things being equal. A change in any of the conditions of demand will result in a shift in the demand curve. Only a change in the price of the good itself will lead to a movement along the curve. (The Latin for other things being equal.) Chamberlin, Edward. An American economist who studied at Iowa and Michigan before graduating with a doctorate from Harvard in 1927, Chamberlin subsequently spent his academic career teaching at the latter university. His major interest was in the interaction of monopoly and competition, which he saw not as opposites, but as always-present elements in business situations which interact with one another. He is best known for his theory of monopolistic competition in which equilibrium is influenced by product differentiation and selling costs as well as by optimum output. Chamberlins major book. Monopolistic Competition, was published in 1933, only a matter of months before a similar analysis was published in Britain by Joan Robinson of Cambridge University. The language used in the two treatments of the subject was different, but the analysis and the conclusions reached are so similar that only specialists need worry about the difference between imperfect competition and monopolistic competition. Change in demand. An increase or decrease in the quantity demanded over a range of prices. Shown by a shift of the demand curve.

Choice. Because wants are unlimited and resources are limited, all economics must choose which goods and services should be produced and in what quantities. Circular flow. A stylized depletion of the circulation of spending in the economy and the corresponding flows of productive factors and output of produced goods and services. Classical economics. The economics of Adam Smith, David Ricardo, Thomas Malthus, and later followers such as John Stuart Mill. The theory concentrated on the functioning of a market economy, spelling out a rudimentary explanation of consumer and producer behaviour in particular markets and postulating that in the long term the economy would tend to operate at full employment because increases in supply would create corresponding increases in demand. Closed economy. An economic system with little or no exposure to international trade in goods and services. Can also refer to an economy that blocks capital flows between it and other nations. Most economies are open economies increasingly involved with international trade in global markets. Collusion. The uncertainty that exists in oligopolistic markets and the high costs of non-price competition can lead to collusive behaviour by firms. When this happens the existing firms decide to engage in price fixing agreements or cartels. The aim of this is to maximise joint profits and act as if the market was a pure monopoly. Comparative advantage. First introduced by David Ricardo in 1817, comparative advantage exists when a country has a margin of superiority in the production of a good or service i.e. where the opportunity cost of production is lower. Countries will specialise in and export those products which use intensively the factors of production which they are most endowed. If each country specialises in those goods and services where they have an advantage, then total output and economic welfare can be increased (under certain assumptions). Competition. In the general sense, a contest among sellers or buyers for control over the use of productive resources. Sometimes used as a shorthand way of referring to perfect competition, a market condition in which no individual buyer or seller has any significant influence over price. Competitive firm. A firm operating under conditions of perfect competition, a market condition in which no individual buyer or seller has any significant influence over price. A competitive firm is a price taker, responding to whatever price is established in the market for its output. Complements. Complements are goods that are in joint demand. A rise in the price of X should cause a fall in demand for X and also the complementary good Y. The CPED will be negative. Concentration ratio. The combined market share of the leading firms in an industry. When a few businesses dominate the market, there is said to be an oligopoly. When one firm has complete market control, there is a monopoly. Consumer confidence. Consumer confidence is strongly correlated with consumer expenditure. When confidence is falling it is usually a reliable indicator of a fall in the growth of spending. If people become more pessimistic they are less likely to commit themselves to a major big-ticket purchase.

Consumer surplus. Consumer surplus measures the welfare that consumers derive from the consumption of goods and services, or the benefits they derive from the exchange of goods. It is the difference between what consumers are willing to pay for a good or service (indicated by the position of the demand curve) and what they actually pay (the market price). The level of consumer surplus is shown by the area under the demand curve and above the ruling market price. Contestable markets. A market where there arc no entry barriers so that firms can enter or leave an industry costlessly. This is not the same as perfect competition. It is possible for an efficient pure monopoly to exist in a market yet still face the threat of hit and run entry from a potential rival if it allows its costs to rise above the efficient level. Contestable markets theory emphasises the importance of the threat of entry from new firms, actual competition within a market may be more important in eliminating X-inefficiencies. Constant dollars. Sometimes called real dollars, to refer to price data which have been adjusted to remove the effect of changes in the general level of prices. Consumer surplus. The net benefit realized by consumers when they arc able to buy a good at the prevailing market price. It is equivalent to the difference between the maximum amount consumers would be willing to pay and the amount they actually do pay for the units of the goods purchased. Graphically it is the triangle above the market price and below the demand curve. Consumption function. Generally, the relationship between consumer expenditures and all the influences that determine them. More specifically, the relationship between consumers disposable incomes (personal income less taxes) and the amount they wish to spend on consumer goods and services. Consumption spending. Spending on consumer goods and services. Consumption. Spending to acquire consumer goods and services, or using up those goods and services to satisfy wants. Coordinates. Intersections of vertical and horizontal values plotted on a graph. Corporation. A legal entity formed to conduct business and possessing certain privileges not available to single proprietorships or partnerships, notably limited liability which confines the shareholders possible losses to the amount paid to purchase shares in the business. Cost push inflation. This occurs when firms increase prices to maintain or protect profit margins alicr experiencing a rise in costs. Cross elasticity. The responsiveness of demand for good X following changes in the price of a related good Y. The main use of cross price elasticity concerns changes in the prices of substitutes and complements. Cross-elasticity of demand. The (percentage) change in the quantity demanded of a good consequent upon a (one percent) change in the price of an associated good. Crowding out. The possible tendency for government spending on goods and services to put upward pressure on interest rates, thereby discouraging private investment spending. If the government attempts to reflate the economy by reducing taxation, or by increasing government spending, then this may lead to a PSNCR (budget deficit). To finance the deficit the government

will have to sell debt to the private sector. Attracting individuals and institutions to purchase the debt the government may have to increase interest rates. This rise in interest rates may crowd out private investment and consumption and offset the fiscal stimulus. Current account. That part of a countrys balance of payments accounts which records the value of goods and services exported minus the value of goods and services imported. Current account balance. The balance of trade in goods and services plus the net income from overseas investments and government transfers. If a country is running a deficit on the current account then there must be a corresponding surplus in the capital account. This might be achieved by attracting direct foreign investment into the economy, or by the government running down official reserves of foreign currency. Another way of financing a balance of payments deficit on the current account is to attract short term banking flows into the financial system by offering an attractive rate of interest. Current dollar. Values which have not been adjusted to remove the influence of changes in the general price level.

Cyclical fluctuations. Short term variations in the level of national income such us those which occur from year to year. Contrasted with secular changes which occur over longer periods of time.

Deflation. Deflation refers to a decrease in the general price level of the economy. A fall in prices in particular markets, such as housing, share prices or the market for electronic goods or textiles is not the same as economy-wide deflation. Most economists believe that disinflation or falling inflation is beneficial for the economy. A stable price level can lead to better decisions and a more efficient use of scarce resources. Lower inflation also helps to stabilise inflationary expectations. A decline in prices after an improvement in productivity allows companies to cut costs and prices, thereby raising living standards. Deflationary gap. When the level of national income falls well below what the economy is capable of producing a deflationary gap exists. This is usually accompanied by falling inflation and recessionary conditions in the economy. Demand. Demand is the quantity of a good or service that a consumer is willing and able to buy at a given price in a given time period. (See effective demand). For normal goods there is an inverse relationship between quantity demanded and the goods own price. Demand deficient unemployment. Demand Deficient unemployment is associated with an economic recession. It occurs due to a fall in the level of national output in the economy causing Firms to lay-off workers to reduce costs and protect profits. Demand pull inflation. Demand Pull inflation occurs when total demand for goods and services exceeds total supply. This type of inflation happens when there has been excessive growth in

aggregate demand and there is an inflationary gap. A good example of this was during the late 1980s with the so-called Lawson Boom. Depreciation. The using up or wearing out of capital goods. Deregulation. Reducing or eliminating government intervention to control particular market activities, especially of private firms. For example, removing price controls or monopoly privileges. Development economics. A sub-discipline within economics specialising in the processes of long term growth and change, especially in the case of the less developed economies. Diminishing returns. The tendency for additional units of a productive factor to add less and less to total output when combined with other inputs which are to some degree fixed in quantity. Combining more of a variable input, such as labour, with a given amount of some other input, such as capital in the form of a machine, will eventually result in the marginal product for labour declining. Direct taxes. Direct taxes include income tax, national insurance contributions, capital gains tax, council tax and corporation tax. Most direct taxes are progressive. Diseconomies of scale. A firm may grow beyond the scale of production that minimises long-run average cost. The rise in LRAC is caused by diseconomies of scale. Disposable income. The income a person or household has left to dispose of after income tax has been deducted from personal income. Disposable income may either be spent on consumption or saved. Dissaving. If individuals or households spend more than their current income they are said to be dissaving. Domar, Evsey David. Born in Lodz (Poland, then Russia) in 1914, Domar graduated with a Ph.D. from Harvard in 1947. His initial work was in the field of taxation, but he went on to study the theory of growth and the construction of Keynesian growth models. The basic Keynesian analysis of saving and investing was static in that equilibrium was achieved apparently at given levels of income when intended savings and intended investing were equal. But investing, Domar pointed out, like Roy Harrod some years earlier, must increase the capacity to produce and the question is, will that increased productivity capacity be used or wasted? Domar developed an analysis which showed that full employment could be maintained through time only if investment exceeded saving and income always grew sufficiently to produce the necessary level of saving. The policy implication of this, in Domars view, was that modern capitalist economies, probably because of their monopolistic elements, tend to allow increased capacity arising from new investment to be less than fully utilized, a deflationary tendency not necessarily offset by technological advance. His major publication is Essays in the Theory of Economic Growth, 1957. His subsequent work has been on comparative economic systems, especially the economics of socialism. Downs, Anthony. Born Evanston, III. USA 1930. Ph.D. Stanford University 1956. Downs is best known for his application of economic analysis to political theory, especially with respect to democratic political parties and bureaucratic organizations. His two major books are in this area, An Economic Theory of Democracy, 1957, and inside Bureaucrucy, 1967. He has subsequently

published work on American urban issues, including the causes and effects of racial segregation in US cities. Dumping. Dumping refers to the sale of a good below its cost of production. In the short term, consumers benefit from the low prices of the foreign goods, but in the longer term, persistent undercutting of domestic prices will force the domestic industry out of business and allow the foreign firm to establish itself as a monopoly. Once this is achieved the foreign owned monopoly is free to increase its prices and exploit the consumer.

Economic recession. Defined as a fall in national output over two successive quarters. An economic recession can be caused by both domestic and external factors and is usually accompanied by a fall in domestic spending, rising unemployment and an increase in government spending on welfare benefits. Economic rent. Any return a factor of production receives in excess of its opportunity cost (what it would have received in its next best use). Economics of soak. If all the inputs in a production process are increased and the output increases by proportionately more than the inputs were increased, economies of scale are being realized. There may also be diseconomics of scale which occur when an increase in all inputs brings about a less than proportionate increase in output. Effective demand. Demand in economics must always be effective. Only when a consumers desire to buy something is backed up by a willingness and an ability to pay for it do we speak of demand. They must have sufficient real purchasing power. Elasticity of demand. Elasticity of demand measures the responsiveness of demand to a change in a variable that affects demand. See also price elasticity, income elasticity and cross price elasticity. Elasticity of labour supply. The elasticity of labour supply measures the extent to which labour supply responds to a change in the wage rate in a given time period. In low-skilled occupations we expect the labour supply to be elastic even in the short-run. This means that a pool of readily available labour is employable at a fairly low market wage rate. Where jobs require specific skills and training, the labour supply will be more inelastic. See also economic rent and transfer earnings and quasi rent. Elasticity of supply. The (price) elasticity of supply is the percentage change in the quantity supplied of a good or service divided by the percentage change in its (own) price. Elasticity. When used without a modifier (such as cross, or income), elasticity usually refers to price elasticity which is the percentage change in quantity demanded of a good or service divided by the percentage change in its (own) price. Entrepreneurship. The ability and willingness to undertake the organization and management of production. As well as making the usual business decisions, entrepreneurship is often associated with the functions of innovating and bearing risks.

Envelope curve. A curve enclosing, by just touching, a number of other curves Equilibrium condition. A condition which must be satisfied for equilibrium to exist, equilibrium being defined as a situation in which there is no tendency for change. For example, in the Keynesian expenditure model, the equilibrium condition is that planned spending just equal the current level of national income. Once that condition is satisfied, (here is no tendency for the level of national income to change. Equilibrium price. A price at which the quantity supplied equals the quantity demanded. At this it price there is no excess of quantity demanded or supplied, nor is their any deficiency of cither and consequently the price will remain at this level. Equilibrium quantity. The quantity of a good demanded and supplied at the equilibrium price. Equity. May be used in either of two unrelated senses. In the context of income distribution theory, refers to an objective, goal or principle implying fairness. In a financial context may refer to a share or portion of ownership. Excess reserves. The difference between the amount of cash a bank wishes or is required to hold in relation to its deposit liabilities and the amount it actually holds. Exchange rate. The price of one countrys currency in terms of anothers. Explicit cost. The amount spent to obtain or produce something. Externalities. A benefit or cost associated with an economic transaction which is not taken into account by those directly involved in making it. A beneficial or adverse side effect of production or consumption. Externalities are defined as third party (or spill-over) effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid. We distinguish between negative externalities and positive externalities. Externalities can cause market failure if the price mechanism does not take into account the full social costs and social benefits of production and consumption.

Fiat money. A type of money which has little or no intrinsic value in itself, but which is decreed to be money by the government and is generally accepted in exchange. Modern paper currencies are all fiat money, as are most coins in active circulation. Factors of production. The factor inputs used in the production process to generate output. The main inputs are land (natural resources); labour (the human input) and capital (machinery, buildings and technology). Entrepreneurship is considered by many to be the fourth (and a specialised) factor of production. Technology should also be considered as a factor input particularly for those economists concerned with explaining the sources of economic growth in the long run. Firms. Economic entities which buy or employ factors of production and organize them to create goods and services for sale.

Fiscal policy. The use by a government of its expenditures on goods and services and/or tax collections to influence the level of national income. Fixed costs. These costs relate to the fixed factors of production and do not vary directly with the level of output. Examples are rent, leasing of equipment, business rates, salaried staff, interest rates, depreciation of capital (due to age) and insurance. Total fixed costs (TFC) remain constant as output increases. Fixed exchange rate. Commitment to a single fixed exchange rate. No permitted fluctuations from the central rate. Achieves exchange rate stability but perhaps at the expense of domestic economic stability. Fixed investment. Fixed Investment - is spending on new capital machinery and plant, construction, housing, vehicles, etc. Fixed capital formation. Investment, the creation of capital goods such as structures, machinery and equipment. Flexible labour market. This is a labour market where there are: Flexible employment patterns both in terms of hours worked and skills required of the workforce. This often involves offering short-term contracts to workers in industries where labour demand is variable. Greater flexibility in pay arrangements such as performance related pay (where pay is linked to profits or productivity) and increased regionalisation of pay awards. Floating exchange rate. Value of the pound determined solely by market demand for and supply of the currency. Trade flows and capital flows affect the exchange rate. No pre-determined target for the exchange rate is set by the Government Foreign exchange rate market. Currencies are traded around the world in a truly global market. The scale of currency transactions is enormous. In London alone over $450 billion worth of currency is bought and sold each day with London easily the largest FOREX market in the world. Not all currency traded is used to finance international trade of goods and services - a substantial proportion is simply speculative buying and selling and this can lead to widespread currency volatility. Forward exchange rate. A forward exchange involves the delivery of currency at sometime in the future at an agreed rate. This is used by companies wanting to reduce the risk of exchange rate uncertainty by buying their currency forward on the market. Free rider problem The undersupplying of a public good caused by the fact that individuals can consume or benefit from the good without paying for it. Frictional unemployment. Unemployment caused by the loss of jobs due to technological change, the entry of new participants into a labour market, or other normal labour market adjustments. Friedman, Milton. Born New York City in 1912. Degrees from Rutgers, Chicago, and Columbia. Associated with the University of Chicago since 1946. Best known for his advocacy of monetary explanations of the course of economic events and fierce opposition to Keynesian economics, Friedman is usually credited with (or blamed for) establishing the monetarist school

of economics which gained great influence on government policy in both the US and the UK in the 1970s. Functional distribution of income. The division of total income in an economy into shares according to the kind of service provided-usually labour or property (land and capital).

General equilibrium. The condition reached when all markets (for products and productive factors) have cleared, that is, established equilibrium prices and quantities. Giffen goods. Giffen goods are very inferior products on which consumers on low incomes spend a high proportion of their income. When the price of these products falls, low income consumers are able to discard their consumption of these goods (having already satisfied their demand) and move onto superior goods. Thus demand may fall when price falls. For a Giffen Good the income effect from a price fall (causing less to be bought) outweighs the substitution effect (causing more to be bought) Gini coefficient. The ratio of the area between the 45 degree line depicting complete equality and a Lorenz curve to the entire area of the triangle below the 45 degree line. Government spending. The total outlays by government on goods and services during some accounting period, usually a year. Government outlays such as welfare benefits to households, for example, are normally excluded from this amount on the grounds that they are merely transfers of income from taxpayers to the beneficiaries of such programs. Graph. A visual representation of a relationship between two variables, usually drawn to some specified scale. Gross Domestic Product (GDP). The value of all the goods and services produced in an economy during some accounting period, usually a year. Gross Domestic Product (GDP) deflator. Nominal GDP divided by real (constant dollar GDP) multiplied by 100. Nominal GDP is the value of output measured in terms of the prices prevailing in the accounting period in question. Real GDP is that output measured in terms of the prices prevailing in some base period. The value of the deflator in the base period is always 100. Gross investment. Total investment during the accounting period. It includes both additions to the capital stock (net investment) and investment to replace worn out capital (to make up for depreciation). Gross National Expenditure (GNE). The sum of all spending on consumption and investment plus government spending on goods and services and net exports (total exports minus imports). It is equivalent in value to GDP. Gross National Product (GNP). GNP measures the final value of output or expenditure by India owned factors of production whether they are located in the India or overseas. GDP is only concerned with incomes generated within the country.

Harrod, Sir Roy F. (1900-78) Born in Norfolk, England. An influential British economist educated at Oxford, who was an early proponent of Keynesian economics, a prominent adviser to the British government during the years of World War II, and subsequently Keynes official biographer. Harrod wrote extensively on a number of topics such as business cycles, monetary problems, international trade, and the theory of economic growth. In the latter field, he pointed out as early as 1939 that in the Keynesian model investment played the role of an offset to saving a way of getting spending withdrawn from the income stream by savers back into it. But investment also increases the productive capacity of the economy. Could the rate of growth in income be sufficient to ensure that an ever growing stock of capital would be kept fully utilized? If not, the implication was that some continuous external stimulation of the economy would be needed to maintain long-term growth on a steady path. Hicks, John R. (1904-1989). One of the leading British economic theorists of the 20th century, Hicks was educated at Oxford to which he returned to teach after holding positions at the London School of Economics, Cambridge, and Manchester. Hicks made important contributions on a variety of topics, but is best known for his work on consumer behaviour as published in his major work, Value and Capital. In it Hicks utilized the indifference curve concept first developed by Vilfredo Pareto to construct a theory of demand which was independent of any cardinal measure of utility such as was implicit in the traditional approach perpetuated by Alfred Marshall in his famous Principles. Hicks also provided a way of incorporating the interest rate in the Keynesian model which has become a standard feature of intermediate level text-book treatments of the Keynesian model. He was joint winner (with the American economist Kenneth Arrow) of the Nobel prize in economics in 1972. High-powered money. The monetary base, or the total of currency in circulation and commercial bank deposits with the central bank. Hirsch, Fred (1931-1978). Born in Vienna, Fred Hirsch graduated from the London School of Economics in 1952. After working as an economic journalist and with the international Monetary Fund he became a professor of economics at the University of Warwick in 1975. He published a large amount of work on international monetary issues and the subject of inflation, but he became more widely known only at the end of his tragically short life when he published his book. The Social Limits to Growth. Its broad theme, as he put it in an interview reported in the New York Times, was that material growth can no longer deliver what has long been promised for it-to make everyone middle-class. Horizontal integration. Where two firms join at the same stage of production in the same industry. For example two car manufacturers merge, or a leading bank successfully takes-over another bank. Household savings ratio. The percentage of household disposable income that is saved. Also known as the average propensity to save (APS). APS = S/Y Human capital. The stock of knowledge and acquired skills embodied in individuals.

Imperfect competition. A market situation in which one or more buyers or sellers are important enough to have an influence on price.

Income elasticity. Income elasticity of demand measures the responsiveness of demand lo a change in the real incomes of consumers. The value of income elasticity of demand depends on the nature of the good or service. Increasing returns to scale. Much of the new thinking in business economics focuses on increasing returns to a company growing in size. If a business can sell more output, it may become progressively easier to sell even more output and reap the benefits of large-scale production. Index of sustainable economic welfare. Since the 1970s, when the gap between economic growth and quality of life began to widen, criticism of GDP as the most important economic indicator has been constantly growing. The Index of Sustainable Economic Welfare takes account of GDP, as well as unpaid household labour, social costs, environmental damage, and income distribution. Indirect taxes. Indirect taxes include VAT, excise duties on fuel and alcohol, car tax, betting tax and the TV licence etc. Indirect taxes. Indirect taxes are imposed by a government on producers. The burden of the tax can be passed onto consumers depending on the price elasticity of demand and elasticity of supply for the product. We distinguish between specific and advalorem taxes. Examples of indirect taxes include Value Added Tax; Air-Passenger Duty, duties on cigarettes and alcohol and insurance duty etc. Infant industry argument. Certain industries possess a potential comparative advantage but have not yet exploited the potential economies of scale. Short term protection from established foreign competition allows the infant industry to develop its comparative advantage. At this point the protection could be relaxed, leaving the industry to trade freely on the international market. The danger of this form of protection is that the industry, free of the disciplines of foreign competition, will never achieve full efficiency. Inferior goods. Goods that have a negative income elasticity of demand. Demand falls as real income of consumers rises. Examples include tobacco, white bread and tinned meat. Inflationary gap. When aggregate demand exceeds productive potential there is an inflationary gap. We tend to see rising inflation and a worsening trade situation at these times. Integration of firms. The process by which firms merge or are taken-over to create a much larger business. There are four main types of integration - horizontal (two firms from the same industry at the same stage of production), vertical (two firms at different stages of production in the same industry), lateral (two related firms in different industries) and conglomerate (two firms in completely different businesses / industries). Internal expansion. Firms can generate higher sales and increased market share by expanding their operations and exploiting possible economies of scale. The alternative is to grow externally through mergers and takeovers. Investment spending. Investment is defined as spending on capital goods by firms and government etc., which will allow production of consumer goods and services in future time periods. If net investment is positive (Gross investment is higher than deprecation or capital consumption) there will be an increase in the nations stock of capital.

Income effect. The effect of a change in income on the quantity of a good or service consumed. Income elasticity of demand. The percentage change in quantity demanded divided by the percentage change in income. Indifference curve. A curve showing all possible combinations of two goods among which the consumer is indifferent. Indifference theory. The analysis of consumer demand using indifference curves and an income constraint to demonstrate the reason for the inverse relationship between price and quantity demand. An alternative to the older marginal utility explanation of this phenomenon. Indirect taxes. Taxes levied on a producer which the producer then passes on to the consumer as part of the price of a good. Distinguished from direct taxes, such as sales taxes which are visible to the person who pays them. Industry. A group of firms producing similar products. Hence, the auto industry or the steel industry. Inferior good. A good for which the demand decreases when income increases. When a households income goes up, it will buy a smaller quantity of such a good. Inflation. A general rise in the average level of all prices. Interest rate. The percentage rate which must be paid for the use of investable funds. Interest. The payment made for the use of funds to create capital goods with. inventories. Stocks of goods in the hands of producers. These stocks are included in the definition of capital and an increase in inventories is considered to be investment. Investing. Creating capital goods. Acquiring or producing structures, machinery and equipment or inventories. Investment spending. The total amount of spending during some period of time on capital goods. Involuntary unemployment. Unemployment caused by a deficiency in aggregate demand.

Jevons, William Stanley (1835-1882). An English philosopher and scientist instrumental in developing the marginal utility theory of consumer choice. He demonstrated that consumers will purchase increasing quantities of goods until the marginal utility derived from the last pennys worth of one good is equal to the marginal worth of every other good. His major work was The Theory of Political Economy published in 1871. J curve effect. The J Curve effect arising from the short run inelasticity of demand for imports and exports following a change in the exchange rate. When the pound depreciates, domestic exporters become more competitive in foreign markets and will be hoping for a large increase in

export volumes. However it will take time for this to occur if the foreign demand for exports is inelastic. On the import side - a falling pound makes imports more expensive and should cause a contraction in demand for imports, If the demand for imports is inelastic, higher import costs will cause total spending on these goods and services to rise. Higher exports are unlikely to offset this in the short run and as a result, the balance of trade will worsen.

Keynes, John Maynard (1883-1946). The most important economist of the 20th century. Keynes first came to prominence with his attack on the 1919 treaty with Germany (The Economic Consequences of the Peace, 1919). During the 1920s he became dissatisfied with the mainstream economics based on the tradition established by Alfred Marshall. The conventional analysis of individual markets appeared inadequate to explain the economic problems then being experienced in England. Keynes became convinced that deflationary policies were the cause of the difficulties and published several works on money, notably a two volume work. The Treatise on Money. From this he went on to develop the analysis subsequently elaborated in The General Theory of Employment, interest and Money, 1936. Within ten years of its publication, Keynes had, as he expected to do, brought about a revolution in the discipline of economics. Keynes lifetime achievements went beyond his theoretical work. He played a prominent role in the intellectual and cultural life of his time and was a very influential adviser to the British government up to the time of his death. Keynesian consumption function. The level of consumer spending (C) is given by the Keynesian consumption function which is assumed to be C = a + cYdt, a = autonomous consumption (spending that is independent of income) c = marginal propensity to consume. According to the Keynesian theory, current consumption is driven by current real disposable income. There are alternative theories of consumption - see also the life-cycle hypothesis and the permanent income hypothesis. Keynesian growth models. Models in which a long run growth path for an economy is traced out by the relations between saving, investing and the level of output. Keynesian macroeconomics. The theory that shows how a market-based capitalist economy may reach equilibrium with large scale unemployment and how government spending may be used to raise it out of this to a new equilibrium at the full-employment level of output.

Labour. The economically productive capabilities of humans, their physical and mental talents as applied to the production of goods and services. Labour force survey. In April 1998, the Government introduced a new monthly Labour Force Survey using a different measure of unemployment. The new measure is based on the International Labour Organisations (ILO) definition of unemployment. It covers those who have looked for work in the past four weeks and are able to start work in the next two weeks. Labour supply. The labour supply refers to the total number of hours that labour is willing and able to supply at a given wage rate. Increasing the effective supply of labour in an economy is important for those countries who want to expand their productive potential.

Laissez-faire. A doctrine advocating a minimum role for government in the economy, such as providing for defence against external enemies, a system of law to protect individuals and their property, and production of such goods and services which for some reason are needed, but would not be produced by private firms. Land. All natural resources. The gifts of nature which are economically useful. Law of demand. The inverse relationship between price and quantity of a good or service demanded. Law of diminishing returns. As we add more units of one factor of production (labour) to fixed amounts of others (land and capital) the increases in total product will first rise then fall. Diminishing returns to labour occurs when marginal product starts to fall. Leibenstein, Harvey. An American economist, born in 1922. Leibenslein taught at the University of California Berkeley in the 1950s and 60s, and subsequently at Harvard. He has published widely in area of economic growth and development, but remains best known for his theory of Xefficiency, which postulates that individuals are non-maximizers when there is little pressure on them and that convention plays a large part in determining the amount of effort they put into their work. See his General X-efficiency Theory and Economic Development 1978 and Inflation. Income Distribution and X-efficiency Theory, 1980. Lender of last resort. The function whereby central banks stand ready to make cash advances to commercial banks in the event they misjudge their cash reserve requirements. Lenin (Vladimir IIich UIianov) (1870-1924). A Russian-born intellectual who masterminded the formation of the Russian Communist Party and successfully seized power with the revolutionary uprising of November 7, 1917. Although he produced a considerable volume of writing, ranging from polemical tracts to serious scholarly works (notably a history of capitalism in Russia), Lenin (the name he began using while living in exile in Germany) was above all else a master politician who succeeded in welding the disputatious radical factions in Russia together to create a well-disciplined political machine. His adaptation of the principles of Karl Marx to the situation in Russia was built on the idea of using the Party as the instrument for forging a revolutionary working class. Lerner, Abba P. (1903-1982). An American academic economist, born in Russia, and educated largely in England, Lemer was one of the first and most enthusiastic converts to Keynesian economics. He subsequently taught at a number of different universities in the US including Michigan State and UCLA Berkeley. His major publication was The Economics of Control (1944) which combined Keynesian principles with welfare economics to produce a complete system of economic management equally applicable to capitalist or socialist economies. Liabilities. In general, debts owed by individuals or firms. In the case of commercial banks, their liabilities are largely in the form of what they owe their customers, that is, the total amount of deposits held. Life-cycle hypothesis. The Life Cycle hypothesis is based on (the idea that the level of spending relative to income depends on where the consumer is in their life cycle. It suggests that consumers attempt to even out consumption over their lifetime and as a result will borrow and save at different ages.

Long run average costs. Total costs divided by the number of units of output. The long run average cost curve plots the relationship between output and the lowest possible average total cost when all inputs can be varied. Long run costs. Production costs when the firm is using its economically most efficient size of plant. Long run. In the long run, all factors of production are variable. A business can change the whole scale of production by varying all the inputs into the production process. Productivity in the long run is described by the returns to scale. In the context of the theory of the firm, the long run is a period of time long enough for the firm to vary the quantities of all the inputs it is using, including its physical plant. Long-run growth. Long-term economic growth comes from increasing the quantity and efficiency of the factors of production in the economy. Growth is determined by the productive capacity of the economy to increase output and this is determined by the trend rate of growth of productivity of both capital and labour. Sustained long run-growth is a vital ingredient in raising the average living standards of the population. Lorenz curve. A curve showing the cumulative percentage of income plotted against the cumulative percentage of population. Luxuries. Goods that have a high income elasticity of demand. Demand rises strongly when there is an increase in the real incomes of consumers.

Macroeconomics. Macroeconomics is the study of the economy as a whole. It analyses the determination of national output (GDP), employment, unemployment and inflation. Traditionally governments have had four main macroeconomic objectives: High levels of employment, Stable inflation, Sustainable economic growth, Equilibrium on the balance of payments. There may be trade-offs between these objectives. It deals with large aggregates such as total output, rather than with the behaviour of individual consumers and firms. Majority goods. Goods which are generally available to consumers because they can be mass produced in whatever quantities there is a demand for. Fast food and consumer electronics are good examples. Malthus, Thomas (1766-1834). Born as the son of an eccentric country gentleman-scholar. Malthus was educated at Cambridge, studying mainly social studies and mathematics in preparation for his intended career as a cleric. He wrote widely on economic issues of his day, maintaining a close correspondence with David Ricardo. His most famous work, however, was on the subject of population. His recognition of what subsequently came to be called the principle of diminishing returns underlay his famous proposition that production of the means of subsistence increases as an arithmetic progression (1,2,3.4, etc.) whereas human population has a tendency to increase geometrically (2,4,16, etc.). Malthus argued that it was useless to try to solve this problem by producing more food. The only cure could be to prevent population from increasing at its biological potential. Unless people learned to control their rate of increase (by postponing marriage until children could be adequately supported), nature would control population through the instruments of what Malthus referred to as misery and vice (which as

far as he was concerned included the use of contraceptive measures). The success of his writings enabled Malthus to escape the life of a country cleric and led him to an appointment in 1805 as professor of history and political economy at a small college operated by the East India Company, Haileybury College, in the south of England. Malthus is often called the first professional economist. He spent the rest of his life teaching and writing. He published a general treatise on economic principles. Political Economy, in 1820, although it attracted less attention than his first book. An Essay on the Principle of Population as it Affects the future Improvement of Society. Managed floating exchange rate. Where the value of the pound is determined solely by market demand for and supply of the currency. Trade flows and capital flows affect the exchange rate. No pre-determined target for the exchange rate is set by the Government Marginal analysis. An analytical technique which focuses attention on incremental changes in total values, such as the last unit of a good consumed, or the increase in total cost. Marginal benefit. The increase in total benefit consequent upon a one unit increase in the production of a good. Marginal cost. These are defined as the change in total costs resulting from increasing output by one unit. Marginal costs relate to variable costs only. Changes in fixed costs in the short run affect total costs, but not marginal costs. Marginal physical product. The change in total product measured in physical terms caused by a one unit increase in a variable input. Marginal product. Marginal product (MP) = the change in total product resulting from adding one extra unit of labour Marginal propensity to consume. The part of the last dollar of disposable income that would be spent on additional consumption. Marginal propensity to save. The part of the last dollar of disposable income that would be saved. Marginal revenue. The change in total revenue as a result of selling one extra unit of output. Marginal revenue product (MRP). Marginal revenue productivity (MRP) focuses on labour demand. It is a theory of wages where workers are paid the value of their marginal revenue product to the firm. MRP theory, suggests that wage differentials result from differences in labour productivity and the value of the output that the labour input produces Marginal utility. Marginal Utility (MU) is the change in total utility or satisfaction resulting from the consumption of one more unit of a good. The hypothesis of diminishing marginal utility states that as the quantity of a good consumed increases, the marginal utility derived from that good decreases. Market. In most markets, prices are determined by the interaction of market supply and demand for the good or service. There are many examples when government intervention aims to influence prices and affect the allocation of resources. Market demand. The relationship between the total quantity of a good demanded and its price.

Market failure. Market failure can occur in a variety of ways. The failure exists when the social optimum diverges from the private optimum. For example the social costs and social benefits of production and Or consumption may differ from private costs and benefits because of the existence of externalities. Market failure also occurs with the provision of public and merit goods and services and in unregulated monopolies Market share. The percentage of total sales or total turnover in an industry that is taken by a particular business. Those firms with the largest market share may enjoy monopoly power. in the industry. The market share of the leading firms in an industry can be measured by the concentration ratio. Marshall, Alfred (1842-1924). One of the great synthesizers of economic theory who also developed and refined many of the most useful analytical tools of the discipline. His famous student at Cambridge, John Maynard Keynes, called him the greatest economist of the 19th century. His influential textbook, Principles of Economics, first published in 1890, served for more than a quarter of a century as the standard reference on the subject, in it he set out clearly such basic concepts as price elasticity of demand, competitive short-run and long-run equilibrium of the firm, consumer surplus, increasing and decreasing cost industries, and economies of scale. Trained in mathematics. Marshall relegated the mathematical expression of his principles to footnotes. Marx, Karl (1818-83). One of the most influential social philosophers in history, Marx lived a life of almost constant conflict and adversity. Despite Ph.D. in philosophy from the University of Jena he was unable to secure a university teaching position and his involvement in revolutionary political activity led to his expulsion from Germany. He was also subsequently forced to leave Belgium and France before finally settling in London where he made a meager living by journalism (serving as a correspondent for the New York Herald-Tribune). While continuing to involve himself in radical political affairs he devoted as much time as he could to an extraordinary scholarly undertaking, which was nothing less than an attempt to synthesize all human knowledge since the time of Aristotle. The fruits of this labour, much of it pursued in the Reading Room of the British Museum, was eventually published in his massive work, Das Kapital which established the intellectual foundation of the Marxist interpretation of history and which posited the coming of a new world order following the inevitable collapse of capitalism. Key elements of his analysis were embodied in an easily-understood pamphlet written with his benefactor Frederick Engels, The Communist Manifesto, published in London in 1848. Maximum prices. Governments can impose legally binding maximum prices to set a statutory price ceiling in a market. To be effective a maximum price must be set below the free market price. Minimum efficient scale (MES). The output in the long run where a business exploits all of the potential internal economies of scale. At this point, the long-run average cost curve readies a minimum point leading to productive efficiency. Minimum prices. A minimum price is a price floor below which the free market price cannot fall. To be effective the minimum price IMS to be set above the normal equilibrium price. A good example of this is minimum wage legislation. Minimum wage. A national minimum wage is a pay floor introduced by the government which sets a wage level which producers cannot legally undercut. The Low Pay Commission

recommended a minimum wage of 3.60 per hour which has been introduced in the spring of 1999 for all workers over the age of 21. For workers aged between 18-21, the minimum wage will be 3.20 per hour. Median voter theorem. The proposition that political parties will tend to adopt moderate policies to appeal to voters near the middle of the political spectrum. Mercantilism. A body of policy recommendations designed to promote the development of the early nation states of western Europe in the 17th and 18th centuries. The emphasis was on utilizing trade to increase national wealth at the expense of the countries being traded with through fostering a favourable balance of trade, by which was meant an excess of exports over imports. Minority goods. Goods which have a very low elasticity of supply. That is, even large increases in their price can call forth little, if any, additional supply, which means that only the very wealthy can afford them. Large, secluded waterfront properties might be an example. Mishan, Ezra Joshua. Born in Manchester England, Mishan taught at the London School of Economics from 1956 to 1977. He published a large number of articles in professional journals and several books, the best known of which Is The Costs of Economic Growth, 1967. In later years he has been a frequent contributor to more popular journals writing on variety of issues, including what he has refereed to as the pretensions of economists. Money. Money is any asset that is acceptable in the payment of transactions or in the settlement of debts. M4 (Broad Money). M4 (Broad money) includes deposits saved with banks and building societies and new money created by lending in the form of loans and overdrafts. It is defined as M0 plus sight (current accounts) and time deposits (savings accounts). M0(Narrow money) - comprises notes and coins in circulation plus commercial banks operational balances at the Bank of England. Over 99% of M0 is made up of notes and coins so this form of money is used mainly as a medium of exchange. M0 measures the cash base in the economy. Monetarism. A view that market economies are inherently self-stabilizing and that variations in the quantity of money are the main cause of fluctuations in the level of aggregate demand. Monetary base. The same as high-powered money: cash in commercial banks, plus cash in circulation and deposits of the commercial bank at the central bank. Monetary policy. The use of the central banks power to control the domestic money supply to influence the supply of credit, interest rates and ultimately the level of real economic activity. Money. Anything generally acceptable in exchange. Money serves a number of functions: it is a medium of exchange, it is used as a unit of account, and it can be used as a store of value. In its latter use, it is an alternative to holding value in the form of goods or other types of financial assets such as stocks or bonds.

Monopolistic competition. In this market structure there arc assumptions common to perfect competition and some that give the individual firm some monopoly power in setting prices. Market has many sellers - Each of whom produces differentiated products that are not perfect substitutes for each other. The closer the products are as substitutes the more price elastic the demand curve There is freedom of entry and exit in the long run. Monopoly. Strictly defined as a market situation in which there is a single supplier of a good or service, but often used to suggest any situation in which a firm has considerable power over market price. A pure monopolist is defined as a single seller of a product in a given market. In simple terms this means the firm has a market share of 100%. The working definition of a monopolistic market relates to any firm with greater than 25% of the industries total sales. Monopsony. A monopsony exists when there is a dominant or single buyer in the market. The monopsonist is able to influence the price at which he is able to purchase factor inputs. Monopsony can occur in labour markets where one firm is the dominant hirer and firer of labour. Monopsonistic firm. A firm which is the sole buyer of a good or service, most likely of labour in a particular market. Multiplier. One of the main predictions of national income theory is that a change in expenditure will cause a change in national income greater than the initial change in aggregate demand. This is known as the multiplier effect. The multiplier is defined as the ratio of the change in national income to the change in expenditure that brought it about. The multiplier itself is simply a number. Multiplier (m) = Final change in national income / Initial change in aggregate demand The multiplier should the distinguished clearly from the accelerator mechanism. Multiplier effect. The tendency for a change in aggregate spending lo cause a more than proportionate change in the level of real national income. MBB, Thomas. A British mercantilist writer of the 17th Century.

National income (GDP) deflator. A general way of referring to the price index which measures the average level of the prices of all the goods and services comprising the national income or GDP. National income. The general term used to refer to the total value of a countrys output of goods and services in some accounting period without specifying the formal accounting concept such as Gross Domestic Product. Natural increase. Growth of the population due to an excess of births over deaths. Natural monopoly. A market situation in which economies of scale are such that a single firm of efficient size is able to supply the entire market demand. In a natural monopoly, the cost structure is different. In industries where massive networks or distribution channels are required, the overhead costs relative to the running costs are likely to be very high. There is also likely to be great potential to exploit technical economies of scale.

Natural rate of unemployment. The natural rate of unemployment is unemployment when the labour market is in equilibrium. At this point the demand for labour equals the supply of labour at the going market wage rate. Natural rate of unemployment. The rate of unemployment that would exist when the economy is operating at full capacity. It would be equal to the amount of frictional unemployment in the system. New deal. The New Deal programme launched in 1998 seeks to provide a gateway back into work for long-term unemployed workers. In addition to a programme of job subsidies for firms taking on unemployed workers, these people have four main options under the scheme: (a) stay on in full-time further or higher education (b) find employment in formal labour market (c) join a recognised training programme or participate on an environmental taskforce to give them work experience that will improve their employability. Net exports. The total value of goods and services exported during the accounting period minus the total value of goods and services imported. Net immigration. The total number of people leaving the country to take up permanent residence abroad minus the number of people entering the country for the purpose of taking up permanent residence. Net investment. Total investment during some accounting period minus the amount of depreciation during the same period. Normal goods. Goods for which there is a positive income elasticity of demand. Normal profit. The minimum rate of profit that a business requires to stay in a particular industry or market in the long run. (Analogous to the transfer earnings to labour). Normal profit can be treated as the opportunity cost of production and is usually included in the average total cost curve of a firm. Thus if the business is breaking-even, we say that is making normal profit. Necessities. Goods which tend to have a low price elasticity of demand and a low income elasticity of demand. Normal profit. Defined as the minimum level of profit required to keep the factors of production in their current use in the long run. Normal profits are included in the ATC curve, thus if the firm covers its ATC it is making normal profits. Niskanen, William Arthur (1933- ). An American economist born in Oregon who studied economics at both Harvard and Chicago. Niskanen has held various posts in government (US Department of Defense) and business (Ford Motor Co.) He was a pioneer in the economic theory of bureaucracy. His best-known book is Bureaucracy and Representative (Government, 1971. Normal good. Any good for which the demand increases as incomes increase.

Official settlements account. A record of the net increase or decrease in a countrys official foreign exchange reserves.

Oligopoly. A market dominated by a few producers each of which has some control over the market. A key feature of oligopolistic markets is interdependence of price and output decisions. Firms have to consider the likely reaction of their rivals to their own pricing strategies. Open economy. An economy open to international trade in goods and services. This economy has a large (often expanding) traded good sector. Open market operations. Central bank purchases or sales of securities in the securities market. Opportunity cost. The cost of a choice measured in terms of the next best alternative foregone. Choices are an inevitable result of scarcity. Pareto Vilfredo (1848-1923). Born in Paris of French and Italian parents, Pareto was educated in Italy where he was trained in mathematics and engineering. After working as an engineer for some years, he inherited a fortune and devoted himself to his broad-ranging interests in mathematics, sociology and religion. He was active in the turbulent politics of turn-of-the-century Europe. He also held an academic appointment at Lausanne where he lectured in economics and sociology. In 1906 he retired to his estate near Cellgny on Lake Geneva and occupied himself developing a rather peculiar system of sociology. When the fascists came to power in Italy Mussolini appointed him a Senator, presumably because of his professed hatred of democrats. His major contributions to economics were the indifference curve analysis which he had adapted from the work of Francis Edgeworth, a British economist, and which was in turn picked up and developed by J.R. Hicks; various elements of general equilibrium theory, most notably the concept of what has come to be known as Pareto optimality and a theory of income distribution which held that the pattern of income distribution was essentially the same in all economics and at all times. Pareto optimality. The condition which exists when it is impossible to make any individual better off without making any other individual worse off. Partnership. An unincorporated business owned by two or more people. Patents. Gives a firm the legal protection to produce a patented product for a number of years. Per capita income, total income divided by the size of the population. Real GNP per capita is used as a benchmark for comparing living standards between countries Perfect competition. A competitive market characterised by many competing firms each producing homogeneous products with no barriers to entry and exit in the long run. No one firm is large enough to exert an influence on the market price. All firms are price takers and in long-run equilibrium, only normal profits are made. Perfect discrimination. With perfect (or 1st degree) price discrimination the firm separates the whole market into each individual consumer and charges them the price they are willing to pay. This is indicated by the demand curve. If successful the firm can extract all the consumer surplus lying beneath the demand curve and turn it into extra revenue. Permanent income hypothesis. In Friedmans model, the key determinant of consumption is an individuals real wealth, not his current real disposable income. Permanent income is determined

by a consumers assets; both physical (shares, bonds, property) and human (education and experience). These influence the consumers ability to earn income. The consumer can then make an estimation of anticipated lifetime income. Per capita income. Total income divided by the size of the population. Perfect competition. A market situation in which there are so many sellers (and buyers) that no one seller (or buyer) can exert any influence on the price. All participants in such markets are price takers. Personal distribution. The distribution of income on the basis of income groups. For example by dividing all income recipients into ten groups (deciles) and showing the share each of these groups had of the total income. Planning curve. The long run average cost curve. Pollution regulation. Legislation might be used to offset externalities examples include: Regulation of the privatised utilities setting minimum standards for health and safety Planning regulations for new buildings Drink-driving laws and penalties Banning on cigarette advertising Setting of minimum school leaving ages. Pollution taxes. The classic way to adjust for externalities is to tax those who create negative externalities. This is sometimes known as making the polluter pay. The tax raises the private marginal cost of consumption or production and should reduce total output. This should help to reduce the externality effects. Positive externalities. Where substantial positive externalities exist, the good or service may be under consumed or under provided since the free market may fail to take into account their effects. This is because the marginal social benefits of consuming the good > private marginal benefits. In the case of external benefits from production, the marginal, social cost would be < private marginal costs. Portfolio theory. The analysis of how an investor can maximize the expected return from a portfolio of various kinds of financial assets having given degrees of risk and uncertainty associated with them (or minimize the risk involved in realizing some given expected return). Positional goods. Goods which are at least in part demanded because their possession or consumption implies social or other status of those acquiring them. Posner, Richard A. (1939- ). An American lawyer, economist and jurist, educated at Yale and Harvard. Posner lectured at the University of Chicago Law School in the 1980s, and was appointed to the US Court of Appeals during the Reagan administration. His major work in economics has been concerned with the economic analysis of law. He has published several important articles and three major books. Economic Analysis of IMW, 1973; Antitrust law: An Economic Perspective, 1976; and The Economics of Justice, 1981. Price discrimination. A monopolist may be able to engage in a policy of price discrimination. This occurs when the firm charges different prices to separate sub-groups of consumers for the

same good or service for reasons not associated with the costs of product ion. There are various forms of price discrimination possible. Price elasticity of supply. Price elasticity of supply = responsiveness of quantity supplied to a change in the goods own price. Price leadership. When one firm has a dominant position in the market the oligopoly may experience price leadership. The firms with lower market shares may simply follow the pricing changes prompted by the dominant firms. We see examples of this with the major Building Societies and Petrol retailers. Price wars. Price wars are concerned with raising or defending market share rather than short run profit maximization. They often happen after a period of relative price stability in oligopolistic markets. Price discrimination. The selling of a good or service at different prices to different buyers or classes of buyers in the absence of any differences in the costs of supplying it. Price elasticity of demand. The percentage change in the quantity of a good demanded by the percentage change in its own price. Price. What must be paid to acquire the right to possess and use a good or service. Principle of diminishing marginal utility. The proposition that the satisfaction derived from consuming an additional unit of a good or service declines as additional units are acquired. Principle of Diminishing Returns. The proposition that the marginal product of the last unit of labour employed declines as additional units of labour are employed. Private goods. A good which cannot be consumed without paying for it and the supply of which is reduced when it is consumed by a particular user of it. Privatization. The selling-off of publicly owned enterprises to private owners. Product differentiation. Causing buyers to believe that a particular version of a product is superior to that being offered by competitors. Production possibilities. Levels of output which are within the range of possibilities for a particular economy. Production possibility curve. A graphical representation of the boundary between possible and unattainable levels of production in a particular economy. Producer surplus. Producer surplus is used as a measure of producer welfare. It is defined as being the difference between what producers are willing and able to supply a good for (indicated by the position of the supply curve) and the price they actually receive. The area above the supply curve and below the market price shows the level of producer surplus. Productive efficiency. Productive efficiency refers to a firms costs of production and can be applied both to the short and long run. It is achieved when the output is produced at minimum average total cost (AC).

Profit. When a firms revenues exceed its costs, profit is the difference between the two. Progressive taxes. Direct taxes are progressive because the proportion of income paid in tax increases as income rises. With a progressive tax, the marginal rate of tax exceeds the average rate of tax. As a result, progressive taxes act to reduce inequalities in the distribution of income. The post-tax distribution of income will he less dispersed than the pre-tax distribution. Property rights. Property rights confer legal control or ownership of a good. For markets to operate efficiently, property rights must be clearly defined and protected. When property rights are not clearly defined, market failure is likely because producers & consumers may not be held to account. Proportional taxes. With a proportional tax, the proportion of income paid in tax remains constant as income changes. In this situation, the marginal rate of tax will be equal to the average rate of tax. Public goods. Public goods are services which are clearly in demand, but which must be provided collectively for two main reasons; Non excludability - the goods cannot be confined to those who have paid for it. Non rivalry in consumption - the consumption of one individual does not reduce the availability of goods to others. Public interest. The notion that there is some kind of general interest of the community as a whole which can be affected by the actions of governments or private agents. Public sector net cash requirement. The Public Sector Net Cash Requirement (PSNCR) is the combined financial deficit of central government + local government + the public corporations. When the government is running a budget deficit it means that in net terms total public expenditure exceeds revenue. As a result, the government has to borrow through the issue of government debt. Purchasing power parity. The theory of purchasing power parity (PPP) states that currencies are in exchange (value) equilibrium when the price of an identical basket of commodities and services are the same in each country, i.e. if the cost of a hamburger in America multiplied by the exchange rate of a foreign currency equals the actual price of the hamburger in that foreign country then the exchange rates between America and that foreign country are in equilibrium.

Quantity theory of money. The idea that there is a direct link between the quantity of money in the economy and the price level. Quasi rent. Payment to a factor of production which is treated as economic rent in the short run but transfer earnings in the long run. For example - wages paid to skilled computer programmers may be counted as economic rent in the short run because supply is inelastic, in the long run, as the supply of labour becomes more elastic, wage rates may come down and transfer earnings will rise. Quota. The Government might seek to physically limit the level of imports coming into the country. This is called a quota. Examples of quotas are found in the textile industry under the

terms of the Multi-Fibre Agreement. Quotas can be in terms of volume (number of units imported) or value (value of imports) permitted. Quota. A limitation on the amount of a good that can he produced or offered for sale domestically or internationally.

Rational behaviour. Behaviour that is consistent with the attainment of an individuals perception of his or her own best interest. Real exchange rate. This measure is the ratio of domestic price indices between two countries. A rise in the real exchange rate implies a worsening of international competitiveness for a country.

Real GDP / GNP. Real GDP/GNP measures the level of and rate of growth of the volume of output produced within the economy. An increase in real output means that expenditure on goods and services has risen fester than the rate of price inflation and therefore the economy is experiencing positive economic growth. Real income: Real income measures the quantity of goods and services that a consumer can afford to buy. An increase in real income will cause the demand curve to shift to the right for normal goods. However, some goods are inferior where an increase in real income will cause demand to shift to the left Real wage unemployment. Real wage unemployment is a form of disequilibrium unemployment that occurs when real wages are forced above the market clearing level. Regressive taxes. Generally, indirect taxes are seen as regressive; the proportion of income paid in tax decreases as income rises. A regressive tax means that lower income groups may face a higher tax burden than richer households. Regulation. Because of the potential economic welfare loss arising from the exploitation of monopoly power, the Government regulates some monopolies (through the work of the privatised utility regulators and the Monopolies and Mergers Commission). Retail price index. The RPI measures the average change in prices of a representative sample of over 600 goods and services. Each month, over 120,000 separate price samples are taken to compile the inflation statistics. The index is weighted according to the proportion of income spent by the average household on categories of goods such as food and housing. Revenue. Revenue is simply the income generated from the sale of output in goods markets. It is also known as turnover RPIX. The calculation of the RPIX is similar to the RPI, but excludes mortgage interest payments. This is due to the fact that when interest rates are increased to control aggregate demand and inflation, the immediate effect is to increase mortgage interest payments and, therefore, housing costs. As housing costs are a significant component of the RPI inflation is artificially increased.

RPIY. The RPIY, or core rate of inflation, excludes indirect taxes and the council tax on the inflation rate. By stripping out the effect of these taxes, the Government can establish the core change of prices within the economy. Real balance effect. The influence a change the quantity of real money has on the quantity of real national income demanded. Redistribution policy. Measures taken by government to transfer income from some individuals to others. Relative prices. The relationship between the prices of different goods and services. May be thought of in terms of the amount of one good which can be had for a certain expenditure compared to the amount of another good which can be had for the same expenditure. Rent-seeking. The activities of individuals or firms to obtain special privileges, such as monopoly power, which will enable them to increase their incomes. Using up resources to win such privileges from governments or their agencies. Resources. All those things which-can be used to produce economic satisfaction. Ricardo, David (1772-1823). Born in London, Ricardo had a successful financial career in the City. He developed a strong interest in the work of Adam Smith and other early contributors to economics such as Jeremy Bentham and Thomas Malthus. He had a life-long friendship with the latter, although their ideas were usually sharply conflicting. Ricardo wrote several influential pamphlets on economic issues of his day, particularly on taxation and commercial policy. In 1817 he published his major work. Principles of Political Economy and Taxation. Smith, Malthus and Ricardo are generally regarded as the main members of the classical school of economics. Risk. Those undertaking investments or the production of goods and services for sale cannot know with certainty whether they will recover the outlays needed to conduct these activities. Although some risks can be insured against (the risk of fire losses for example) there is no way of insuring against the possibility of business losses due to the uncertainty of the market place. Robinson, Joan (1903-83). Born in Surrey, England. A prominent Cambridge economist. Joan Robinson first attracted attention with her work on imperfect competition which became the basis of standard expositions in university textbooks on economic theory, but which she subsequently repudiated. She was a powerful advocate of Keynesian economics in the 1930s and 40s. After World War II she sought to develop a dynamic version of the Keynesian model and her work was the basis for what is sometimes called neo-Keynesianism, a radical form of Keynesianism associated with a small group of economists at Cambridge. She was one of the few mainstream academic economists to take Marxian economics seriously and incorporated elements of it into her own work. In the 1960s and 1970s she engaged in a vigorous intellectual controversy with Paul Samuelson and other dominant American theorists (based at the Massachusetts Institute of Technology) over the theory of capital and the marginal productivity theory of income distribution.

Saving function. The relationship between saving and national income. Saving: The act of abstaining from consumption. In terms of the national accounts, the difference between personal income less taxes and total consumption spending. Seasonal unemployment. Unemployment which occurs regularly because of seasonal changes in the demand for certain kinds of labour. Good examples include construction, hotels and leisure and agriculture. Semi fixed exchange rate. Exchange rate is given a specific target. Currency can move between permitted bands of fluctuation. Exchange rate is dominant target of economic policy-making (interest rates are set to meet the target). Bank of England may have to intervene to maintain the value of the currency within the set targets. Re-valuations possible but seen as last resort. Scarcity. The fact that human wants exceed the means of satisfying them. Schedule. A table or list of values. Schumpeter, Joseph (1883-1950). An Austrian-born economist who had a broadly-based career as a lawyer, banker, teacher and senior civil servant in Austria before migrating to the US where he became a professor economics at Harvard in 1932. His scholarly writing ranges over topics as diverse as business cycles and the historical evolution of capitalism. He is perhaps best known today for his defence of monopoly, which he developed in conjunction with his view that the success of capitalism was largely attributable to the freedom it allowed for innovation and entrepreneurial activity. Seasonal unemployment. Unemployment which occurs regularly because of seasonal changes in the demand for certain kinds of labour. Secular change. Change over a long period of time, such as a decade or more. Distinguished from cyclical change which occurs in shorter time periods such as a year. Shareholder. Owner of some fraction of the stock issued by a corporation. Short run. The short run is a period of time when there is at least one fixed factor of production. This is usually fixed capital. Output expands when more units of variable factors (labour, raw materials) are added to fixed factors. Shut-down price. A firm needs to make at least normal profit in the long run to remain in the industry. In the short run the firm will continue to produce as long as total revenue covers total variable costs or price = average variable cost Short run. In the theory of the firm, a period of time which is too short for changes to be made in all inputs. For example, a period not long enough to permit the size of the physical plant to be altered. Simple money multiplier. The amount by which a change in the monetary base is multiplied to bring about the eventual change in the total money supply. It is called the simple money multiplier because it does not take into account possible offsets to the process, such as a rise in the amount of money individuals or households may choose to hold as cash when the money supply increases. Single proprietorship. A form of unincorporated business in which there is only one owner.

Size distribution of income. The distribution of income among groups of income recipients defined on the basis of the size of their incomes. Smith, Adam (1723-90). Generally regarded as the founder of modern economics, Adam Smith was born in 1723 in Kirkaldy, Scotland. Educated at Glasgow College and at Oxford, he eventually gained the chair of moral philosophy at the University of Edinburgh. He published his Theory of Moral Sentiments in 1759 and his great work. An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. The latter was an immediate success and its influence is still felt today. Perhaps its most famous passage is that in which Smith elaborated on his notion that individuals are motivated not by altruism, but by self-interest. In pursing their own interests, however, they inadvertently advance the interest of society as a whole, led as it were by an invisible hand. Social cost. The real cost to society of having a good or service produced, which may be greater than the private costs incorporated by the producer in its market price. Social Darwinists. A disparate group of turn-of-the-century commentators on social issues who sought to utilize the Darwinian law of natural selection (survival of the fittest) as a basis for social policy. The best-known of the social Darwinists was Herbert Spencer. Spencer, Herbert (1820-1903). A British philosopher and early sociologist. Spencer was trained mainly in engineering, but he developed an early interest in social science. He became involved with several radical social movements and tried to develop an ambitious, but never fully coherent philosophical system he called Synthetic Philosophy. He published three major books: Social Statics, 1850; The Man versus the State, 1884; and The Principles of Ethics. 1892-3. His social theories were founded on the conviction that the evolution of society from a state of brutal barbarism to modern industrial civilization had depended on the subordination of the less capable members of society to their superiors. Any interventions which alleviated the circumstances of the less fit. Spencer contended, disrupted the operation of the benign natural processes which ensured progress by eliminating the idle, incompetent and unproductive members of society. Stalin, Joseph Vissarianovich (born J.V. Dxhugashvili) (1879-1953). Lenins disciple and successor as leader of the Soviet Union. Stalin reinforced the system of centralized state control after gaining power when Lenin died in 1924. Through systematic purging of dissenters from the Party apparatus, Stalin achieved supreme control and drove forward a massive program of industrial development and forced collectivization of agriculture. As he once put it. We lag behind the advanced countries by 50 to 100 years. We must make good this distance in ten years. Despite enormous losses due to famine in the 1930s and the devastation of World War II, by the time of his death Stalin had made the Soviet Union into a modern, industrial state capable of challenging the United States for international economic, political and technological leadership. Stationary state. The economic condition envisioned by the classical writers once the growth of population had reached the point where output per capita was reduced to the subsistence level and the accumulation of capital had reduced the return to investment to zero. The economy would remain in equilibrium with no possibility of future increases in population or per capita incomes. Stigler, George(1911- ). Stigler was born and grew up in the western US and studied at the University of Washington, at Northwestern, and Chicago. He subsequently taught at several universities in the American mid-west and at Columbia before settling down at the University of Chicago where he remained from 1958 until retirement in 1981. His published work covers a

variety of topics in economic theory, including oligopoly, economies of scale and other aspects of industrial organization. Some of his most original contributions have to do with the economics of information, which he treated as a standard commodity subject to the usual influences of demand and supply, and the economic theory of regulation. Structural unemployment. This type of unemployment exists even when there are job vacancies, due to a mismatch between the -skills of the registered unemployed and those required by employers. People made redundant in one sector of the economy cannot immediately take up jobs in other parts as they do not have the relevant skills. For example, it would be hard for a redundant ship yard worker to instantly take a job in a high-tech electronics business, likewise workers laid-off in steel manufacturing may have problems in finding re-employment in financial services. This type of unemployment is linked to the occupational immobility of labour. Subsidies. Subsidies represent payments to producers by the government which reduces costs and encourages them to increase output. The effect of a subsidy with a downward sloping demand curve is to increase the quantity of goods sold and to reduce the market equilibrium price. Government subsidies are often offered to producers of merit goods and services and industries requiring some protection from low cost international competition. Substitutes. Substitute goods are in competitive demand - for example, different brands of coffee or soft drinks. The cross price elasticity of demand for two substitutes will be positive i.e. a rise in the price of X (a substitute for good Y) will cause an increase in the demand for good Y. Substitute goods. Goods which may be used in place of other goods. Substitution effect. The change in the quantity of a good demanded resulting from a change in its relative price, leaving aside any change in quantity demanded that can be attributable to the associated change in the consumers real income. It may also be thought of as a change in the quantity demanded as a result of a movement along a single indifference curve. Sunk costs. Some industries have very high start-up costs or a high ratio of fixed to variable costs. Some of these costs might be unrecoverable if an entrant opts to leave the market. This acts as a disincentive to enter the industry. Sunk costs are absent from a contestable market. Supernormal profit. Profit made by a business in excess of normal profit. Supernormal profits can be maintained in the long run if barriers to entry can effectively block the successful entry of new firms into a market. Supply. Supply is defined as the willingness and ability of producers to supply output on to a market at a given price in a given period of time. There is usually a positive relationship between supply and price.

Tariff. A tax imposed on an imported good. Tariff. A tariff is a tax on imports and can be used to restrict imports and raise revenue for the government. The effect of a tariff depends on the price elasticity of demand for the good and the elasticity of supply.

Tax. A tax is any compulsory transfer from a private individual, institution or group to central or local government. Trade unions. Trade unions are organisations that represent people at work. Their purpose is to protect and improve peoples pay and conditions of employment. But they also campaign for new laws which benefit working people. Trade unions exist because an individual worker has little power to influence decisions that are made about his or her job. By joining together with other workers, there is more chance of having a collective voice and influence. Transfer earnings. The minimum reward required to keep labour in its present occupation. This is shown by the area under the labour supply curve. Transfer payments. Transfer payments are transfers from tax-payers to benefit recipients through the working of the social security system. The total welfare bill now exceeds 100 billion per year.

Tastes. The preferences of consumers. Technology. Knowledge which permits or facilitates the transformation of resources into goods and services. Tort. In law, a private or civil wrong. Total factor productivity. The growth of real output beyond what can be attributed to increases in the quantities of labour and capital employed.

Unemployment. The non-utilization of labour resources; the condition in which members of the labour force are without jobs. Sometimes used more broadly to refer to the waste of resources when the economy is operating at less than its full potential. Utilitarian. Refers to a school of philosophy based on the ideas of Jeremy Bentham (1748-1832). The main principle involved was that private morality and government policy should be based on the concept of general utility,- the greatest good for the greatest number. Unemployment. The unemployed are those registered as able, available and willing (to work at the going wage rate in any suitable job who cannot find employment. Unemployment is a flow concept - i.e. there are inflows and outflows from the total. Unemployment falls when more people leave the unemployment register (when they find work) than sign on each month. See also seasonal unemployment, real wage unemployment, demand deficient unemployment, frictional unemployment and structural unemployment and active labour market policies. Utility. Utility describes the satisfaction or enjoyment derived from the consumption of a good or service.

International Trade and Balance of Payments

Domestic trade is different and international trade is different. In domestic trade the buyers and sellers are located within the country but in international trade they are out of your country - from many countries. Actual buyers or sellers are the residents of foreign countries. In international trade we trade with people outside our political boundaries.

International trade is very important for every country.

Every country needs to buy products from outside which it does not produces or does not produces most competitively. International trade is growing day by day and with the growth of the domestic economies, international trade is actually growing. In some economies international trade is like the engine of growth. These are export-led economies. We see that some countries have higher trading share than other countries in the economy of our country. The USA is our largest trading partner. Now you can easily guess that if anything adverse happens between the two countries or even within any country (remember the September 11- terrorist attack on World Trade Centres?). Thus, if people from America do not buy (reduction in demand), then it can create problems for our production and industry. It is important to understand that international trade provides a remedy for a lack of balance between the resources of a country and its need for them. Our country exports surplus resources and productions to other countries (we export human resource in Information technology like software engineers to various countries) and import resources we do not have or have in short supply. Thus, international trade, to be precise, is a source of economic gain to the trading countries. Most significantly, it is such a resource source that never dries up.

Principle of Comparative Advantage

The principle of comparative advantage states that countries will benefit by concentrating on the production of those goods in which they have a relative advantage. For instance, France has the climate and the expertise to produce better wine than Brazil. Brazil is better able to produce coffee than France. Each country benefits by specialising in the good it is most suited to making. France then creates a surplus of wine which it can trade for surplus Brazilian coffee. Of course, all is not well with international trade. It creates its own problems. It creates problems relate to foreign exchange, rate of exchange, balance of trade and payments, tariffs, capital flows, transfer of rise in prices, etc. FOREIGN EXCHANGE

History of foreign exchange

In this part we shall have a look at the evolution of money and the various exchange rate systems prevailing till the middle of the 20th century. The exchange of goods and services has been prevalent since thousands of years and a system of barter developed over the years as man looked for ways to fulfill his needs for different commodities and services. The initial exchange was limited to items of food and gradually as man

explored, invented and travelled to distant land it became necessary to have a medium of exchange. This necessity led to the evolution of money. The Evolution of money Primitive societies used various commodities as a medium of exchange. These ranged from grain, shells, tobacco, rice, salt, ivory to cattle, sheep, skins and slaves. These were the commodities, which were in greater demand and were thus easy to exchange. However, while a farmer could easily meet his requirements for various goods by offering his wheat, a person having cattle would find it difficult to exchange it for salt. He would either have to take a very large quantity or take some other easily traded commodity. Thus the marketability of a commodity determined its acceptance and use as a means of exchange. Marketability of a commodity was determined by the familiarity with the commodity and its quality, divisibility, uniformily and ease of transportation and storage. Over time, with the introduction of metals and coins, another important quality of the commodity emerged. It became a medium of exchange, having a value much greater than its intrinsic value. It was no longer used for consumption, but for acquiring other commodities for consumption. This was the evolution of money. The use of coins facilitated exchange as it was easy to determine the value of a unit, was easily divisible and acceptable to all. Two metals, gold and silver were favoured for minting of coins because of their intrinsic value. There however still remained the inconvenience of carrying a large amount of coins or bullion and it was not easy to transfer or transport large amounts. It was in the 17th century that the practice of depositing coins and bullion with goldsmiths, moneychangers, mint masters etc started. These persons enjoyed the trust of the people and were entrusted with the job of safe keeping of surplus money. The next step was the transfer of value by assignment rather than by physical delivery. Goldsmiths in England were among the first to start the system of money by book entry. This was a major development and ultimately led to the spread of banking services. People were confident that they would receive a certain value, on demand, against the bank note they possessed. The history of foreign exchange can be traced back to the time moneychangers in the middle east would exchange coins from all over the world. Foreign exchange dealings with gold as the standard of value started around 1880 after more than a hundred years of bimetallism where both gold and silver were commonly used as a measure of value.

The Gold Standard

Under the gold standard, the exchange rate of two currencies was based on the intrinsic value of gold in the unit of each currency. This also came to be known as the mint parity theory of exchange rates. Under the gold standard exchange rates could only fluctuate within a narrow band known as the upper and lower gold points. A country, which had a balance of payments deficit had to part with some of its gold and transfer it to the other country. The transfer of gold would reduce the volume of money in the deficit country and lead to deflation while the inflow of gold in the surplus

country would have an inflationary impact on that economy. The country which was in deficit would then be able to export more and restrict its imports as a result of the fall in domestic prices and reduce its BOP deficits. A lowering of the discount rates in a country with a surplus and a hike in discount rates in the deficit country also aided in reducing the imbalance in the BOP. The main types of gold standard were: The Gold specie standard The Gold Bullion standard. The Gold Exchange standard. The Gold Specie Standard - 1880 - 1914 Under the gold specie standard, gold was recognized as a means of settling domestic as well as international payments. There were no restrictions on the use of gold and it could be melted down or be sent to a mint for conversion to coins. Import and export of gold was freely allowed and Central Banks guaranteed the issue or purchase of gold at a fixed price, on demand. The price of gold varied according to the supply of the metal in the market and the value of gold coins was based on their intrinsic value.

The gold bullion standard - 1922 - 1936

The gold bullion standard started after the first world war, as increased expenditures to fund the war effort exposed the weaknesses of the gold standard. It was decided at an international conference in Brussels in 1922 to reintroduce the gold standard but in a modified form. Under the gold bullion standard, paper money was the main form of exchange. It could however be exchanged for gold at any time. As it was unlikely that there would be a great demand for converting currency notes to gold at any given time, the banks could issue currency notes in excess of the value of gold they were holding. The gold bullion standard too could not last long as many major currencies were highly over or under valued leading to a distortion in balance of payment positions. In 1925, the sterling was over valued against the dollar by nearly 44% and necessitated a devaluation. This devaluation had an impact on other currencies too and led to an exchange rate war. England withdrew from the gold standard in 1931, America in 1933 and Italy, France, Belgium, Switzerland and Holland remained. It finally collapsed in 1936 with the devaluation of the French franc and the Swiss franc.

The Gold Exchange Standard- 1944- 1970

During the Second World War, international trade suffered with runaway inflation and devaluation of currencies. A need was felt to bring out a new monetary system that would be stable and conducive to international trade. The process was started in 1943 by Britain and the US and finally in July 1944 the American proposal was accepted at the Bretton Woods conference. The new system aimed to bring about convertibility of all currencies, eliminate exchange controls and establish an international monetary system with stable exchange rates. The IMF was set up in 1946 under the Bretton Woods agreement and the new exchange rate system also came to be known as the Bretton Woods system.

Under the Bretton Woods system, member countries were required to fix parities of their currencies to gold or the US dollar and assure that rates did not fluctuate beyond 1% of the level fixed. It was also agreed that no country would effect a change in the parity without the prior approval of the IMF .


E.C.M FCNRA FCNR(B) FCON FC(B&O) D I.B.R.D (World Bank) I.C.O.R I.D.A ADR BIS EMU EU ERM FDI FII FX/FOREX GATT GATS GDP G7 IAS IMF LTCM NRI NEP OECD SWIFT TRIMS TNC UN : European Common Market : Foreign Currency Non-Resident Accounts : Foreign Currency Non-Resident (Banks) Accounts : Foreign Currency Ordinary Non-Repatriable : Foreign Currency (banks & Others) Deposits : International Bank for Reconstruction and Development : Incremental Capital Output Ratio : International Development Association American Deposit Receipt Bank for International Settlement Economy and Monetary Union European Union Exchange Rate Mechanism Foreign Direct Investment Foreign Institutional Investors Foreign Exchange General Agreement on Trade and Tariffs General Agreement on Trade in Services Gross Domestic Product Group of 7 Highly Industrialised Countries International Accounting Countries Standards International Monetary Fund Long Term Capital Management (US based Hedge Fund) Non-Resident Indians New Economic Policy Organisation of Economic Corporation Developments
Society for Worldwide Inter Bank Financial Telecommunication

Trade Related Investment Measures Trans - National Corporation United Nations


United Nations Development Programmes World Trade Organisation

Million is Billion is Trillion is 10,00,000 1,000 Million = 10,00,000,000 1,000 Billion = 10,00,000,000,000 Dollars are US dollars otherwise specified. 1 US $ = App.Rs.45/- (today).