What

is

the

difference

between

fiscal

and

monetary

policy?

The government uses both fiscal and monetary policy to stimulate the economy (get it growing) and also to slow the rate of growth down when it gets overheated. With fiscal policy the government influences the economy by changing how the government collects and spends money. The most common tools that the government enacts to effect fiscal policy include: Increased Spending on new government programs and initiatives (such as job creation programs). This has the effect of increasing demand for labor and can result in lower unemployment levels Automatic Fiscal Programs are programs that take effect immediately to help correct the slide in the economy. Probably the single best example of this is unemployment insurance which a person can file for as soon as they lose their job. Tax Cuts are another tool that government uses to stimulate demand for goods and services when the economy takes a turn for the worse. The effect of a tax break is to put more money back in the pockets of businesses and consumers which they can spend and put back to work in the economy. Monetary Policy, on the other hand, involves the manipulation of the available money supply within the economy. In the United States, the role of manipulating the money supply falls to the Fed or the central bank in the US. Not only does the Fed have overall responsibility for the country's monetary policy, but it also has responsibility for issuing currency and overseeing bank operations. An increasing money supply puts more money in the hands of consumers which they turn around and spend - a decreasing money supply does just the opposite. In order to increase or decrease the money supply, the Fed has four principal levers which it pulls to try and effect change. The first thing that the Fed can do is to alter the reserve ratio which is the percentage of assets that commercial banks have to keep on deposit at one of the Federal Reserve Banks - the higher the reserve ratio, the less money that banks can lend out to the general public. Another way the Fed can control the money supply is by adjusting the federal funds rate (fed funds rate). The federal funds rate is a short-term borrowing rate that banks have established amongst themselves for short-term borrowing. Another way the Fed can adjust the money supply is by raising or lowering the discount rate which is the rate at which commercial banks can borrow money from the Fed. The higher the rate (or interest charged on the loan), the less inclined commercial banks are to borrow and a smaller amount of money will be available in the market. And lastly, the Fed can buy and sell government bonds. The buying of bonds translates into income for the US government, which can in turn put more money into the economy.

Fiscal Policy vs Monetary Policy Fiscal policy and monetary policies are instruments utilized by governments to give impetus to the economy of a nation and sometimes they are used to curb the excess growth. The fiscal policy is the underlying principle through which the government controls the economy with the collection and expenditure of money. This is revealed in the governments fiscal policy of a particular period. The government engages in manipulating the available fund within the economy. This is described in the monetary policy of the government. It deals with the issuing of currency and administration of banks for smooth operations. A good flow of money enables customers to have more cash at hand and in turn encourages spending. The fiscal policy relates with the programs and plans of the government and creates an increasing demand for workers resulting in lowering of unemployment position. The automatic fiscal plans correct the sliding down of economy, like the unemployment insurance to give relief to persons who lose jobs. Tax cuts are brought in to give back more money to business and consumers which they can spend in turn to strengthen the economy.

The fiscal policy revolves around the economic position of the nation and the related strategy to impose taxes to make maximum use of fund. This is not a one time affair but goes on changing every year to suit the position of the economy and its needs during the specific period. The monetary policy differs with the fiscal policy on the ground that it is exclusively for banks and the circulation of money in an efficient way. This is also changed every year on the demand and supply of the money and makes effect on the rate of interest on loans. This monetary policy acts as the key regulator through the key bank of the nation as the Federal Reserve System in US. Fiscal policy is fundamentally an attempt of the nation to give direction to the economy through manipulation of tax structures. Whereas, the monetary policy is the procedure by which the nation or its key bank influences the supply of fund, rates of interest and so on. The main objectives of both the procedures are attainment of growth of economy and its stability. In the monetary policy, the central bank attempts to bring in four principles to either increase or reduce money supply to make a change in the structure. The primary principle is to change the cash reserve ratio of commercial banks. This restraint compels banks to maintain a deposit at the central bank. The increase in the ratio means dearth of funds at the hands of commercial banks, which makes loans to consumers difficult. Accordingly interest rates on short-term borrowings are settled. The central banks also employ the process of buying or selling of government bonds to control the supply of money in the market. These are basic differences between fiscal policy and monetary policy of a country. Summary 1. Fiscal policy gives the direction of economy of a nation. Monetary policy controls the supply of money in the nation. 2. Fiscal policy relates to the economic position of a nation. Monetary policy focuses on the strategy of banks. 3. Fiscal policy administers the taxation structure of the nation. Monetary Policy helps to stabilize the economy of the country. 4. Fiscal policy speaks of the governments economic program. Monetary policy sets the program of key banks of the nation.

Checking vs Savings

A financial institution normally offers their customers access to various accounts. There are generally two accounts that the customer can choose from; a checking account or a saving account. Although each bank widely varies its banking terms, the requisites of how you can access each account remain universal.

A checking account is normally the banking account that you use in your daily routine. It is the account from where you pay bills, withdraw money and make purchases. A saving account is where you place any monies that you wish to set aside or accumulate for a rainy day. Money placed in a saving account will, over time, accumulate a payment of interest. Banks will normally provide each saving account an interest level. For example if you had saved $100 in a savings account with a 3% interest rate, in a 12 month period you would secure an extra $3.00 in your saving account. Because of the constant movement of money in a checking account, banks pay little or no interest on monies held in these accounts. If you wish to save large amounts of money it is best to place it in a savings account; that way you can earn money while the bank is securely looking after it. Checking accounts will also offer their customers an overdraft facility on their account. If you are in good standing with your bank, they will offer you the facility of using more money than you actually have. The over drawn money is usually requested to be repaid at the end of the month. Savings accounts do not offer this clause. From a savings account, you may only withdraw what monies you have invested.

Checking accounts allow you prompt access to your funds. Savings accounts, on the other hand, have strict rules regarding withdrawal. Some savings accounts will require you to complete a notice period before withdrawal can be made, and some savings accounts will only let you withdraw from your account so many times in a given period. The benefit of holding a checking account is the flexibility that you can achieve within your account. This type of account will be issued with a debit card, allowing you access to funds when the banks are closed, and allowing you to pay for items without dealing in cash. Thanks to todays technological advances, checking accounts are now available online. In an instant you can securely log on and complete remotely complete instructions. Unfortunately, many savings accounts do not offer such a facility for their customers. No card facilities are offered with these types of accounts; you will still have to physically visit the bank to make a withdrawal from your account. Summary
1. Checking accounts are used for everyday financial needs, like withdrawing money and making purchases. 2. Savings accounts restrict your withdrawal and do not offer instant access to your account. 3. Checking accounts can be accessed online. 4. Savings accounts are used to securely keep large sums of money that you have been saving. 5. The financial institution will pay you an interest rate for keeping your money in its account

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

Summary: Microeconomics and macroeconomics are important studies within economics, that are essential to sustain the overall growth and standard of the economy. While the two studies are different,

with microeconomics focusing on the smaller business sectors, and macroeconomics focusing on the larger income of the nation, they are interdependent, and work in harmony with each other. The main differences are: 1.Microeconomics focuses on the markets supply and demand factors, and determines the economic price levels. 2.Macroeconomics is a vast field, which concentrates on two major areas, increasing economic growth and changes in the national income. 3.Microeconomics facilitates decision making for smaller business sectors. 4.Macroeconomics focuses on unemployment rates, GDP and price indices, of larger industries and entire economies. Microeconomics and macroeconomics are the fundamental tools to be learnt, in order to understand how the economic system is administered, and sustained.

GDP vs National Income GDP or Gross Domestic Product and National Income are financial terms that are related to the finance of a country. National Income is the total value of all services and goods that are produced within a country and the income that comes from abroad for a particular period, normally one year. Gross Domestic Product is defined as the value of the goods and services generated within a country. The GDP, which is based on ownership, measures the overall economic output of a country. The GDP also determines the local income of a nation. The National Income determines the overall economic health of the country, trends in economic growth, contributions of various production sectors, future growth and standard of living. Gross Domestic Product, Gross National product, and Gross National Income are the factors that determine the national income. Generally, these three methods are used to determine National Income. The product or output method is a method that evaluates the overall value of services generated by the country. The income method takes into account the overall income from various means of production. Then there is the expenditure method where the sum of all expenditures incurred is taken into account

In the calculation of GDP, many factors, such as, services and goods produced, exports, and government/private spending are used. In a very simple formula, the GDP can be calculated. The

general formula for determining GDP is C + G + I + NX where C is the National Consumer Spending, G is the total government spending, I is the amount of business capital, and NX is net exports minus total imports. Summary: 1.National Income is the total value of all services and goods that are generated within a country and the income that comes from abroad for a particular period, normally one year. 2.Gross Domestic Product is defined as the value of the goods and services generated within a country. 3.Gross Domestic Product, Gross National Product, and Gross National Income are the factors that determine the national income. Generally, these three methods are used to determine National Income. 4.In the calculation of GDP, many factors, such as, services and goods produced, exports, and government/private spending are used. 5.The GDP, which is based on ownership, measures the overall economic output of a country. The GDP also determines the local income of a nation. The National Income determines the overall economic health of the country, trends in economic growth, contribution of various production sectors, future growth and standard of living.

positive vs normative economics Each of us must have an understanding on how the economy works. It will allow us to see if our policy makers are making the right economic decisions for us. We should be able to know how our behavior and spending habits affect the economy. It is important therefore to know what economics is and learn about its different features and dimensions. Economics is a social science that deals with the production, distribution, and consumption of goods and services. Its purpose is to explain how economies work and the interaction between its various agents. There are several dimensions of economics, namely: Microeconomics examines the behavior of the consumers, producers, buyers, and sellers. Macroeconomics examines issues that can affect the entire economy like unemployment, inflation, monetary and fiscal policy. Economic theory provides a research outlet of economics with the use of theoretical reasoning and mathematical solutions. Applied economics application of economic theory Rational economics formulation of a framework the understanding of economic behavior. Behavioral economics uses social and emotional factors in understanding the decisions of individuals and business entities in the performance of their economic functions.

 Positive Economics

Positive economics is the study of what and why an economy operates as it does. It is also known as Descriptive economics and is based on facts which can be subjected to scientific analysis in order for them to be accepted. It is based on factual information and uses statistical data, and scientific formula in determining how an economy should be. It deals with the relationship between cause and effect and can be tested. Positive economic statements are always based on what is actually going on in the economy and they can either be accepted or rejected depending on the facts presented Normative economics is the study of how the economy should be. It is also known as Policy economics wherein normative statements like opinions and judgments are used. It determines the ideal economy by discussion of ideas and judgments. In normative economics, people state their opinions and judgments without considering the facts. They make distinctions between good and bad policies and the right and wrong courses of action by using their judgments. Normative economic statements cannot be tested and proved right or wrong through direct experience or observation because they are based on an individuals opinion. Although these two are distinct from each other, they complement each other because one must first know about economic facts before he can pass judgment or opinion on whether an economic policy is good or bad. Summary 1. Positive economics deals with what is while normative economics deals with what should be. 2. Positive economics deals with facts while normative economics deals with opinions on what a desirable economy should be. 3. Positive economics is also called descriptive economics while normative economics is called policy economics. 4. Positive economic statements can be tested using scientific methods while normative economics cannot be tested.

CPI vs GDP Deflator

CPI and GDP deflator generally seem to be the same thing but they have some few key differences. Both are used to determine price inflation and reflect the current economic state of a particular nation. GDP Deflator takes into account goods that are produced domestically. It does not bother with imported goods and it reflects the prices of all the commodities, services included. The GDP deflator is calculated quarterly and it weights may change per calculation. GDP is an abbreviation of Gross Domestic Product which is the overall value of all final goods and services made within the borders of a country in specified period. GDP has two types the: Nominal GDP and the Real GDP. The ratio of the two values is the GDP deflator. If expressed mathematically, GDP Deflator = (Nominal GDP/Real GDP) x 100 Essentially, the GDP deflator compares the price level in the current year to level in the base year

There are so many price indices out there and GDP is unlike some of them that are based on a predetermined basket of goods and services. In the GDP deflator, the so-called basket in a year is weighted by the market value of all the consumption of each good therefore it is allowed to change with peoples investment and expenditure patterns since people do respond to varying prices. CPI, which is short for Consumer Price Index, indicates the prices of a representative basket of commodities procured by the consumers. It uses a fixed basket of goods and services and is a widely used measure of the cost of living faced by consumers of a nation. Like the GDP deflator, it also compares prices of the current period to a base period. CPI tends to consider insignificant goods, even the outdated ones that are not really purchased by the consumers anymore. Nevertheless, they are still considered for pricing in the fixed basket. Consumption goods are the main priority of the CPI measure. The prices of other items used in production are not considered as well as the prices of investment goods. Only consumer items are taken into account, the machines and the industrial equipments that are used to make them are not considered. As you can see, GDP deflator is not identical with the CPI but provides an alternative to each other as a measure of inflation. Over long periods of time, both provide similar numbers, but they can diverge in shorter periods. Summary: 1. The GDP deflator measures a changing basket of commodities while CPI always indicates the price of a fixed representative basket.

2. GDP deflator frequently changes weights while CPI is revised very infrequently. 3. CPI will consider imported goods because they are still considered as consumer goods while GDP deflator will only contain prices of domestic goods

Gross vs Net Income.

Many people face utter confusion when asked to state the difference between gross and net income. To be fully in control of your finances you need to understand the tangible differences between the two. Both personal and business finances can be greatly affected if you lack this relevant knowledge. As an employee, your wages are determined by numerous factors. Your pay slip will contain a set of two figures. The first number is classed as your gross income. It is the amount your employer has agreed to pay you for either a week or months worth of work before the government charges you any taxes. This calculation becomes a slightly more complex if you run a business or large corporation. In order to calculate your gross income from the business, you first need to take away the cost of the goods. An easy calculation is as follows; Cost per unit of sales total cost of goods sold = Gross profit. If your calculation generates a negative figure, it is unfortunate, but your company has made no money during the financial year. Now comes the tricky bit because we live in a democratic society we are expected to pay a certain level of tax to the state. The government looks at the amount we earn. The level of your gross income determines what level of tax you have to pay. The more you earn, the more you have to pay. Different countries have different levels of deductions and the government has the right to deduct your gross income accordingly. You can often find yourself with an extremely depleted final figure after all the taxations are deducted

Now comes the tricky bit because we live in a democratic society we are expected to pay a certain level of tax to the state. The government looks at the amount we earn. The level of your gross income determines what level of tax you have to pay. The more you earn, the more you have to pay. Different countries have different levels of deductions and the government has the right to deduct your gross income accordingly. You can often find yourself with an extremely depleted final figure after all the taxations are deducted. Business Net Income is even more confusing for the business owner. Net income is calculated by subtracting not only the cost of goods, but also any operating expenses that have occurred while running your business. The list that you can claim for is endless. Of course the benefits of this are that the more you deduct, the lower your income becomes and the less the government can tax you for. Summary

1. For an individual, gross income is the salary that your employer pays you before deductions. 2. For a company, gross income is established by the following calculation: Cost per unit of sales total cost of goods = Gross Profit. 3. Both individual employees and businesses pay tax in relation to their gross salary or profit. 4. Many different taxes are deducted from your earnings 5. Once the tax has been deducted from your gross earnings, you are left with what is known as your net income.

GNP vs GDP GNP or gross national product and GDP or gross domestic product are both measures of economic development. When you calculate the estimated value that defines the worth of any countrys services provided and production carried out over a whole year, then you refer to it as that countrys GDP. On the other hand, GNP refers to the GDP added to the total amount of capital gain from all investments made abroad with the amount of income that has been earned by foreign nationals in that country subtracted from the total. Meanwhile, the formula to calculate GDP is addition of consumption, investment, government spending, exports with imports subtracted from the total. Both terms are used in the sectors of finance, business and forecasting of economic trends. But while, GDP captures an image of the domestic economic strength of a country, GNP captures an image of how the nationals of a particular country are faring financially. GNP ignores the production area but focuses totally on the nationals of a particular country and businesses and industries owned by them irrespective of where they are located. Further, GDP is also taken into account on the basis of the current prices in the period being studied. It includes three variants which are:

Nominal GDP: is the production of services and goods that are valued at the current price prevalent in the market. Real GDP: is the production of goods and services that are valued at constant prices and are not affected by market fluctuations. This calculation helps economists to figure out if production in a country has improved or not without any reference to how the purchasing power of the countrys currency has changed.

In countries where there is very high foreign investment, the GDP is always much higher than the GNP. This is the reason the difference between the two is very trivial when it comes to America. But, is extremely high when it comes to countries like Saudi Arabia. [The image shows the GDP growth per capita of each country. As seen in the image China has the highest GDP growth in the world]

Nominal GDP vs Real GDP First of all, the term GDP stands for Gross Domestic Product, and it is defined as the cost of all the services and goods that are available in a country. Nominal GDP indicates the present-time prices of the types of services available, and the goods produced, whereas, Real GDP indicates costs according to various base years. Growth Domestic Product is the rate of services and final goods, therefore, if there is a growth in the GDP, it does not necessarily mean that there is also a growth in the services and goods provided. Gross Domestic Product is measured in current dollars, which refers to the year in which the services and goods are produced. This would indicate the Nominal GDP, as current dollars can also be specified as nominal dollars. Real GDP is the estimation of national output, but accounts for inflation as well. Inflation refers to the rise in prices of goods on a yearly basis, and is the macroeconomic gauge of the structure of an economy. Inflation indicates the income status of an economy. The formula to calculate Real GDP is: Nominal GDP/GDP Deflator x 100. The Real GDP calculation for the year is the same as the amount determined for Nominal GDP, that is stated in the price level for the base year. This shows the growth of the Nominal GDP as a percentage, and which has been accustomed to allow for inflation. Real GDP focuses on price changes, and the inflation rate, that occurs throughout the year. The size of a population can affect the Real GDP. It is found that industries in many countries have grown at a fast pace due to domestic GDP. Statistical analysis has shown a wider outlook in the growth of the economic conditions, and the growth has been even more evident in the recent years. Therefore, a constant change in business strategies and plans is required. Basic growth has been seen in the E & M industry, although, the present financial crisis has lead to a deceleration in this industry by 8.0 percent. This is due to the general decrease in market activity, but growth is predicted to resume shortly. The E & M industries include the sectors of Television, Film, Print and Media, Radio Advertising, Animation, the Gaming and VFX industry, and the Internet Advertising industry. It is essential to calculate GDP on an annual basis for all types of major sectors, like government outlays, public consumption, exports and imports, and investments that arise. The basic formula for calculation is: GDP = C + G + I + NX. C Refers to all types of consumer spending or private consumption that occurs within a countrys economy. G This refers to the amounts of government spending. I Refers to the capital expenditure of businesses. NX This refers to the net exports of a country, including exports and imports. Summary: The main differences between Nominal GDP and Real GDP are:

1.Nominal GDP represents the current prices of all types of services, and goods produced. 2.Real GDP is the costs of the services rendered, and goods produced, that is indicated by various base years.

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

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

Summary 1) Earnings Before Interest and Taxes (EBIT) and Profit Before Interest and Taxes (PBIT) both measure of a firms profitability that excludes interest and income tax expenses. 2) EBIT = Operating Revenue Operating Expenses (OPEX) + Non-operating Income. PBIT is equal to Net profit + Interest + Taxes. 3) EBIT is mostly used to evaluate a companys profitability in comparison to others. PBIT is frequently used by creditors to measure a companys earning and paying capacity.

CTC vs Gross Salary A salary is the periodic payment that an employee receives from an employer in return for the work he provides. An employee, when seeking employment, will always look towards CTC, or Cost to Company, and gross salary. The difference between CTC and gross salary, is that some components are included in one, but not in the other. Cost to Company is the amount that an employer will spend on an employee in a particular year, whereas, gross salary is the amount an employee receives as a salary, before any deductions. When talking of Cost to Company, it involves salary, reimbursements, contributions and tax benefits. A salary includes the basic amount, dearness allowance, house rent allowance and other allowances. The reimbursement includes bonuses, reimbursement of conveyance/telephone/medical bills, incentives, and other benefits that are given. Contributions refer to the amount that the employer contributes to the PF, gratuity, super annuation and medical insurance. Leave encashment, non-cash concessions and stock option plans are all included in the CTC. Though these are included in the CTC, these may vary from one company to another. In regards to gross salary, it is the amount that the employer has committed to pay an employee on a monthly basis. A gross salary will not include the contributions to the PF and gratuity, among other things. For gross salaries, certain components are different for individual employees, and other components are the same for all employees. The components of a gross salary includes basic pay, dearness allowance, house rent allowance, city compensatory allowance, and other emoluments. Cost to Company refers to the amount that the employer is willing to spend on an employee. While the employers contribution is added to the Cost to Company, the employers contribution is not added to the gross salary. Summary: 1. Cost to Company is the amount that an employer will spend on an employee in a particular year, whereas, gross salary is the amount an employee receives as a salary, before any deductions.

2. A gross salary will not include the contributions to the PF and gratuity, among other things. 3. The employers contribution is added to the Cost to Company; the employers contribution is not added to the gross salary. CTC involves salary, reimbursements, contributions and tax benefits. Salary includes the basic amount, dearness allowance, house rent allowance and other allowances. On the other hand, the components of a gross salary includes basic pay, dearness allowance, house rent allowance, city compensatory allowance, and other emoluments.

How is relation between FDI and FII?

FII generally means portfolio investment by foreign institutions in a market which is not their home country. These institutions are generally Mutual Funds, Investment Companies, Pension Funds, Insurance House's is a short term benefit to the country and the rules and regulations to enter the Indian Market are not much, the fluctuations in the stock market is generally due to the FII Investments , cause the rules are eased the investor can leave the market at Any point of time. There investments are in the stock market whereas FDI is generally a long term commitment to a particular company in a sector in terms of equity investment by some foreign entity. Therefore we could see Lehman investing 15% in say Unitech, now that would be FDI. However if Lehman has bought shares of Unitech though secondary markets (stock trading market) it would have been an FII. FII funding is a paramount maker of stock markets and there selling or buying moves the stock in a day. FDI also have to follow a high rules and regulations to enter the market and the subs. given to such players are huge in term of taxes .FDI have long term commitment and hence we see flight of capital in terms of FII outflows but not generally in FDIs. The Economy high and low depends on the FDI's Investment where as the Stock mark fluctuations are generally because of FII Foreign direct investment (FDI) flows into the primary market whereas foreign institutional investment (FII) flows into the secondary market, that is, into the stock market. All other differences flow from this primary difference. FDI is perceived to be more beneficial because it increases production, brings in more and better products and services besides increasing the employment opportunities and revenue for the Government by way of taxes. FII, on the other hand, is perceived to be inferior to FDI because it only widens and deepens the stock exchanges and provides a better price discovery process for the scrips. Besides, FII is a fair-weather friend and can desert the nation which is what is happening in India right now, thereby puling down not only our share prices but also wrecking havoc with the Indian rupee because when FIIs sell in a big way and leave India they take back the dollars they had brought in.

Do you know the difference between FDI and FII?

What is foreign investment?

Any investment flowing from one country into another is foreign investment. A simple and commonly-used definition says financial investment by which a person or an entity acquires a lasting interest in, and a degree of influence over, the management of a business enterprise in a foreign country is foreign investment. Globally, various types of technical definitions including those from IMF and OECD are used to define foreign investment. How does the Indian government classify foreign investment? The Indian government differentiates cross-border capital inflows into various categories like foreign direct investment (FDI), foreign institutional investment (FII), non-resident Indian (NRI) and person of Indian origin (PIO) investment. Inflow of investment from other countries is encouraged since it complements domestic investments in capital-scarce economies of developing countries, India opened up to investments from abroad gradually over the past two decades, especially since the landmark economic liberalisation of 1991. Apart from helping in creating additional economic activity and generating employment, foreign investment also facilitates flow of technology into the country and helps the industry to become more competitive. Why does the government differentiate between various forms of foreign investment? FDI is preferred over FII investments since it is considered to be the most beneficial form of foreign investment for the economy as a whole. Direct investment targets a specific enterprise, with the aim of increasing its capacity/productivity or changing its management control. Direct investment to create or augment capacity ensures that the capital inflow translates into additional production. In the case of FII investment that flows into the secondary market, the effect is to increase capital availability in general, rather than availability of capital to a particular enterprise. Translating an FII inflow into additional production depends on production decisions by someone other than the foreign investor some local investor has to draw upon the additional capital made available via FII inflows to augment production. In the case of FDI that flows in for the purpose of acquiring an existing asset, no addition to production capacity takes place as a direct result of the FDI inflow. Just like in the case of FII inflows, in this case too, addition to production capacity does not result from the action of the foreign investor the domestic seller has to invest the proceeds of the sale in a manner that augments capacity or productivity for the foreign capital inflow to boost domestic production. There is a widespread notion that FII inflows are hot money that it comes and goes, creating volatility in the stock market and exchange rates. While this might be true of individual funds, cumulatively, FII inflows have only provided net inflows of capital. FDI tends to be much more stable than FII inflows. Moreover, FDI brings not just capital but also better management and governance practices and, often, technology transfer. The know-how thus transferred along with FDI is often more crucial than the capital per se. No such benefit accrues in the case of FII inflows, although the search by FIIs for credible investment options has tended to improve accounting and governance practices among listed Indian companies. According to the Prime Ministers Economic Advisory Committee, net FDI inflows amounted to $8.5 billion in 2006-07 and is estimated to have gone up to $15.5 billion in 07-08. The panel feels FDI inflows would increase to $19.7 billion during the current financial year. FDI up to 100% is allowed in sectors like textiles or automobiles while the government has put in place foreign investment ceilings in the case of sectors like telecom (74%). In some areas like gambling or lottery, no foreign investment is allowed.

According to the governments definition, FIIs include asset management companies, pension funds, mutual funds, investment trusts as nominee companies, incorporated/institutional portfolio managers or their power of attorney holders, university funds, endowment foundations, charitable trusts and charitable societies. FIIs are required to allocate their investment between equity and debt instruments in the ratio of 70:30. However, it is also possible for an FII to declare itself a 100% debt FII in which case it can make its entire investment in debt instruments. The government allows greater freedom to FDI in various sectors as compared to FII investments. However, there are peculiar cases like airlines where foreign investment, including FII investment, is allowed to the extent of 49%, but FDI from foreign airlines is not allowed. What are the restrictions that FIIs face in India? FIIs can buy/sell securities on Indian stock exchanges, but they have to get registered with stock market regulator Sebi. They can also invest in listed and unlisted securities outside stock exchanges if the price at which stake is sold has been approved by RBI. No individual FII/sub-account can acquire more than 10% of the paid up capital of an Indian company. All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company, unless the Indian Company raises the 24% ceiling to the sectoral cap or statutory ceiling as applicable by passing a board resolution and a special resolution to that effect by its general body in terms of RBI press release of September 20, 2001 and FEMA Notification No.45 of the same date. In addition, the government also introduces new regulations from time to time to ensure that FII investments are in order. For example, investment through participatory notes (PNs) was curbed by Sebi recently.

FDI vs FII Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country. On the contrary, FII or Foreign Institutional Investor is an investment made by an investor in the markets of a foreign nation. In FII, the companies only need to get registered in the stock exchange to make investments. But FDI is quite different from it as they invest in a foreign nation. The Foreign Institutional Investor is also known as hot money as the investors have the liberty to sell it and take it back. But in Foreign Direct Investment, this is not possible. In simple words, FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily. This difference is what makes nations to choose FDIs more than then FIIs. FDI is more preferred to the FII as they are considered to be the most beneficial kind of foreign investment for the whole economy. Foreign Direct Investment only targets a specific enterprise. It aims to increase the enterprises capacity or productivity or change its management control. In an FDI, the capital inflow is translated into additional production. The FII investment flows only into the secondary market. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise.

The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor. FDI not only brings in capital but also helps in good governance practises and better management skills and even technology transfer. Though the Foreign Institutional Investor helps in promoting good governance and improving accounting, it does not come out with any other benefits of the FDI. While the FDI flows into the primary market, the FII flows into secondary market. While FIIs are short-term investments, the FDIs are long term. Summary 1. FDI is an investment that a parent company makes in a foreign country. On the contrary, FII is an investment made by an investor in the markets of a foreign nation. 2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily. 3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general. 4. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor

What is Sustainable Development?

Environmental, economic and social well-being for today and tomorrow
Sustainable development has been defined in many ways, but the most frequently quoted definition is from Our Common Future, also known as the Brundtland Report:[1] "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts:

the concept of needs, in particular the essential needs of the world's poor, to which overriding priority should be given; and the idea of limitations imposed by the state of technology and social organization on the environment's ability to meet present and future needs."

All definitions of sustainable development require that we see the world as a systema system that connects space; and a system that connects time. When you think of the world as a system over space, you grow to understand that air pollution from North America affects air quality in Asia, and that pesticides sprayed in Argentina could harm fish stocks off the coast of Australia.

And when you think of the world as a system over time, you start to realize that the decisions our grandparents made about how to farm the land continue to affect agricultural practice today; and the economic policies we endorse today will have an impact on urban poverty when our children are adults. We also understand that quality of life is a system, too. It's good to be physically healthy, but what if you are poor and don't have access to education? It's good to have a secure income, but what if the air in your part of the world is unclean? And it's good to have freedom of religious expression, but what if you can't feed your family? The concept of sustainable development is rooted in this sort of systems thinking. It helps us understand ourselves and our world. The problems we face are complex and seriousand we can't address them in the same way we created them. But we can address them. It's that basic optimism that motivates IISD's staff, associates and board to innovate for a healthy and meaningful future for this planet and its inhabitants
Sustainable Development

"Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs." - Brundtland Commission, 1987 Does your business fit this definition of sustainable development? Sustainable development is a worthy goal for small businesses everywhere. As members of our various communities, we know that society, the environment, and the economy are interconnected. It just makes sense to pay attention to the environmental impact of our economic practices, and try to ensure that our communities are healthy, pleasant places to live. Paying attention to sustainable development is especially sensible when so many of our potential customers and clients are actively seeking greener products and services. Witness the growth of industries such as "organic" food, for instance. Many food producers have switched to organic production methods; organic products can be sold for a higher price in the market, and consumers are willing to pay that price. Making environmentally conscious decisions about your business operations can be good for the bottom line. One of the basic assumptions underlying the definition of sustainable development is that environmental considerations have to be entrenched in economic decision-making. While our government has made a strong commitment to practicing sustainable development and implementing policies to support it, if small businesses don't get on board, full sustainable development is impossible. "In Canada, almost 80 per cent of the population is urban. Therefore, a shift to more sustainability must take place at the local level, in the places where we live, work, and shop" (The Sustainability Report).

If you're like me, you're an environmentally conscious person. You reduce, reuse, and recycle in your home, and you've taught your children to do these things, too. But what about where you work? Are you also operating your business in an environmentally conscious fashion? For small businesses to be actively involved in sustainable development, they need to adopt environmentally sound business principles and translate these into action. The following page will give you the information you need to put the definition of sustainable development into action.

Sustainable Development

Sustainable development is the management of renewable resources for the good of the entire human and natural community. Built into this concept is an awareness of the animal and plant life of the surrounding environment, as well as inorganic components such as water and the atmosphere. The goal of sustainable development is to provide resources for the use of present populations without compromising the availability of those resources for future generations, and without causing environmental damage that challenges the survival of other species and natural ecosystems. The notion of sustainable development recognizes that individual humans and their larger economic systems can only be sustained through the exploitation of natural resources. By definition, the stocks of non-renewable resources, such as metals, coal, and petroleum, can only be diminished by use. Consequently, sustainable economies cannot be based on the use of nonrenewable resources. Ultimately, sustainable economies must be supported by the use of renewable resources such as biological productivity, and solar, wind, geothermal, and biomass energy sources.

However, even renewable resources may be subjected to overexploitation and other types of environmental degradation. Central to the notion of sustainable development is the requirement that renewable resources are utilized in ways that do not diminish their capacity for renewal, so that they will always be present to sustain future generations of humans. To be truly sustainable, systems of resource use must not significantly degrade any aspects of environmental quality, including those not assigned value in the marketplace. Biodiversity is one example of a so-called non-valuated resource, as are many ecological services such as the cleansing of air, water, and land of pollutants by ecosystems, the provision of oxygen by vegetation, and the maintenance of agricultural soil capability. These are all important values, but their importance is rarely measured in terms of dollars. A system of sustainable development must be capable of yielding a flow of resources for use by humans, but that flow must be maintainable over the long term. In addition, an ecologically sustainable economy must be capable of supporting viable populations of native species, viable areas of natural ecosystems, and acceptable levels of other environmental qualities that are not conventionally valued as resources for direct use by humans

Production Possibility Curve

The choices that society must take are often presented in terms of production possibility curve. The production possibility curve is related to the concept of opportunity cost that you were introduced earlier. Opportunity cost can be seen numerically with a production possibility table - a table that lists a choice's opportunity costs by summarizing what alternative outputs you can achieve with your inputs. Where output - a result of an activity, input - is what you put into a production process to achieve an output. The information in the production possibility table can be presented graphically in a diagram called a production possibility curve. A production possibility curve is a curve measuring the maximum combination of outputs that can be obtained from a given number of inputs. It is a graphical representation of the opportunity cost concept. A production possibility curve is created from a production possibility table by mapping the table in the twodimensional graph. The downward slope of the opportunity cost curve represents the opportunity cost concept you get more of one benefit only if you get less of another benefit. The production possibility curve demonstrates that: 1. There is a limit to what you can achieve, given the existing institutions, resources, and technology. 2. Every choice you make has an opportunity cost. You can get more of something only by giving up something else. The table contains the information on the trade -off between the production of the guns and butter. This information has been plotted on the graph. As we move along the production possibility curve from A to F, trading butter for guns, we get fewer and fewer for each pound of butter given up. That is the opportunity cost of choosing guns over butter increases as we increase the production of guns. This concept is called the principle of increasing marginal opportunity cost. The phenomenon occurs because some resources are better suited for the production of butter than for the production of guns, and we use the better ones first.

% of resources devoted to production of guns 0

20 40 60 80 100

Number of guns. 0 4 7 9 11 12

% of resources devoted to Pounds of production of butter. butter. 100 80 60 40 20 0 15 14 12 9 5 0

Row. A B C D E F

A. Production Possibility Frontier (PPF)

Under the field of macroeconomics, the production possibility frontier (PPF) represents the point at which an economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible. If the economy is not producing the quantities indicated by the PPF, resources are being managed inefficiently and the production of society will dwindle. The production possibility frontier shows there are limits to production, so an economy, to achieve efficiency, must decide what combination of goods and services can be produced.

B. Let's turn to the chart below. Imagine an economy that can produce only wine and cotton. According to the
PPF, points A, B and C - all appearing on the curve - represent the most efficient use of resources by the economy. Point X represents an inefficient use of resources, while point Y represents the goals that the economy cannot attain with its present levels of resources.

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

D.
When the PPF shifts outwards, we know there is growth in an economy. Alternatively, when the PPF shifts

inwards it indicates that the economy is shrinking as a result of a decline in its most efficient allocation of resources and optimal production capability. A shrinking economy could be a result of a decrease in supplies or a deficiency in technology. An economy can be producing on the PPF curve only in theory. In reality, economies constantly struggle to reach an optimal production capacity. And because scarcity forces an economy to forgo one choice for another, the slope of the PPF will always be negative; if production of product A increases then production of product B will have to decrease accordingly. B. Opportunity Cost Opportunity cost is the value of what is foregone in order to have something else. This value is unique for each individual. You may, for instance, forgo ice cream in order to have an extra helping of mashed potatoes. For you, the mashed potatoes have a greater value than dessert. But you can always change your mind in the future because there may be some instances when the mashed potatoes are just not as attractive as the ice cream. The opportunity cost of an individual's decisions, therefore, is determined by his or her needs, wants, time and resources (income). This is important to the PPF because a country will decide how to best allocate its resources according to its opportunity cost. Therefore, the previous wine/cotton example shows that if the country chooses to produce more wine than cotton, the opportunity cost is equivalent to the cost of giving up the required cotton production. Let's look at another example to demonstrate how opportunity cost ensures that an individual will buy the least expensive of two similar goods when given the choice. For example, assume that an individual has a choice between two telephone services. If he or she were to buy the most expensive service, that individual may have to reduce the number of times he or she goes to the movies each month. Giving up these opportunities to go to the movies may be a cost that is too high for this person, leading him or her to choose the less expensive service. Remember that opportunity cost is different for each individual and nation. Thus, what is valued more than something else will vary among people and countries when decisions are made about how to allocate resources. C. Trade, Comparative Advantage and Absolute Advantage Specialization and Comparative Advantage An economy can focus on producing all of the goods and services it needs to function, but this may lead to an inefficient allocation of resources and hinder future growth. By using specialization, a country can concentrate on the production of one thing that it can do best, rather than dividing up its resources. For example, let's look at a hypothetical world that has only two countries (Country A and Country B) and two products (cars and cotton). Each country can make cars and/or cotton. Now suppose that Country A has very little fertile land and an abundance of steel for car production. Country B, on the other hand, has an abundance of fertile land but very little steel. If Country A were to try to produce both cars and cotton, it would need to divide up its resources. Because it requires a lot of effort to produce cotton by irrigating the land, Country A would have to sacrifice producing cars. The opportunity cost of producing both cars and cotton is high for Country A, which will have to give up a lot of capital in order to produce both. Similarly, for Country B, the opportunity cost of producing both products is high because the effort required to produce cars is greater than that of producing cotton. Each country can produce one of the products more efficiently (at a lower cost) than the other. Country A, which has an abundance of steel, would need to give up more cars than Country B would to produce the same amount of cotton. Country B would need to give up more cotton than Country A to produce the same amount of cars. Therefore, County A has a comparative advantage over Country B in the production of cars,

and Country B has a comparative advantage over Country A in the production of cotton.

Now let's say that both countries (A and B) specialize in producing the goods with which they have a comparative advantage. If they trade the goods that they produce for other goods in which they don't have a comparative advantage, both countries will be able to enjoy both products at a lower opportunity cost. Furthermore, each country will be exchanging the best product it can make for another good or service that is the best that the other country can produce. Specialization and trade also works when several different countries are involved. For example, if Country C specializes in the production of corn, it can trade its corn for cars from Country A and cotton from Country B. Determining how countries exchange goods produced by a comparative advantage ("the best for the best") is the backbone of international trade theory. This method of exchange is considered an optimal allocation of resources, whereby economies, in theory, will no longer be lacking anything that they need. Like opportunity cost, specialization and comparative advantage also apply to the way in which individuals interact within an economy. Absolute Advantage Sometimes a country or an individual can produce more than another country, even though countries both have the same amount of inputs. For example, Country A may have a technological advantage that, with the same amount of inputs (arable land, steel, labor), enables the country to manufacture more of both cars and cotton than Country B. A country that can produce more of both goods is said to have an absolute advantage. Better quality resources can give a country an absolute advantage as can a higher level of education and overall technological advancement. It is not possible, however, for a country to have a comparative advantage in everything that it produces, so it will always be able to benefit from trade.

OPPORTUNITY COST Should I go to work today? Should I go to college after high school? Should the government spend money on a new weapon system? These are decisions that are made everyday; however, what is the cost of our decisions? What is the cost of going to work, or the decision not to go to work? What is the cost of college, or not to go to college? Finally what is the cost of buying that weapon system, or the cost of not buying that weapon? In economics it is called opportunity cost. Opportunity cost is the cost we pay when we give up something to get something else. There can be many alternatives that we give up to get something else, but the opportunity cost of a decision is the most desirable alternative we give up to get what we want. Let?s look at our examples from above. If you have a job, what do you give up to go to work? There are many possibilities. I could sleep in. If it is a nice day I could take my dog to the park and play all day. Or, I could even spend the day looking for a better job right? I give up all of these things if I choose

to go to work. What I get from working is a greater benefit than the cost of giving up these things. But, opportunity cost is the most desirable thing given up not the aggregate of the things we gave up. Let?s look at the college example. We are all told to go to college so you can get a good education and that will translate into a good job. How do we know that college is such a good thing? How much college do we need? Let?s look at some numbers from a 2002 study on education from the Institute of Government and Public Affairs: ?There are distinct benefits of a college education. A study conducted in April of 2002, by the Institute of Government and Public Affairs for the Illinois Board of Higher Education, showed the following benefits:

Higher Earnings - Earning a bachelor?s degree provides the average student with over $590,000 in future earnings. Similarly a professional degree provides a present value to the student of almost $1.25 million in future earnings. Labor force participation rates and employment rates for people aged 25 and over increase with increased levels of education. People with college experience contribute time and money to charitable causes at a higher rate than those with less education. Increased levels of education are associated with the increased likelihood of voting or registering to vote.

In addition, college can provide many other benefits that are less tangible, and will help your child become a better-rounded individual. Benefits include increased self-awareness, the ability to think critically, and an opportunity to meet many different people. Overall, the entire college experience will provide your child with a lifetime of benefits?. As we can see there are many benefits to a college education. So what are the costs? There are monetary costs for sure. Also, we will spend four or more years going to classes. We could be working and earning money instead of going to college. Finally we will be giving up free time for study time that could be used to do other things. What about spending money on a missile defense system? In the fiscal year 2006 budget the taxpayers of Colorado will spend, as a fraction of overall federal spending, $150.7 million for the ballistic missile defense system (Center on Arms Control and Nuclear Proliferation). That same money could pay for 27,547 people to get health care (Centers for Medicare and Medicaid Data Compendium) or, 37,384 scholarships for university students (National Center for Education Statistics). These represent real choices that the government must make with our Tax dollars. The opportunity costs in this case depend upon what you value more military spending, health care, or college scholarships.

To get a graphical representation of how an economy makes decisions on what to produce, or spend their money on, we will use a Production Possibilities Curve. Production Possibilities Curve shows the choices a country can make with respect to its available resources. Resources are Land, Labor, and Capital Land- this refers to all natural resources used to produce goods and services. This includes crops that are grown on a land, minerals that are mined from land and rent that is paid to an owner of land for its use. Goods and services are the things that we buy like mp3 players or hair cuts. A good is a physical thing you can hold a service is some thing that gets used up right after it is purchased. Labor- this is the effort that an individual person puts into making a good or service. This for this effort the person is paid a wage. Labor includes factory workers, medical personal, and teachers. They all provide their labor for a wage. Capital- this is anything that is used to produce other goods and services. If you make cars you need machines to make the metal that is used in the cars. It is also the truck that drives the cars to the dealer who sells them, and it is the building that the cars are made in. All of these are the resource known as capital. If we look at a simple model of an economy for the country of Appleoplios it shows that they can produce two goods apples and shoes, we can get a better idea of what choices they have for production. When the resources of Appleoplios are used to their full potential they can produce 100 million apples (point A) a year or they can produce 4 million pairs of shoes (point B), but they cannot produce all of both.

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

What about point F? Can Appleoplios produce at point F? Not at this time. They do not have enough resources to produce at this point. Would the country like to produce at point F? Sure they would, but how do they do it? They need to fine more resources or use technology to increase their production possibilities. Like all economies they want to produce more then the year before. They want to move their production possibilities curve out to point F and further the next year.

This is a new PPF that is achieved with the introduction of new resources or a new technology that can help the production process.
budget line A graph showing what combinations of quantities of two goods can be afforded by a consumer with a fixed total amount to spend. If each good is available in any quantity at a fixed price per unit, the budget line is a straight line with a slope proportional to the relative price of the two goods. ACB is the budget line, showing combinations of goods X and Y that can be bought for given total spending. C is a consumer equilibrium, on the highest indifference curve consistent with the budget constraint budget line
budget line in economics can be defined as a line which shows the various combinations of two products that can be bought in a fixed or given income.the budget lie graph is a downward sloping line whose gradient shows the ratio between the prices of two goods X and Y.there will be a parallel shift in the budget line due to an increse or decrease in income!points insyd the budget line are inefficient since income is saved and outside the line they become infeasible.