Archive for the ‘Economy’ Category

What is Keynesian economy?

Keynesian economy is about the relationship among following 3 parameters
  • Unemployment
  • Growth (economic)
  • Inflation
It argues that you can control 2 parameters which would influence the 3rd parameter.
During  a good economic growth [case 1]
growth is high, causing unemployment is low,  which in turn causes inflation to become high
During an economic downturn [case 2]
growth is low, causing unemployment is high, which in turn causes inflation to become low (or could cause deflation)
In ideal scenario, growth should be high, unemployment should be low and inflation should be low too.
Keynesianism states that Central Bank should do the opposite of what public is doing.
Thus, in case 1 above, government should save money and try to control inflation (because if more money is flowing to economy, the inflation would rise).
Hence, in case 2 above, government should spend money by investing in infrastructure etc. which would drive economical growth leading to low unemployment
Keynesianism always gives priority to low unemployment over low inflation. Thus, it makes poor less poor and rich less rich (a reason why riches often dislike Keynesian economy).

Why rupee always falls against dollar, pound, euro?

Historically, Indian Rupee always fell against strong currencies like Dollar, Pound or Euro.

During mid of 2013, rupee had almost a free fall. It now equals 1 $ = 60 Rs or 1 £ = 93 Rs.
So why suddenly rupee fell so low?
One reason is better economic outlook in USA. Large scale investors are now expecting better return on their investment from USA. Thus, their funds are going towards USA and less amount is coming to India. For many day to day products, India needs foreign currency (in the form of $, £, € etc.) so less foreign currency coming to India means more demand for $ £ € to buy goods/raw materials from outer world.
Incidentally, weakening of rupee should make export much more attractive as same $ will now buy more Rs. However, there is a catch. To produce many of those exportable goods, businesses need to import raw materials from outside India, which requires foreign currency! Since such import is getting more expensive, resulting goods (manufactured in India) is also becoming expensive – thus eroding the benefit of weakening rupee for export.
Weakening rupee also sometimes prompt foreign importers (who buy exported goods from India) demanding a re-negotiation on price (as they claim weakening rupee will benefit Indian exporters also we have just seen that may be the case always).
Non residents Indians (NRI) are happy because if they send foreign currency to India now they will get much better return (i.e. more Rs for every $ sent). However, such fun is only possible if they don’t want to take money out of India at a later date. If NRIs send money to India and invests in a scheme in India, when they convert money later from Rs to $/£/€, chances are – due to rupee weakening even more, they will get a very poor return.
So, in short, weakening rupee is not a good news for investors especially those who want to invest foreign currency in India and then want to convert that to their native foreign currency once their investment is matured. If rupee falls further between the time they invested and investment matured and considering rate of return and inflation, they may even get same/lower than what they originally invested in $/£/€ terms!
In theory, Reserve Bank of India (RBI) can intervene by imposing a temporary limit of foreign currency going out of India but that will irk lots of common public and goes against free market economy principle (which India has adopted since 1990s).

Why Microsoft created Windows 8 Metro interface?


There was nothing wrong as such in Windows 7. However, unless businesses can make working things obsolete via upgrade to newer versions they won’t make enough money!

So Microsoft introduced Windows 8. However, unlike previous versions of Windows, they tried to force new Metro interface which is more suitable for touch screen devices. Most users were unhappy and wanted to revert to Windows 7 like interface. But why Microsoft introduced it in first place?

Metro and legacy Windows applications are not compatible. An app designed for Metro interface won’t run in traditional Windows environment. Metro apps can only be downloaded via Windows Marketplace. Now this is a very crucial difference. In earlier Windows, you could download apps from literally millions of websites. However, in Metro interface, your only option is Windows market place. This is similar to Apple’s AppStore concept. Microsoft did at because they wanted to capture 30% of all app sales. They can only do it if those apps are sold using their own app store only.

The trouble for Microsoft started when consumers did not like Windows 8. In fact various statistics show PC sales have been slowed down because consumers shunned Windows 8. Now Microsoft is caught between devil and deep sea. Backtracking from their Metro interface means potential loss of profit in future and acceptant strategic failure. However, if they continue to force Windows 8 Metro interface to consumers they may face continued backlash.

This is also the reason why Microsoft does not offer any option to start Windows 8 straight into legacy desktop! Because they want consumers to adopt their new Metro interface. Some consumers are using third oath apps to make Windows 8 behave like Windows 7.

But now you know why Microsoft did not offer these simple options themselves!

Why trading statements put negative values within brackets?


If you have ever looked at a company’s trading statement (usually profit and loss statement), you must have noticed that negative numbers as printed within brackets like (10)% – rather  than -10%.

This concept originated from an era when these statements were typed using typewriters. Usually negative figures mean loss, which require special attention. Using brackets mean person typing it has to type two characters – thus chance of missing a negative number is lower than if it was marked by a single character like minus sign.

Historically same tradition still continues. Even though we now have everything computerized, this trend did not change – largely because in Excel it is easy to make negative numbers formatted within brackets without causing any problem in calculation (where they are automatically treated as negative values).

Why Apple is suing Samsung?


Lately it has been a trend to big multinationals suing each other’s over patent infringement cases.  The Apple vs Samsung battle is the latest one. No doubt Apple got a favourable verdict in a court which is just few miles away from their Californian headquarters.

It is difficult to comment how reasonable Apple’s claim is because nowadays most phones look and behave in very similar way.

But what is the real reason for Apple’s move?

Samsung itself is a very big conglomerate and powerful rival to Apple. The executives in Apple are very well aware that Samsung (and other competitors) will come up with many innovations some of which will invariable be better than Apple’s own.

In today’s cut throat consumer market, first movers do not have advantage for long. Within months (if not weeks) competitors can bring out a better model of the gadget. So majority of profit needs to be reaped as soon as the product is released. At least, before a cheaper better clone is released by competitors.  By suing Samsung, Apple at least made sure their competitor will lose some market share (!) in short term.  In current consumer market popular gadgets sale in huge numbers and majority of other models just lag behind (like what Nokia’s Windows phones are doing now).  That means even a very short term but massive market lead can bring billions in profit.

Whether Apple’s strategy is counterproductive or not, only time will tell. The sentiments of posters in social networking sites and blogs indicate that most people are actually favoring Samsung on this case. So this might be a boomerang for Apple.

Gurantee vs Warranty


Warranty = manufacturer will repair (usually free of charge) if product breaks down or does not perform as expected. Consumers may be charged for a warranty – which works somewhat like an insurance policy e.g. extended warranty.

Guarantee = There may be a possibility of getting replacement/refund under law if product/service fails to meet the requirement of buyer. Gurantee is usually free and legally binding.



What is black money in India?


Black money is a term used (predominantly in India) to indicate money which has not been declared for tax purpose.

Black money occurs in all economies but in few countries, the amount is massive.

Let us illustrate this with an example; if you pay cash to your plumber and he does not declare this in his income statement, the amount becomes a black money. In most countries, this happens in small scale transaction involving small traders. However, in many countries (especially India and surrounding countries) it happens at a mass scale.

For example, one builder sells a flat for Rupees 10 million. When a buyer is found, he offers it to sell for Rs 9 million on the condition that official transaction will be noted as Rs 7 million and then buyer will pay him Rs 2 million separately without keeping any footprint of the transaction. Thus, they will pay tax on Rs 7 million only. Buyer will accept it as he is getting a price reduction of Rs 1 million. Seller is saving on tax as he won’t declare Rs 2 million as income. So in a nutshell, the tax amount is shared between buyer and seller.

This activity flourishes because of two reasons:

1. People believe by dodging tax they are helping themselves

2. In many cases the practice is so rampant that normal citizens do not dare to buck the trend because they believe law will take side of rich people only (even though when these people are actually in fault)

Some analysts estimate that the amount of black money stored by Indians in Swiss bank is over Rs 1 trillion. Indian government did not show any real interest to tackle this problem because many head honchos in political parties are benefitting from this practice by paying little tax.

Why Barclays bank was fined £290 million?


In June 2012, British bank Barclays was fined £290 million for trying to manipulate LIBOR  rates.

What does that mean?

Just like normal people borrow money from banks; banks themselves borrow money from other banks. They do this for various reasons but often due to cover cash flow in short duration. LIBOR is an indicator or how much one bank has to pay to another bank for borrowing money. In other words, it is a rate at which one bank pays interest to other banks. Just like a customer with good credit score gets a lower interest (as he is considered lower risk), a bank with good reputation gets lower LIBOR rate. How the banks’ credit scores are determined? It is calculated from bank’s financial numbers like how much it is actually costing them to borrow etc.

Barclays actually lied how much it is costing them to borrow. This, in turn, makes them appear lower risk to other banks compared to what might have happened if they quoted their true financial numbers. Thus, they lied to get a lower interest rate from other banks. So, if they had disclosed their true financial data, other banks could have charged more interest to lend them money. Thus investors who lent money to Barclays lost money in interest.

Just like a country’s share index is measured upon how some big businesses are doing, a country’s LIBOR rate is also a measure of how healthy its overall banking sector is. If one bank reports wrong financial figures for its own health, this will affect the overall LIBOR rate. Many financial (both business and retail) interest rates are directly dependent on LIBOR rates. So, wrong manipulation of LIBOR rate is considered a fraud.

Barclays’s traders also bribed and coaxed employees of other banks to make them submit their figures so that it looks better in Barclays favor.

The common British public demanded a full enquiry on this unfair practice as they suspect other banks might be doing this as well. However, so far current British government did not show any move to initiate such enquiry. People believe that this is because wealthy bankers pay hefty donation to political parties and thus neither Conservative nor Labour party are willing to upset their billionaire donors.

Why Insider Trading is considered a crime?


Let us first define what is Insider Trading.

A publicly listed company can raise money by selling its share to public. But the general public should be given a chance to judge whether to invest money on this business or not.

For this purpose, the company releases its trading performance (e.g. profit or loss, any significant strategic progress which might affect its profit and revenue etc.) statements to open market. The auditors and relevant industry watchdog verifies whether these publicly issued statements reflect the situation of the company correctly.

However, before the information is available to public, it is naturally available to its insiders (i.e. senior board members and associates). If they knew some information (which might affect company’s share price) which is not available to general public and used this information to buy/sell shares to make personal profit, this is known as Insider Trading.

For example, say company X is performing moderately well in the market. In the board meeting, it was revealed to members that a because of rising competition, the company is going to discontinue one of its most popular products – this may cause company’s next year profit to fall drastically. By hearing this, some of the board members, who has bought considerable volume of shares of company X may decide to sell their shares when price is good at the market (because general public is not aware of this development). When the news is publicly released, every shareholder is given same option whether they want to sell their shares or not. But, if board members use this information to offload their shares (value of which is destined to fall because of this development) before normal shareholders get a chance to do the same, is considered an unfair practice.

The detection of insider trading is not an easy task. Most of the time, the board members do not buy/share themselves but they relay the information to their friends who make the transactions on their behalf. Often there are no official records of this friendly relationship! Industry regulators usually try to scan who have bought/sold large amount of shares of the affected company shortly before just a big announcement is made public. That is why detection is not always full proof.

What is bailout?


You must have read in news lately that so many banks and other businesses are seeking bailout from government.

This means they have run out of money for their day to day operation. In brief, this is same as having cash flow problem.

Those who support bailout argues that if these businesses are provided additional cash injection (i.e. bailout) then they can continue with their normal operation in the future. This is analogous to providing loans to an ailing business.

However, those who oppose bailout, claim that the management of those affected companies ran in to cash flow problem because their strategies were wrong and they were incompetent. By bailing them out, it sends a signal to them that they won’t be made responsible for their failure. They also claim how government will decide whom to bailout and whom to not? It is unethical to bailout a large business with tax payers’ money but not doing the same to a small business. The government counter argues that when they (i.e. govt.) provide the bailout money, they also usually own a certain percentage of the company. That’s how some of the UK banks are now partially owned by tax payers. This is a difference between bailout and just a normal loan. There is a catch though, the government might sell their stake later. So this does mean that this is nothing but providing an emergency loan to ailing business.

Banks are considered a special case because if government allows a bank to fail, then it will severely affect consumer confidence and people will rush to withdraw money from all banks even if there is a slight rumor that the bank can fail. This would cause a turmoil in the economy. As banks are also aware of government’s weakness on this front, they try to leverage this by coercing government for a bailout. This action gave rise the to proverb “too big to fail”. This means, very big organizations like banks etc., failure of which can cause havoc with a nation’s finance, security, trade etc. will always be bailed out by government to prevent further damage.