National Income

Wednesday, October 14, 2009

Most traditional measures of living standards have concentrated on measures of material living standard .i.e. the quantity of goods and services which people can enjoy. The most well known indicator is national income. This is a measure of output. the output of goods and services is a continous process so that in trying to measure what is produced we are in fact dealing with a flow and not a stock. we have to measure a flow of output over time and the time period used for this purpose is invariably one year. Noe that the total national product includes services as well as goods, because production is defined as any economic activity which satisfies a want and for which people are prepared to pay a price.

Taxes

Friday, October 2, 2009

There are four broad categories of taxes:

1. Personal Income Taxes
2. Corporate Income Taxes
3. Indirect Taxes
4. Social Security Taxes

Personal Income Taxes
Personal Income Taxes are the taxes paid by individuals on their labor and capital incomes. These taxes have fluctuated between 8 and 10 percent of GNP and have averaged arround 9 percent of GNP.

Corporate Income Taxes
Corporate Income taxes are the taxes that companies pay on their profits.

Indirect Taxes
Indirect Taxes are the taxes on the goods and services that we buy and include the custom duties that we pay when we import goods from other countries.

Social Security Taxes
Social Security taxes are the taxes that are paid by employees to finance the social security programs.

Balance Of Payments Accounts

Wednesday, September 30, 2009

A country’s balanace of payment accounts record its international trading, borrowing, and lending. There are in fact three balance of payment accounts:

1. Current Account

2. Capital Account

3. Official settelements accounts

The Current Account records the reciept from the sale of goods and services to foriegners, the payments for goods and services bought from foriegners, and gifts and other transfers (such as foreign aid payments), received from and paid to foriegners. By far the largest time in current account are the reciept from sale of goods and services to foriegners (the value of exports) and the payments made for goods and services bought from foreigners (the value of imports). Net transfers are relatively small items.

The Capital Account records all the international borrowing and lending transactions. The capital account balance records the difference between the amount that a countrys lends to and borrows from the rest of the world.

The official settelements Account shows the net increase or decrease in a country’s holdings of foreign currency.

Portfolio Balance Theory (Exchange Rate Determination Theory)

Saturday, September 12, 2009

The portfolio balance theory of the exchange rate is the proposition that the exchange rate adjusts to make the stock of financial assets denominated in units of that currency demanded equal to the stock supplied. For example, the quantity of U.S. dollars supplied is the quantity of U.S. dollar – denominated securities. The total includes securities issued by the government and by firms. It also includes the U.S. money supply. But the money supply is just one part of the total stock of U.S. dollars ---denominated assets. The exchange rate adjusts to make the total quantity of U.S. dollar –denominated assets demanded equal to the quantity supplied.

In studying the forces that determine the exchange rate, we’ll work with the third and broadest theory—the portfolio balance theory.

Monetary Theory (Exchange Rate Determination Theory)

The monetary theory of the exxchange rate is the proposition that the exchange rate adjusts to make the stock of a currency demanded equal to the stock supplied. The stock of currency is identical to the quantity of money. According to the Monetary Theory, the exchange rate adjusts to ensure that the quantity of money in each currency supplied equals the quantity demanded.

Some international economist regard the monetary theory of exchange rate as too narrow and suggest that a broader aggregate should be considered. This consideration gives rise to the portfolio balance theory.

Flow Theory (Exchange Rate Determination Theory)

The flow theory of the exchange rate is the proposition that the exchange rate adjusts to make the flow supply of the dollars equal to the flow demand for dollars. The flow supply of dollars in any given period depends on the value of US imports. U.S. Residents supply dollars in exchange for foreign currency in order to be buy foreign imports. The flow demand for dollars in any given period depends on the value of US goods (export)that foriegners plans to buy during that period of time. In addition to the flow demand and supply resulting from imports and exports, there is also a net flow demand or supply resulting from imports and exports, there is also a net flow demand or supply resulting from international borrowing and lending. According to the flow theory of the exchange rate the value of exchange rate adjusts to keep the flow demand for a currency equal to its flow supply.

Exchange Rate Determinition

The foreign exchange value is determined by demand and supply. But what exactly do we mean by demand for and supply of dollars? There are, in fact, three different senses in which we can speak of the supplyof and the demand for dollars and all three have featured, at various times, in the theories of the determination of the foreign exchange rate:

1. Flow Theory
2. Monetary Theory
3. Portfolio balance theory

Brief history of Forex trading

Initially, the value of goods was expressed in terms of other goods, i.e. an economy based on barter between individual market participants. The obvious limitations of such a system encouraged establishing more generally accepted means of exchange at a fairly early stage in history, to set a common benchmark of value. In different economies, everything from teeth to feathers to pretty stones has served this purpose, but soon metals, in particular gold and silver, established themselves as an accepted means of payment as well as a reliable storage of value.

Originally, coins were simply minted from the preferred metal, but in stable political regimes the introduction of a paper form of governmental IOUs (I owe you) gained acceptance during the Middle Ages. Such IOUs, often introduced more successfully through force than persuasion were the basis of modern currencies.

Before World War I, most central banks supported their currencies with convertibility to gold. Although paper money could always be exchanged for gold, in reality this did not occur often, fostering the sometimes disastrous notion that there was not necessarily a need for full cover in the central reserves of the government.

At times, the ballooning supply of paper money without gold cover led to devastating inflation and resulting political instability. To protect local national interests, foreign exchange controls were increasingly introduced to prevent market forces from punishing monetary irresponsibility.

Foriegn Exchange Regime

Foreign Exchange rates are of critical importance for millions of people. They affect the costs of our foreign vacations and our imported cars. They affect the number of dollars that we end up getting for the oranges and beef that we sell to Japan. Because of its importance, governments pay a great deal of attention to what is happening in foreign exchange markets and, more than that, take actions designed to achieve what they regard as desirable movement in exchange rates. There are ways in which the government can operate the foreign exchange market----three regimes


1. Fixed Exchange Rate
2. Flexible Exchange Rate
3. Managed Exchange Rate

Foreign Exchange

What is Foreign Exchange?

When we buy foreign goods or invest in another country, we have to obtain some of that country’s currency to make the transaction. When the forigner buy our goods or invest in our country, he has to obtain some of our currency. We get foreign currency and foriegner get our currency in the foreign exchange market. The Foreign exchange market is the market in which the currency of one country is exchanged for the currency of the other. The foreign exchange market is not a place like a downtown flea market or produce market. The market is made up of thousand of people-importers and expoters, banks, and specialist in buying and selling of foreign exchange called oriegn exchange brokers. The foreign exchange market opens on Mondaymorning in Tokyo, ehich is still Sunday evening in New york, and finally, Los Angeles and SanFrancisco. Before the west coast markets have closed, Tokyo is open again for the next day of business. The sun never sets on the foreign exchange market. Dealers arround the world are continually in contact using computers linked by telephone. On any giveb day, billions of dollars exchange hands.