Mostly issued by financial institutions, a letter of credit (LC) is a standard document which is primarily used in the trade finances to provide irrevocable payment undertakingsSearch
Value of the best foregone alternative – Opportunity Cost
A key concept in economics, ‘Opportunity Cost’ is generally defined as the ‘value of the best foregone alternative’. In simpler terms, it is the cost of the next best choice available to you when you choose from various ‘mutually exclusive choices’.
In economics and especially for economists, the idea of cost is slightly quirky, as for them, the cost of something is not just the monetary value but ‘all’ of the value given up in acquiring that particular thing. Additionally, going by the definition, the cost of something is not just its cash value but is also the value of something that you didn’t get. A simple concept, opportunity cost however has powerful implications. It has been described as expressing the basic relation between scarcity and choice. Opportunity cost is that notion which plays a important part in making sure that there is efficient use of scarce resources.
Inflation and Deflation and their effects
Known to be amongst the most important variables of economics, inflation and deflation are those factors that can impact everything from interest rates to how contracts are negotiated. Changes in these variables can spin into action a lot of other changes in the economy and hence they are closely monitored as indicators of the situation of a specific economy.
Inflation
Inflation is the increase in the price of goods and services that represent the economy as a whole. It is also defined as the upward movement in the average level of prices. Since inflation deals with the general rise in prices, it is in fact intrinsically linked to money. When there is a general rise in the price level, fewer good can be bought using a unit of currency. Hence, inflation also shows ‘erosion’ in the purchasing power of money i.e. it decreases the value of money. Inflation is counted as an annual rate.
Taxes and Taxation
Every one of us pays taxes and they in turn affect our lives. We have all kinds of taxes, federal, state, local and what not and we have to pay them, unless we want the IRS knocking down our door or worse, being incarcerated for evasion of taxes. Every politician promises us that these will be simplified but in the end, they just end up adding more to the tax code. The thing has been edited approximately 14,000 times in the last 20 years with the addition of 3 million new words. All this and ironically, since the independence, there has been an ongoing debate on what role the tax should play in our lives and what the proper tax code should be. The debates however seem to be going nowhere since currently we are dealing with the country’s most complicated tax code ever. The king among these complexities is – the Federal Income Tax.
Law and Economics
Law and Economics or the economic analysis of the law, tries to answer the two basic questions relating to laws. First, as to how the relevant factors are affected by the legal rules and second, if the effect of these are socially desirable and economically efficient. The positive theory states that common legal rules are efficient whereas the normative theory states that they should (or needs to be) be efficient. Here, efficient bear the meaning – maximization of social willingness to pay. Law and Economics encompasses the fields of law as well as the political economy.
The subject of economic analysis of law relates to the economic application of methods to legal issues. Also, since the field refers to both the legal as well as political systems, few issues of law and economics also find their way in constitutional economics, political science and political economy. Most of the work carried out in this field is in the neoclassical tradition.
Interest Rates
In economics, the term ‘interest rates’ has a few definitions which are competing. However, according to the Economics glossary, interest rate is the yearly price charged by a lender to a borrower in order for the borrower to obtain a loan. This is usually expressed as a percentage of the total amount loaned.
One might hear of all the different interest rates in the media around them. So the question that arises is, ‘How to differentiate between them?’ The very first thing one needs to understand is that there are not just a few but various (dozens or hundreds) of interest rates that vary according to their application. These rates can vary depending on the loan’s duration or the credibility and hence the involved risk factor of the borrower.
Primarily we have two interest rates, namely nominal interest rate and real interest rate.
Understanding Cash Reserve Ratio and Reverse Repo Rates
Cash Reserve Ratio (CRR)
A Cash Reserve Ration, also known as the Reserve Requirement is a regulation set by Central bank (Federal Reserve or the nation’s governing bank) which dictates the minimum amount (reserves) that a commercial bank (in some cases, any bank) must be held to customer notes and deposits. In simpler terms this is the amount the bank must surrender with/to the Central (governing) Bank.
It is a percentage of bank reserves to deposits and notes. Cash reserve ratio is also known as liquidity ratio or cash asset ratio and is utilized as a tool (sometimes) in monetary policy and as a tool to influence the country’s interest rates, borrowing and economy. The central banks in the western world refrain from altering the reserve requirements or rarely do it as it would result in the banks (that have lower excess reserves) facing immediate liquidity problems and hence to implement their monetary policy, they prefer using open market operations.
Financial Economics
Financial economics is a field of economics that deals with the deployment and allocation of resources, in an uncertain environment, across time as well as spatially and blends the study of finance with the methodology of economics. This branch of economics if further characterized by the heavy presence of monetary activities in which it is said that the money (of any type) is bound to appear on both sides of the trade.
Financial economists are primarily interested in predicting the individual choices of investors and hence they study the interrelations between the financial variables that include shares, interest rates and prices (which are contrary to the real economy). In contrast to finance which studies the markets trading financial products, financial economics focuses on the real or traditional variables of finance using an approach that is consistent with economics.