Financial Accounting Essentials You Always Wanted to Know: 5th Edition

Demand and supply are fundamental blocks to understanding how markets function. A market is a place where buyers and sellers meet. However, the interaction between buyers and sellers is driven by two important forces, namely, demand and supply. Demand measures the amount of a good or service a buyer is able and willing to buy at a given price. Supply measures the ability and willingness to produce at a given price. The demand for a good or service is a function of various parameters such as taste and preferences, income level, availability, or other similar goods. Similarly, the supply of a good or service is a function of various parameters such as the cost of input, the technology used in the production, and the market size of the product. This blog elaborates on a few crucial concepts that will help you understand demand and supply better. Two of them are price and equilibrium. The common link between demand and supply is price. In economics, the word equilibrium is used when market demand is met by market supply. The result leads to price and quantity determination. In other words, an equilibrium is met when demand and supply forces meet such that the good that is produced by the seller is bought by the buyer at a mutually agreeable price. There can be two cases under which market equilibrium is not met. Excess supply: Under this condition, the market supply exceeds market demand. Imagine the case where charging infrastructure is developed by the government across the city. However, the demand for electric vehicles, and hence the demand for charging is low. Under this scenario, the market for charging infrastructure experiences an excess supply. Excess demand: Under this condition, the market demand exceeds the market supply. Imagine the case where the demand for electric vehicles is high as consumers have become sustainable in consumption. However, firms are not able to match the demand and there is a shortage in production. In this case, the market for electric vehicles experiences an excess demand. When prices can’t adjust to this, they either increase or decrease. In the case of excess demand, the market price is higher than the equilibrium price, and the good or service becomes costlier. Under a case of excess supply, the market price is lower than the equilibrium price, and the good or service becomes very affordable.  In many cases, government intervenes through policies to regulate prices. These are called price control mechanisms. Price Ceiling: Under a price ceiling, the government places a cap on the maximum price that can be charged by the producer. In such a case, the producer cannot charge the buyer a price above this price ceiling imposed by the government. Take for example the case of Uber. Under situations of high demand, the fare of cabs increases, and Uber practices a principle of ‘surge pricing’, which is to price cabs more during times of peak demand. Now, imagine if the government were to restrict surge pricing by placing an upper cap on the price that Uber can charge, even during peak demand. This would be a good example of a price ceiling. A price ceiling is usually effective if placed below the equilibrium price. A price ceiling above the equilibrium price is ineffective, as the market clears at the equilibrium price. Price Floor: Under a price floor, the government supports the firm/industry through price support. A price floor essentially means a minimum support price, below which the price shall never fall. It is a kind of government-mandated support to the producers of the good or service such that the producers do not face a loss under uncertain demand or an economic downturn. A good application of the price floor is government support in the form of subsidies to agricultural farmers and dairy farmers. The government often provides a monetary subsidy to the farmers and buys the extra surplus that is generated at the level of the price floor. A price floor is effective if it is placed above the equilibrium price. When the equilibrium price level is perceived to be low, the government provides a price floor that is above the equilibrium price. A price floor below the equilibrium price will be ineffective, as the market equilibrium price will be above the price floor at which the market will in any case be in equilibrium. Understanding demand and supply is crucial to design policies. While at the surface, it seems to be easy, understanding which phenomenon is a demand-side one versus a supply-side one is sometimes confusing and tricky. Take for example the case of food inflation. Food inflation refers to the increase in prices for food commodities in an economy. However, food inflation can be either a supply or demand side phenomenon. Food inflation can be due to a drought or due to the vagaries of climate change. This causes the supply of food to decline, causing a supply shortage, which eventually leads to a price increase. On the other hand, food inflation can also occur due to an increased demand for certain food items in the market. The role of the Central Bank, as well as the government, is to first understand the cause of inflation, and then frame policies that will best be suited for the situation. For example, if the problem is a supply-side phenomenon, the government should find ways to increase the supply by providing subsidy support to the affected farmers. Similarly, if inflation is a demand-side phenomenon, then framing appropriate demand-side policies will correct the situation rather than looking at supply-side solutions. Framing policies that are different from the reason for the phenomenon could adversely affect the phenomenon at play. For those looking to get an in-depth understanding of such topics, Principles of Economics Essentials You Always Wanted To Know is an easy-to-understand guide on all the essential economics concepts, including demand and supply.  This book is a part of Vibrant Publishers’ Self-Learning Management Series and is suitable for both students and experienced professionals. This blog is written by Cledwyn Fernandes, author of Principles of Economics Essentials You Always Wanted To Know. Book Cover of Principles of Economics Essentials You Always Wanted To Know Find out more about the book here: Link to the book: Principles of Economics Essentials You Always Wanted To KnowAuthor: Cledwyn Fernandes Press Release: A Complete Guide To The  World Of Economics Also Read: How Does Economics Explain Inflation?What is a Market in Economics?Microeconomics is Essential For You!

Policy-making is an art. Designing effective policies that can address the situation at hand is a sign of an efficient policymaker. The two key entities that are responsible for policymaking in an economy are (a) The Government (for fiscal policies), and(b) The Central Bank (for monetary policies). The role of the government is to promote sustainable growth, reduce inequalities, and improve social welfare in the economy. The role of the Central Bank is to ensure that inflation is stable in the economy. However, both these policies are like two taps that release water into the economy. It is therefore extremely crucial to balance the taps as an uneven flow from one could have an adverse effect on the economy. Let’s now understand fiscal and monetary policies in detail. Fiscal policy refers to the actions taken by the government to maintain employment and output stability. Through its revenues and expenditures, the government frames policies to enhance economic growth. The fiscal policy can be expansionary or contractionary in nature. An expansionary fiscal policy is one where the government reduces taxes or increases subsidies and welfare schemes and expenditures towards infrastructure projects with the aim of increasing economic growth. For example, building a highway, investing in clean energy projects, or providing subsidies to farmers are all examples of an expansionary fiscal policy. On the other hand, a contractionary fiscal policy is one where the government increases taxes or reduces expenditures and subsidies to bring down economic growth. This phenomenon is seen during times of high boom, which could lead to high volatility in the market. This is termed a contractionary monetary policy. Monetary policy refers to the actions taken by central banks to pursue objectives such as price stability, and economic growth. In the United States, the Federal Reserve (popularly known as The Fed) is the central bank of the economy. Just like the fiscal policy, the monetary policy can be expansionary or contractionary. An expansionary monetary policy is when the central bank pursues policies to increase the money supply in an economy. The central bank does this by either reducing policy rates (which in turn reduces lending rates by commercial banks) or reducing the reserve ratios (the amount of money that retail commercial banks need to keep with the central bank). There are a few other ways by which the central bank can affect the money supply in the economy. However, the central point of an expansionary monetary policy is to increase the amount of money in the hands of the people to induce spending, which in turn leads to higher economic growth. On the other hand, a contractionary monetary policy is one where the central bank pursues policies to reduce the money supply in the economy. The central bank does this by increasing policy rates (which in turn increases lending rates by commercial banks) or increasing the reserve ratios (the amount of money that retail commercial banks need to keep with the central bank). A contractionary monetary policy reduces the money supply in the economy which in turn reduces spending and lowers economic growth. A contractionary monetary policy is most effective during times of high inflation. The goal of the policy is to reduce inflation and maintain price stability. Fiscal and monetary policies are two taps of the same pipe. It is therefore important that there is close coordination between the central bank of an economy and the government. For instance, if the government is reducing taxes, and investing in infrastructure projects that would lead to higher economic growth in the economy, the central bank should complement this policy by reducing interest rates and reducing the reserve ratios which would yield higher economic growth and boost the fiscal policy by the government. In case the monetary policy takes a reverse stance as compared to the fiscal policy, it would result in conflicting results. Designing effective policies first requires policymakers to understand the current state of the economy. Careful diagnosis of the problems and issues will lead to correct and effective policies that can provide a remedy. The effectiveness of a fiscal and monetary policy depends on a large variety of factors such as time lag between implementation and outcome, the cause of the problem, and the impact that the policies can have on the economy. Consider the case of the Great Recession in 2008. The initial response under both Bush and Obama’s administrations was a fiscal stimulus – which was to increase the income of the economy through large-scale transfers. The Bush administration facilitated tax cuts, while the Obama administration facilitated increased spending. The Fed complemented the fiscal policy by reducing interest rates. However, as the recession deepened, the governments pulled back on spending with the fear that the economy would enter into high debt in the future. Thus, this was a clear scenario of The Fed and the U.S. Congress being at odds with each other. Governments are usually concerned about the economy’s debt and deficit level which can have political consequences in the future. The Fed is concerned about inflation and price levels. Therefore, there could be times when both policies are moving in opposite directions. Book cover of Principles of Economics Essentials You Always Wanted To Know - a handy guidebook to the world of economics. This blog is written by Cledwyn Fernandes, author of Principles of Economics Essentials You Always Wanted To Know.  In the book, Cledwyn has dedicated a chapter to fiscal and monetary policies, wherein he goes into the details of how these policies impact the economy and the application of fiscal and monetary policies in different economic scenarios. The book is an easy-to-understand guide on all the essential economics concepts related to the world of economics and is a part of Vibrant Publishers’ Self-Learning Management Series. Find out more about the book here: Link to the book: Principles of Economics Essentials You Always Wanted To KnowAuthor: Cledwyn Fernandes Press Release: A Complete Guide To The  World Of Economics Also Read: Demand, Supply, Price, and Equilibrium - The Fundamentals of EconomicsHow Does Economics Explain Inflation?What is a Market in Economics?

One of the biggest questions most financial consultants are trained to ask is about your financial goals. Only if they know what you want in your life can they suggest a way for you to reach there, at least in financial terms. From an individual’s perspective, this question is often confusing. For most people, the goal is to derive the maximum yield from their money while minimizing the risk. They would like to know how they can get to lead the life of a Bill Gates or Jeff Bezos, despite their far more limited resources. In between lies a vast space of reasonableness. Financial consultants are not magicians. They are financial consultants. At the same time, financial goals are not dreams or flights of fancy. They are financial goals. Hence, they need to be rooted in realism and reasonableness. Personal Finance Essentials is a compact guide to understanding the subject of “financial planning”. Personal Finance Essentials You Always Wanted To Know is the newest guidebook by Vibrant Publishers which explains everything about financial planning. This blog will help you set your financial goals so that you can begin your personal finance journey.   The Relevance Of Financial Goals As sentient, intelligent beings, we owe it to ourselves and our dependents to create the best life we can. It is a matter of strategy or choice. We can’t rely on good luck as is not a strategy or a plan. It might happen sometimes and deliver good outcomes but most of the time it does not. In fact, our life is full of goals, some stated and many unstated. We want to do well in class. We want to win in sports. We want to look like a movie star. We want to study a certain subject in college. We want to visit the pyramids and take the Alaska cruise. As we mature and grow older, we find that money becomes an integral part of many of these goals. This is why we need to set financial goals too. How you live is your own responsibility. It is for each individual to determine the desirable trajectory of life for themselves as well as their dependents for as long as they remain dependents. This trajectory is nothing but a set of goals that act as a guiding light for actions and decisions. By no means are they cast in stone. There are many variables that have the power to derail the trajectory. Moreover, money management changes with age too. Read more at <insert blog 1 link>. Hence, financial goals need to be evaluated and reset periodically. Financial goals can be long-term or short-term. They can be annual or monthly. They can cover retirement, education, travel, savings, debt reduction, net worth, or anything else relevant to an individual. It is all a personal choice. The SMART framework is a checklist to help individuals set realistic financial goals.   Framework For Setting Effective Goals As stated earlier, goals are goals, and not dreams and wishes. The more rooted they are in reality, the greater the probability of achievement. Hence, financial goal-setting needs to take into account factors such as earnings, expenses, assets, liabilities, dependents, age, and other financial priorities and factors relevant to one’s life and situation. Despite understanding their importance, many people struggle with financial goal-setting. There are several frameworks introduced by experts designed to facilitate the process and make it effective. Illustrated here is a framework that has come to be known as SMART, and we will soon see why. The SMART framework is also a popular framework used by organizations in their goal-setting exercises, typically done at least once a year. S Specific “I will have $10,000 saved in my bank account” is a specific, and hence desirable goal, as compared to “I will save a lot of money in my bank account.” M Measurable “Every month for the next 12 months, I will save $500 and put it in a separate account, to pay for the next family vacation,” can be measured while “I will save the $6,000 needed for the next family vacation by reducing my expenses” is not. A Attainable This can also be called “realistic.” For a person with an annual income of $100,000, “I will pay off the outstanding mortgage of $250,000 in 5 years” may be a much more attainable goal than “I will pay off the outstanding mortgage of $250,000 in 12 months.”  R Relevant “My neighbor’s salary should be reduced” might make you feel good temporarily if it does happen, but it has no relevance to your situation. “I will strive for a 10% increase in salary on the basis of a strong performance” would be more relevant. T Time-bound “My equity holdings should exceed $50,000” is a specific and measurable goal, but, without the dimension of time-integrated, may not bring much joy. “My equity holdings should exceed $50,000 within the next 2 years” makes it time-bound.   What Should Your Financial Goals Be? Though the specifics will vary, we recommend some broad areas around which you should have financial goals. Besides, they are likely to be interconnected. Achieving one will increase your ability to achieve others, and vice versa. Debt – reduce and eliminate debtSome debt may need to be taken on, such as a mortgage, as otherwise, it is almost impossible to buy a house early enough in your life. By and large, for an individual, all debt is bad and needs to be paid off. The earlier the better. The interest you pay on your debt will be higher than what you earn on your credit balances. In the interim, even moving to a lower-cost borrowing might be a desirable goal. Spending – spend less than what you earnThis is Financial Planning 101. The simplest and most necessary of all financial goals. Once you achieve this, you can live like a king or queen. Knowing that your bank account will not sound the empty sound at you when you dip into it is a liberating feeling. Income – increase; create multiple streamsThis is the second step in financial planning 101. The more you have the more you have to take care of your expenses, positioning you better to save and provide for old age. Of course, easier said than done. You are probably already doing what is possible to earn your potential. It could be investing your saved money in a manner that creates an opportunity to earn, such as buying a rental property. Or, it could be a side hustle that you are good at and that does not require an investment. You must be on a constant lookout for such opportunities. To understand your income, expenditure, and finances better, read Components of Financial Statements.   Your financial plan should also include your dependents You need to ensure they are provided for when you are alive, and when you are not. This means that you need life insurance to step in, in the unfortunate event of you as the primary provider dying early. The other aspect is to ensure your financial affairs are sorted out to a degree that your successors do not face any issues. Emergency fund – define and identifyWhile we need to pack away our savings in investments that provide the best returns, we may need to make a compromise in some cases to ensure that we have a certain amount of money available on call in case we need it. It is understood that money available on call does not earn the return that money committed for a longer period might. However, there are compensating advantages. Knowing that you have access to a fund that can help you tide over temporary emergencies can be a morale booster and a mental relief provider, enabling better financial outcomes. In conclusion, financial goals are as important as personal or professional goals that one may set in life. Financial goals can either be short-term, or long-term, but they need to be reasonable  and achievable. Eliminating debt, if any, should be a primary financial goal, followed by increasing income and saving to create an emergency fund. One may also have other financial goals depending upon their lifestyle and ambitions. All-in-all setting financial goals and striving to achieve them will propel you towards success and secure you for the future. This blog is written by Ankur Mithal , author of  Personal Finance Essentials You Always Wanted To Know and Organizational Development Essentials You Always Wanted To Know    

Fiscal and monetary policies are macroeconomic tools in the hands of the government and central bank of a country to exercise control of the economy. Fiscal and monetary policies are formulated for controlling inflation, creating employment and increasing the growth prospects of an economy.  Fiscal policy is mainly concerned with government revenue and expenditure, and monetary policy deals with the circulation of money. While government departments usually have direct involvement in the formation of fiscal policy, monetary policy is formulated by the central bank of the country. Taxes on various goods are determined by the fiscal policy. Monetary policy determines the rate of interest charged by the banks.   What is fiscal policy? Fiscal policy deals with the revenue collection and expenditure by the government. A country's government plans how it will generate revenue for running the country. Taxes are the major source of government revenue. However, higher tax does not necessarily mean higher revenue. When people need to pay higher taxes, their disposable income reduces. This may lead to reduced consumption and savings. Reduction in consumption may affect government tax collection. A lower demand situation faced by the industry may also reduce the taxes paid by the corporates. The government needs to maintain a balanced approach in levying taxes on various goods and services sold in the economy. Taxes can be of two types; direct and indirect. Direct tax is based on the income of the people. The higher the income of an individual or the profit of a company, the more the taxes. Indirect taxes are taxes levied by the government on various goods and services sold in the country. As the taxes are collected not directly but through sales of goods, hence they are termed indirect taxes. The government determines tax rates. Fiscal policy also determines the expenditure of the government. The government needs to spend money on the salary of government employees, for the maintenance of government properties, roads etc. At the same time, the government can spend money on building infrastructure and productive capacity in the country. The latter may help more in achieving growth and developing the economy.   Fiscal policy, growth and development Economic growth can be achieved by increasing production, increased demand and consumption. Government expenditure often creates new jobs, new infrastructure and develops the economy. When government expenditure creates new jobs, people get more money to spend. This expands the economy and brings prosperity. Keynesian theory of macroeconomics suggests that even deficit financing can help an economy: when the government spends money beyond its means that can lead to more employment and the development of infrastructure, bringing an economy out of recession. Tax cut allows people to have more money in hand and consumption increases. An increase in consumption can make the factories expand their capacity and produce more. This may help in generating more investments.  In the case of tax concession to businesses, there are more investments and expansion of the businesses. Additional taxes usually contract the economy by reducing the demand for goods.   Fiscal policy and inequality Direct taxes are often called progressive and indirect taxes as regressive. The former taxes people as per their level of income. However, indirect taxes like value-added tax are levied equally on the rich and poor. Government has the opportunity of taxing the rich more and redistributing the money to the poor. The expenditure on creating universal health care or education system may help in creating opportunities for all sections of people in the economy and eventually reduce inequality. Government can also provide a universal minimum income to all citizens.   What is monetary policy? Monetary policy is the macroeconomic policy that deals with the circulation of money in an economy. Monetary policy determines the bank's interest rate. If the interest rate is high, people save more and reduce consumption. This reduces the money supply in the economy. Increased interest rates also make loans expensive and people do not prefer taking loans for buying consumer goods like cars or houses. Monetary policy also influences the currency exchange rate. When the interest rate in a country increases, foreign money in the economy increases, as investors prefer to earn higher interest. If the central banks stock more foreign currency, local currency may depreciate. When the central banks sell foreign currency in the market, it improves the value of the local currency.   Monetary policy and inflation Monetary policy is often used to stabilize prices and reduce inflation. Due to increases in interest rates, home loans, car loans, etc. become expensive. Consumers spend less and save more reducing the money supply in the economy. This enables checking the inflation. Inflation occurs when more money chases few goods (head to How Does Economics Explain Inflation? for more). Now as the money supply is cut down, inflation eases. However, an increase in interest rates may deter investors from taking fresh loans for investing in the economy. Reduction in the investment may reduce production and employment over a period of time which may create a situation where again inflationary situation arises due to a reduction in the supply of goods. Monetary policy can control inflation when it is due to excess money supply. However, it cannot solve the supply-side constraints.   Monetary policy and growth A monetary policy that wants the economy to be growth-driven works towards a low-interest rate regime. Lowering interest rates enable businesses to go for fresh investments, expand productive capacity and grow the economy. Lower interest rate encourages consumers to buy new cars, new homes and other consumer goods. These increase the demand in the economy. Higher demand and supply levels expand the economy. Economic growth can be achieved with monetary policy. However, increasing activities and increase in income may also have an inflationary effect on the economy.   Economic policies and influence of the state State economic policies try to ensure stability in the economy. It tries to reduce volatility. Volatility affects business as well as negatively impacts day to day life of the people. The state has monetary and fiscal policy tools to influence the economy. The effective implementation of monetary policy can cut inflation. It can bring in growth. Fiscal policies can expand the priority sectors of the government. It can also influence the consumption of certain products by a tax cut. Fiscal policy can create employment and bring prosperity to the economy. State influence on the economic front is exercised through fiscal and monetary policy measures. It is imperative that these policies are balanced to reduce uncertainty and volatility in the macroeconomic environment. Learn about macroeconomic policymaking and other rudiments of macroeconomics with Macroeconomic Essentials. Out now. Our book Macroeconomics Essentials You Always Wanted To Know brings you a multifaceted and holistic introduction to the realm of microeconomics. To know more about macroeconomic policies, policymaking tools, and how they impact our lives, head now to Amazon or Ingram to pre-book your personal guide to all the macroeconomic fundamentals. Also read:Follow These Tips to Get Started (And Succeed) As An Online EntrepreneurWhat is Entrepreneurship and how do you set up a successful business?What is a Market in Economics?

Running up a credit card debt that cannot be squared off at the end of the month is not desirable, but it can be handled by a 25-year-old who just started her first job. She will be receiving a salary and probably has a few other expenses to worry about. If not this month, she is confident of squaring it off soon, even though she may need to pay additional interest as months pass. For a 70-year-old retired widower though, it can be the proverbial last straw. He does not have any new sources of income and is living off the savings he banked over a full working life. He needs careful budgeting to ensure he has enough money to support himself for the rest of his life. A sudden extra expense in the form of interest can upset calculations. If at all he needs to spend more money, he would rather do it from the money in his bank account. The interest foregone will be lower than the interest charged on an unpaid credit card bill. It is clear from the above example that financial decisions are based on an individual’s unique situation in life.  Among the various factors influencing financial planning, age occupies a position of prominence, requiring an adjustment to the strategies one adopts in making these decisions. The upcoming book “Personal Finance Essentials You Always Wanted To Know” deep dives into the world of financial planning for all individuals, no matter what stage of life they are at. This blog is a gist of the considerations that people in different age groups have for managing their personal finances. The New Adults (18 – 30 year-olds) In most cases, this is the period during which external support comes to an end and one begins to live independently. It could be a time when one needs to pay off the debts taken on for the purpose of education. The pursuit of higher studies to boost earning potential is also considered and, if found suitable, implemented. The focus should be on paying off student debts, if any, and creating a foundation for savings. This is the time when personal responsibilities, and expenses, are low, and it is possible to put away earnings. The earlier one starts saving the longer the runway it gets for growth and flight. Adulthood often comes with dealing with financial statements with no previous experience of it. Components of Financial Statements will help you get your basics cleared.   The Mid-Career Tricenarians (30 – 40 year-olds) This is the age where hopefully, the experimentations of early adulthood are over and one is settled into a life of one’s choosing. In short, you are now an active part of the commercial world, receiving money for your contribution and efforts, and paying money for buying the products and services produced by others. Responsibilities tend to rise during this period, with people starting families, buying homes, and having children. This increases the expenses. However, this is the time when one would also experience a rise in one’s stock. Long-term decisions like a home mortgage, children’s education, and insurance coverage may need to be taken during this period. A home mortgage leads to the acquisition of and creation of equity in a home, generally the single largest asset for most individuals.   The Peak Agers (40 – 50 year-olds) This may well be a continuation of the previous stage, excepting that you are likely to be better placed in financial terms with a rise in earnings while witnessing the build-up in the value of assets like home equity. Some people could use financial leverage to create larger assets, like trading the earlier house for a larger one. Some may need to put away money for foreseen expenses like the college education of children. Others could use this leverage for building more in terms of financial assets. It must be remembered that financial assets are what you will be relying on for earnings during your retirement years.   The Pre-Retirement Folks (50 – 65 year-olds) You will probably see your children become adults and leave the nest at some point during this phase. Some of your responsibilities will start coming down. However, some expenses, such as healthcare, do not come down. Also, it is difficult to reduce expenses related to the lifestyle that you have become used to. This is the time to assess your financial decisions and make changes, as required. You may also need to review your lifestyle and gradually move towards one that you will be able to sustain for many years during retirement. You don’t want to suddenly have to step down to a lesser lifestyle the day you retire. Your money accumulation rate could increase once again as your responsibilities decrease. However, at this stage, knowing that retirement is nigh, you are likely to be more responsible in your use of that money.   The Post-65 Retirers Time to sit back and relax?Physically yes, but financially no. Though the accumulation phase of your life is behind you, you need to continue to strive to ensure that you are able to lead a life in retirement that you wanted to and set yourself up for. This includes ensuring that you watch your expenses, and also review your investments to ensure they are yielding the right results. If not, you may need to move them around. You also need to take critical decisions such as optimization of the social security claim and estate planning that would smoothen the process of transition when you are gone.  Retirement also opens new doors for you. Read How To Get Back To Work After Retirement to know more.   Conclusion It must be noted that these stages are illustrative in nature. Many people go through one or more of these. At the same time, there are many others who do not adhere to them. Each person’s situation is unique, as is their capacity to handle risk and variance. A careful evaluation, supported by consultation with experts where required, should be the basis for financial decisions. Vibrant Publishers’ “Personal Finance Essentials” guidebook will help you understand everything related to money management. A financial journey can begin at any stage of life and it is the first step towards gaining financial independence and creating a secure future for yourself. Good luck! This blog is written by Ankur Mithal, author of the upcoming book Personal Finance Essentials You Always Wanted To Know.   About the Author  Ankur Mithal is a widely experienced business professional. In over 15 years with Standard Chartered Bank, he worked in Sales, Project Management as well as Operations, operating out of Kolkata, Delhi, Hong Kong, Mumbai, and Singapore. He was involved in a number of improvement interventions in the BPO industry that straddled the disciplines of Organizational Development as well as Quality which created interest and enabled him to learn about them. He is also the author of Organizational Development Essentials by Vibrant Publishers.

Selling and buying goods and services often are not restricted within the boundaries of a country. Countries trade across borders. Why do countries trade internationally? Countries trade because not all the resources are available in all parts of the globe. Good quality kiwis may be available in New Zealand and not in India. Therefore, if Indian men, women and children want to enjoy kiwi, they need to import it. Again, not all countries are equally competent in manufacturing each and every good. China can produce garments at a much less price than France can. Hence, French people can save money when they import clothes from China. Benefits of International Trade  International trade can make the world more prosperous. The exchange of goods enables countries to maintain better relationships. It is said that trade is the best mechanism to prevent war. Countries having strong trade relationships are unlikely to enter into a war. Globalization opens up economies worldwide. It helps in reducing the cost of production. Most of the modern economies are now part of a global value chain. A car finally assembled in the USA may have various components manufactured across the globe. Globalization can bring homogeneity in the lifestyle as well across the globe. World Trade Organization (WTO) and Most Favoured Nation (MFN) World Trade Organization was established in the year 1995 with the purpose of providing a better level playing field to countries across the world for international trade. It endeavors to ensure fair trade between countries. It intervenes to reduce friction between countries engaged in international trade. WTO members must offer all their fellow members the status of the most favored nation(s) under which countries cannot discriminate between member countries. If the USA levies a certain rate of tariff on Chinese goods, it is not expected to allow any preference for the same good produced in India or Bangladesh. However, the principle of MFN is often violated. Countries do discriminate between members with differential tariff and non-tariff barriers. Anti Dumping  Another challenging situation is the dumping of goods. For capturing the market, countries are seen to sell goods at a lower price compared to the cost of manufacturing (Head to What is a Market in Economics? for more). Countries are ready to incur losses in the short term to gain market share in a country in the long term. To prevent this, countries are allowed to levy anti-dumping duty under WTO’s rule-based trade mechanism. Trade Balance  Trade comprises exports and imports. A country may export its production of goods and services to other countries. The country also imports goods and services from other countries as per its need. A country often exports goods to a country more compared to the imports from the country. Similarly, the country will have more imports of goods from another country compared to exports to this country. When a country has more exports of merchandise goods to a country compared to imports, it is running a trade surplus. Again, when import from a country exceeds exports to the country, it is a situation of trade deficit. While calculating the trade balance, we consider only trade of goods and do not take into account invisibles or services. Some economies may have more imports than exports—for example, big economies like the USA and India. These countries run trade deficits. China mostly runs a trade surplus in aggregate. Often the deficit in the trade of goods is compensated by a surplus in services trade. Trade deficits may have several implications on economic conditions in various countries. An economy with a high level of trade surplus may have export-led growth. There can be job creation in the export-oriented sectors. It is natural for a country to have a surplus or deficit with some of its partners. A deficit indicates that domestic production is not enough for the consumption requirements in the country. Balance of Payment  Balance of payment is a record of all possible transactions between residents of a country with the rest of the world. The possible transactions can be in goods, services, assets, payment of salaries, interest, etc. The transactions are for a specified time period, usually the financial year. The BOP has primarily two main accounts; the current account and the capital account. International Monetary Fund (IMF) has introduced a third component—namely financial account—as part of BOP. Similar to other forms of accounting, in the case of BOP as well, each transaction is recorded with a plus or minus sign. When a transaction earns foreign currency for the country, it is termed as credit and recorded with a plus sign. When a transaction leads to spending foreign currency, it is a debit; the corresponding record has a negative sign. Usually, exports are considered as credit and imports are considered as debit. For a nation, exports earn foreign currency hence it is credit. In the case of imports, foreign currency is spent from the country; hence, the corresponding entry is a debit entry. Balance of payment is vital for a country’s economic prosperity. It affects the forex reserve in the country. It is also a determinant of the exchange rate of the currency of the country. Macroeconomics Essentials You Always Wanted To Know is brimming with information on foreign exchanges, trades, international organizations—like International Monetary Fund and World Trade Organization—and everything else you might need to get your macroeconomic fundamentals in check. The book is available for pre-order now. 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The pangs of inflation have been felt all around the world. In the US, the inflation rate was 7.7% in October 2022 and in India, it was 6.77%. The UK recorded its highest inflation rate at 11.1% in 41 years in 2022. After the Covid-19 pandemic, inflation has increased as a result of all the services re-opening but businesses not having the resources to provide the goods and services. But, let’s try to understand what is inflation. What is inflation? A price rise is considered inflation. It increases the cost of living in a country. By definition, inflation is the rise in prices during a given time period. What are the factors behind inflation or price rises? There are various reasons for price rises. Microeconomic theories like the law of demand, the law of supply, consumer preferences, cost of production, competition, and market condition are responsible for price rises. The book, Microeconomics Essentials You Always Wanted to Know deals with various microeconomic theories like demand, supply, consumer choice, the revenue of firms, cost of production, market, competition, etc. which are vital to understanding inflation in a country. The understanding of underlying reasons for inflation can help businesses and entrepreneurs take the right pricing decisions in an inflationary condition. There are various reasons for price rises. Microeconomic theories like the law of demand, the law of supply, consumer preferences, cost of production, competition, and market condition are responsible for price rises. The book, Microeconomics Essentials You Always Wanted to Know deals with various microeconomic theories like demand, supply, consumer choice, the revenue of firms, cost of production, market, competition, etc. which are vital to understanding inflation in a country. The understanding of underlying reasons for inflation can help businesses and entrepreneurs take the right pricing decisions in an inflationary condition. How do we explain these changes in price? When we analyze the above situation, the price rise was due to the absence of workers in the production process. So, workers’ absence led to a short supply. In economics, we deal with the theory of supply and demand. If the demand increases, the price goes up. If the price goes up, demand falls. In case of an increase in supply, the price falls. Again, in case of an increase in price, suppliers are motivated to produce more and supply more. The price is dependent on the supply and demand of goods. There is a shift in consumer demand due to consumer preference and income level. It also shows how the production cost determines the supply of various materials. The production cost is determined by the prevailing wages, raw material cost, cost of electricity, and many other productions related factors” When we analyze the above situation, the price rise was due to the absence of workers in the production process. So, workers’ absence led to a short supply. In economics, we deal with the theory of supply and demand. If the demand increases, the price goes up. If the price goes up, demand falls. In case of an increase in supply, the price falls. Again, in case of an increase in price, suppliers are motivated to produce more and supply more. The price is dependent on the supply and demand of goods. There is a shift in consumer demand due to consumer preference and income level. It also shows how the production cost determines the supply of various materials. The production cost is determined by the prevailing wages, raw material cost, cost of electricity, and many other productions related factors” Steps taken to control inflation Usually, the central bank in a country tries to taper the money flow in the economy to control inflation. When there is less money in the hands of the people, the demand for goods comes down, making the prices stable. However, this is not applicable when the inflation is due to supply-side constraints i.e. less production due to the unavailability of laborers or issues with the supply of raw materials. Sometimes, due to natural calamities, drought, etc. farm production may drop leading to price rises in food items. Governments sometimes try to increase imports and curb exports to control inflation but economists do not find this sustainable. About the Author Prof. Amlan Ray is currently Senior Director & Dean at SRISIIM, New Delhi, a management and research Institution recognized by the Ministry of Science & Technology and Ministry of Education, Government of India. He has 27 years of experience working in Corporates, Consulting, Training, and Academia.

Cost Accounting refers to the approaches and activities adopted by managers to use the company’s resources to increase the value given to customers and to achieve organizational goals. Cost Accounting, if used and analyzed correctly, will help to take important business decisions. Here are some cost accounting terms that you should know! Cost Object Cost object is the product or service with respect to which the cost needs to be computed. For example, if a car manufacturer wants to assess costs, the cars that they manufacture would be their cost object. Similarly, the cost object for a bank would be its customer accounts. Costs are classified on the basis of the cost object. Direct and Indirect Costs Costs are classified under two categories as given below: Direct Costs These are costs that can be directly traced or caused by a product, service, project, organizational unit, or activity. For example, the cost of a steering wheel is a direct cost in the manufacturing of a car. Similarly, the cost of effort undertaken by a worker in making the doors of the car also amounts to direct cost. Below are some examples of direct costs: Cost of cement used in the construction of a building Cost of tires used in building a car Cost of a project management consultant in the construction of a bridge Indirect Costs These are costs that cannot be directly traced to a single product, service, project, organizational unit, or activity. These costs are allocated rather than being traced to individual products or services as there is no cost-effective way of tracing them directly. For example, the rent of a plant used to manufacture cars of multiple varieties cannot be directly traced to every car model. Hence, the rent is an indirect cost. If the plant were to manufacture only one car model, then the rent would become a direct cost. Similarly, the cost of supervisors for various products of the company is also an indirect cost and needs to be allocated in some proportion instead of being directly traced to the products. Below are some examples of indirect costs: Salary of staff in corporate headquarters Cost of adhesive used in creating various products of the company. This is especially because it may not be cost-effective to try and relate this cost directly to each product. It would be much better to allocate this cost on a certain basis (an estimation) Cost of power in a plant making many different products Variable and Fixed Costs When a company changes the number of products and/or services it provides, its total costs would also change. However, some costs change in relation to quantity or volume whereas others do not. On this basis, these are the following categories of costs: Variable Costs Costs that change proportionately with volume are called variable costs. So, if the company sells 10% more products, its variable costs would also go up by 10%. For example, the cost of car tires is variable and so is the cost of the steering wheel. We saw earlier that both these costs are also Direct costs. Hence, a certain cost can be Direct and at the same time, Variable. Below are some other examples of variable costs. Cost of paint required for a house Cost of labor for manufacturing a truck Cost of wood in constructing a house Non-variable/Fixed Costs These are exactly the opposite of variable costs. They do not vary with the quantity or volume of the product manufactured or the service provided. This means that this cost is independent of the volume. For example, the rent of office premises is a fixed cost as it does not change with the change in business volume. Below are some examples of fixed costs: Cost of assembly line for a car model Cost of supervisors Cost of rent paid by a bank branch office However, it may be noted that fixed costs are generally fixed within a certain relevant range. For example, if the business grows so much that a new office will have to be bought to accommodate the new machinery and personnel, then the rent cost changes. Hence, it is said to be fixed only over a certain volume of business called the relevant range. The diagram and table below show how fixed costs behave over the relevant range. Semi-variable Costs Many costs are a combination of both the above costs. The total amount in such costs will then change with volume, but not proportionately. It is always best to try and separate this into two components – fixed cost and variable cost, and deal with them separately. For example, telephone bills usually contain a fixed charge for having a connection and a variable charge based on actual usage. In this case, it is easy to separate the two costs. Similarly, the cost of driving a car includes many other cost components, like the cost of gasoline, oil, tires, and maintenance, all of which are variable. But there are also costs of insurance and registration that are fixed. Hence, the total cost in both the above cases is semi-variable and can be easily separated into its fixed and variable components. The two distinctions of costs – Direct and Indirect and Variable and Fixed are on separate dimensions. Hence, every cost would be a combination of these. The following combinations are possible: Direct and Variable – Cost of car tires Direct and Fixed – Rent of factory producing only one kind of car Indirect and Variable – Cost of power in a factory producing several types of cars Indirect and Fixed– Rent of factory producing several types of cars To read more about Cost Accounting, pick up the book Cost Accounting and Management Essentials You Always Wanted To Know which is an ‘essential’ guide and includes practical examples and case studies to explain the concept better. © 2022, By Vibrant Publishers, USA. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior permission of the publisher.