The main idea behind Baumols model is that Innovation is the motivating force behind the growth miracle of capitalism. In the neoclassical theory of the firm, firms compete based on price, but William Baumol argues that in a Capitalist economy innovation rather than price is the main competitive dimension and less innovative firms will find their markets shrinking as they lose business to their more innovative competitors. Thus, innovation is essential to the survival of firms in a capitalist economy. Baumol argues that innovation has replaced price as the most important factor that lies behind economic growth. He suggests that even though it has been recognized that important innovations stem from small firms, individuals or entrepreneurs, the bulk of innovative Continue reading
International Economics
Econometric Forecasting Models
Econometric model building holds considerable promise as a method of forecasting demand. The best  starting point towards an understanding of the basis of econometric forecasting is regression analysis. But  the difficulty with regression analysis is that it is used to forecast a single dependent variable based on the  value and the relations between one or more independent variables and each of these independent variables is  assumed to be exogenous or outside the influence of the dependent variable. This may be true in many  situations. But unfortunately, in most broad economic situations an assumption that each of the variable,  is independent is  unrealistic. For example, let us assume that demand is a function of Gross National Product (GNP), price and  advertising. Continue reading
Use of Exchange Controls to Eliminate a Nation’s Balance of Payments (BoP) Deficit
The exchange control refers to a set of restrictions imposed on the international transactions and payments, by the government or the exchange control authority. Exchange control may be partial, confined to only few kinds of transactions or payments, or total covering all kinds of international transactions depending on the requirement of the country. The main features of a full-fledged exchange control system are as follows: The government acquires, through the legislative measures, a complete domination over the foreign exchange transactions. The government  monopolizes  the purchase and sale of foreign  exchange. Law eliminates the sale and purchase of foreign exchange by the  resident individuals. Even holding foreign exchange without informing the exchange control authority’s declared illegal. All payments to the foreigners Continue reading
Correction of Balance of Payments (BoP) Deficit
Balance of Payments Adjustments The short-term and small deficits in balance of payments are quite likely to emerge in wide range of international transactions. These deficits do not call for immediate corrective actions. More importantly, irregular short-term changes in the domestic economic policies with a view to remove the short-term deficits in balance of payments may do  more  harms than good to the economy. Since these changes cause dislocations in the process of reallocation of  resources  and short-term fluctuations in the economy. Therefore, short-term deficits of smaller magnitude are not a serious concern to the policy makers. A constant deficit indicates that the country’s imports dominates exports  or depreciation of its foreign exchange and gold reserves. These countries lose their Continue reading
Disequilibrium in Balance of Payments
We have noted above that the balance of payments is always in balances from accounting point of view. Besides, in the accounting procedure, a deficit in the current account is offset by a surplus in capital account resulting from either borrowing from abroad or running down the gold and foreign exchange reserves.  Similarly, a surplus in the current account is offset by a corresponding deficit in capital account resulting from loans and bills to debtor country or by  decline  of  its gold and foreign exchange reserves. However, disequilibrium in the balance of payments does arise because total receipts during the reference period need not be necessarily equal to the total payments. When total receipts do not match with total payment Continue reading
Balance of Payments (BoP)
The balance of payment is defined as a systematic record of all economic transactions between the residents of a country and residents of foreign countries during a certain period of time. Although the above definition of balance of payments is quite revealing certain terms used in the definition may require some clarification. The term’s systematic record does not refer to any particular system. However, the system generally adopted is double entry book-keeping system. Economic transactions include all such transactions that involve the transfer of title or ownership. While some transactions involve physical transfer of goods, services, assets and money along with the transfer of title while other transactions do not involve transfer of title. For example, suppose that a subsidiary Continue reading