Tag: Economic

  • Green marketing examples social economy development

    Green marketing examples social economy development

    What advocates now is green consumption. Green marketing examples – As a long-term benefit, green marketing is also essential. Among them, green marketing can increase market share and improve market competitiveness after the whole people have implemented green consumption. Novel marketing will drive the activation and vigorous development of the market. Now that our country’s population is growing, the employment situation is grim, and the environmental impact is becoming more and more serious. The recent smoggy weather is a hot spot, so promoting green marketing is a top priority and urgent.

    Here are the articles to explain, The relationship between green marketing examples social economy development

    After understanding the relationship between social economy and green marketing in the market with examples. To develop this relationship and achieve the goal of building a resource-friendly society. This is what we should do, and it is a topic that must discuss and study. To achieve this goal, consumers, enterprises, and governments should all lead by example, implement marketing, consumption, and other policies under environmental protection, and establish a long-term model of harmonious coexistence between man and nature.

    What is green marketing?

    (1) The concept of green marketing

    Green marketing was proposed abroad as early as the 1980s, and it was implemented abroad in the 1990s. Later, after cultural exchanges, the Fifth Plenary Session of the 16th Central Committee of the Party pointed out that building a friendly society, is essential for green marketing. Green marketing refers to a marketing method or method that takes the protection of the ecological environment as the main purpose, builds a green culture, matches the green consumption of consumers, and satisfies the ecology and consumer concepts.

    When companies promote their products. They all use green consumption as the main theme and promote and advertise the concept of green consumption. That is healthy and environmentally friendly for their products. For example, a long time ago, Acorn International had a green logo that was very eye-catching. Which was the concept of green consumption that was close to nature and close to consumption. Acorn International is an infomercial that promotes a marketing model that is convenient and reduces people’s driving.

    Its products, such as good back and the like, are made of environmentally friendly materials. For example, good back materials use a composite material, especially the imported diving materials used in the improved U9 products. Which are decomposable under certain conditions. Such a healthy consumption concept is deeply rooted in people’s hearts, environmentally friendly, and in line with consumer tastes. Such marketing is a kind of green marketing.

    (2) The difference between green marketing and traditional marketing

    Traditional marketing is general marketing understanding with examples. Which is mainly centered on promoting products and asking consumers to accept products. Rather than green marketing which caters to green consumption. Traditional marketing emphasizes the transaction between the two parties more and achieves the purpose of the transaction. This is the purpose. The only thing they have in common is to introduce the characteristics of the product. But traditional marketing methods, it is closer to people’s living habits.

    After all, green consumption is a new concept for most people, a new term that has never stood exposed to before. In traditional marketing, in the process of marketing, consumers can directly feel the characteristics of the product and the role of the product. In the new green marketing, what customers feel may not be so directly felt. It is more of a healthy consumption method and attitude, as well as an environmentally friendly and healthy product. Which will guide consumers more towards healthy consumption and reasonable consumption.

    Because of the particularity of green marketing, the marketing method tends to carry out in a one-to-one model. It is appropriate to put oneself in a position for the sake of consumers. Green consumption considers for the sake of social interests. For the benefit of the whole society, and the sake of the scientific outlook on Development. Traditional consumption is only for profit, and the purpose of promotion achieve through product and price concessions. Green marketing refers to the energy-saving and environmental protection characteristics of the product with their examples. The product positioning is to choose green, healthy, environmental protection, etc., to serve customers in terms of service and quality.

    The relationship between green marketing and socio-economic development

    (1) modern enterprises must choose the necessary ”green” concept

    Modern science and technology advocate an innovative and green consumption model, and many consumers like healthy products that are suitable for themselves and their needs. Only when there is demand in the market will consumption generate. Enterprises must pay attention to the psychology of consumers in the marketing process. This model is a two-way choice model. Green marketing is a kind of representative of “green” with a healthy color. It brings to enterprises not only the kind of marketing model that consumers intuitively feel but also other psychological hints to maintain ecological balance.

    Because of the continuous introduction of policies, the country attaches great importance to environmental protection and sustainable development, so companies must support policies, otherwise they will be forcibly resisted. Green marketing has a distinctive mark. It integrates into all aspects of the enterprise, including marketing, product research and development, product sales, and product after-sales service. It is a process of full green ecology, attaches importance to environmental protection, and advocates environmental protection. Not long ago, the popular “firewood turkey” promoted a kind of eating healthy wild chicken.

    Other concepts

    The concept of firewood turkey makes people remember the taste of childhood love by consumers. Moreover, the chicken was killed on the spot, fresh and intuitive. Which gave consumers trust, indicating that the chicken was healthy and not less than two patties. But soon, it was closed by the environmental protection department, because when burning firewood. Will produce a lot of thick smoke, which is not only detrimental to health. But also affects the surrounding air quality, especially this year.

    Focus on the improvement of air quality, PM2.5 index. But this firewood turkey violates this, so the business will not last long. Therefore, the production concept of an enterprise must revolve around the protection of the ecological environment and a suitable and healthy green marketing method. Only then will such a business last for a long time, and it will stand the inspection and supervision of time and society.

    (2) Is the driving force for promoting economic development

    For green consumption, there is a market when there is demand. More people pay attention to their health today. Since Chai Jing became ill because of the birth of her daughter, she has started to study smog. What I want to discuss here is that modern people are becoming more and more aware of the protection of the environment and paying more and more attention to their bodies. The number of physical examinations every day is increasing.

    This increase, on the one hand, means that people are now very concerned about their bodies. And at the same time, the environment changes. Fearing that they will affect by an environment that is not particularly healthy now. With such an idea, there is such a demand. In the beginning, many companies began to make changes to some daily chemical products. The changes in many details give consumers an intuitive feeling that the texture of the product is different. The packaging of many products paper-base.

    When customers buy things, they will know the high quality of the product. If they change to plastic, there will be no such texture. They feel that the product is cheap, or even worse. This also promotes the sales of products, which also achieves the effect of environmental protection. There are still many electrical appliances. The development of electricity is not easy. There will be coal and other substances.

    Other Driving force

    Although there are new energy sources, they supply by coal and other substances. Many electrical appliances use energy-saving technologies. Such as variable frequency air conditioners and energy-saving refrigerators. Which are both environmentally friendly and power-saving. Many consumers are willing to consume such products. Besides, when it comes to eating, people take food as the sky, and applying green marketing methods to eating is a multiplier with half the effort.

    For example, the more popular health soup pot is healthier than the hot pot, and it is suitable for a wider range of people. The elder, children, young people, middle-aged, women, and other different strata love it, and they also fancy the concept of healthy eating. It is not so much an idea as a business opportunity. This kind of healthy consumption method is loved by customers, needed by enterprises, and needed by this society. It is the driving force of the entire economy and the foundation for long-term sustainability.

    (3) It is a necessary product for sustainable development

    Sustainable development is a long-term vision. Our life on earth is not only the supply of our generation but also the reproduction of people, which will continue to develop for millions of generations. Therefore, the protection of the environment is a must, and examples of green marketing will be a benchmark for market trends and directions. To implement the concept of sustainable development, it is necessary to pay attention to the impact of products, life, and processing sites on the environment and ecology.

    Therefore, the comparative product of sustainable development is green marketing examples. My country is a large agricultural country. In the early days, the foreign affairs movement began to develop the industry. But at that time, I did not pay attention to the protection of ecology. It was only later that I realized the importance of the ecological environment to us humans. Although at that time, productivity and competitiveness were improved, it affected the environment, which was felt by everyone. The development of refrigerators is such a journey.

    In the past, there were fluoride refrigerators, which caused serious damage to the atmosphere. Later, because of this problem, someone would reform and develop the technology. The current fluorine-free energy-saving refrigerators have not increased the burden on the environment, and the technology has existed improved. It means that this is not only a change of times but also economic and technological development.

    There are also the previous fur clothes. Which are highly sought after, and the killing of animals is illegal, and this practice existed later banned. With the current artificial fur, this is human wisdom, human self-awareness, and the improvement of technical ability. This is how it comes. There is no doubt that the green marketing model promotes economic growth and stimulates market flow.

    How to achieve green marketing.

    (1) Full cooperation between the government and enterprises

    Publicity is a skill, but also a right. If the government cooperates with companies to promote the importance of green consumption and make it deeply rooted in people’s hearts. Through publicity efforts at all levels and vigorous publicity in villages, townships, towns, counties, cities, provinces, etc., the influence is as influential as Chai Jing’s “under the dome”.The government and enterprises should first warn people about the destruction of the ecological environment, how much it affects humans, and the importance of the ecological environment to all of us.

    Secondly, they should develop green education, etc., and carry out publicity in green education, not only in the living community but also in work and study. Companies publicize to employees, teachers publicize to students and delve into the psychological roots. The concept of green consumption can promote through online videos, news and other media, and public service advertisements that combine corporate products can use. This is a win-win solution. Such propaganda has made people realize that this is not only a consumption model, but also a natural form, and the society will eventually tend to have certain economic value.

    (2) In the production process of an enterprise, it is necessary to apply the concept of green consumption

    Some of the green enterprises in our country are still stuck on how to strive for greater profits. Such green consumption stands deeply embedded in the business philosophy of the operators, so the operators of the enterprises need to promote green. It is not easy for companies to do this consciously, so this requires the power, supervision, and supervision of the public. In the production, processing, sales, and after-sales service of products, a fully integrated green model.

    The understanding of ”green“ is to integrate it into the business activities of the enterprise as a ”business philosophy”. For a green marketing combination, don’t pursue immediate benefits, and aim for the long term. As an enterprise, as a CEO, you must have a keen vision and flexibly apply green marketing to every link, from green products, from green prices, from green channels, from green promotions… To cooperate and integrate them. Only in this way can the green marketing examples of enterprises adapt to market demand and be sustainable.

    (3) Formally transform the enterprise

    In the trademark, it is necessary to focus on the meaning of green environmental protection. Furthermore, In advertising and branding, this is not only to baptize the company’s greenness but also to increase its brand effect. In advertising, don’t blindly talk about the intuitive attributes of the product, give customers a healthy attitude from the side, and make the effect of public service advertising.

    In particular, there are some advertising words and advertising slogans that must be clearly stated. That the characteristics of the product are closely related to ecological protection and health. Establishing a good green-friendly image of an enterprise can help enterprises more widely and directly transmit their green reputation to market segments. This is beyond the reach of promotion. It can also improve the competitiveness of enterprises and bring a good reputation and absolute advantages to enterprises.

    Conclusion

    There are many opportunities and challenges facing our country now, and we need to resolve them one by one. In international exchanges, the improvement of technology can minimize costs and maximize benefits. Seek a kind of green and environmentally friendly technical support, spread the green marketing examples, and concepts, receive it and realize mutual learning. Now that the global economy is in line with our country’s basic national policy, we must take the road of sustainable development, implement a scientific outlook on development, and realize a resource-friendly society to perfection.

    In the future development of enterprises, they must restrain their behavior, not carry away by immediate interests, respect society and nature, and take the road of sustainable development where population, economy, society, environment, and resources promote and coordinate each other. To adapt to the times, change, and innovate, we must conform to the laws of natural development, and achieve reasonable green marketing and reasonable green consumption. Civilization takes small steps and policies stand vigorously pursued. The whole society must work together to build a resource-friendly society, jointly achieve economic growth, and achieve the goal of common prosperity. It will not be far away.

    Green marketing examples social economy development Image
    Green marketing examples social economy development; Photo by Markus Spiske on Unsplash.
  • Economic reforms: Meaning, Definition, Need, and Achievements

    Economic reforms: Meaning, Definition, Need, and Achievements

    Economic reforms in India – Introduction; The performance of the Indian economy within the last decade has been remarkable. Business environment easy – This can partly attribute to the continued economic reforms. Since 1991, the govt of India has introduced diverse economic reforms to tug the country out of the depression and to accelerate the speed of growth. Also, The reforms have embraced almost all aspects of the country’s economy.

    Economic reforms: Introduction, Meaning, Definition, Importance, Need, and Achievements

    Policies concerning industrial licensing, trade and foreign investment have undergone major changes. Also, significant macroeconomic adjustments have taken place. Economic institutions too have undergone a significant change; the banking sector and capital markets, in particular, have been major targets of the change. And finally, structural adjustments covering areas like subsidies, the price Mechanism, and the public sector have also taken place. Collectively, these reforms aim at the modernization of the country’s industrial system, removal of unproductive controls, strengthening of private investment, including foreign investment, and integration of India’s economy with the global economy.

    In one word, it can be said that the all-around opening up of the country’s economy has been the essence of the reforms. All these economic reforms knowing as the new Economic Policy. Accordingly, New Economic Policy refers to all those different economic reforms introduced since July 1991 or policy measures and changes that aim at increasing productivity and efficiency by creating an environment of competition in the economy.

    Meaning and Definition of economic reforms:

    Economic reforms or new policy refers to varied policy measures and changes introduced since 1991. The common objective of all these measures is to improve the productivity and efficiency of the economy by creating a more competitive environment therein.

    The reforms are often classified into two broad categories:

    Changes in the sphere of industrial licensing policy and foreign trade as well as foreign investment policies belong to the first category. Also, Reforms touching the macroeconomy and economic institutions plus structural adjustments covering areas like subsidies, price environment, and public sector, belong to the second category. All these initiatives collectively mention because of the New Economic Policies (NEP).

    Importance and Need for Economic Reforms or New Economic Policy:

    About five decades back (1st April 1951) India had commenced its journey to economic development on the path of a socialistic pattern of society and mixed economy. So far India has completed 9 five-year plans. There is no denying the fact that in these five decades Indian economy has achieved many successes but the number of failures is by no means small. During the period of planning the public sector was given utmost importance. Also, The private sector was largely kept under government control. Trade and industry were subjected to many restrictions. Bureaucracy and red-tapism were the normal features of the economy. The cumulative effect of all this was that at the end of June 1991, the country landed in an unprecedented economic crisis.

    Stores of unfamiliar trade were only adequate to pay for fourteen day’s imports. New loans were not available. Enormous sums were being removed from the records of non-private Indians (NRIs). The faith of the international community in the Indian economy was shaken. Industrial progress was in reverse gear and prices were skyrocketing. To haul the economy out of monetary emergency and to put it on the way to quick and consistent financial development; it was generally fundamental to address monetary disequilibrium, check expansion, the right unfriendly equilibrium of installments, and recharge trade saves. To achieve all these objectives, the introduction of economic reforms or an appropriate economic policy was considered inevitable.

    The importance and need for economic reforms or the New Economic Policy were felt predominantly in light of the accompanying reasons.

    Increase in Fiscal Deficit:

    Before 1991, the monetary shortfall of the public authority had been mounting quite a long time after year because of the constant expansion in its non-advancement use. Also, Financial A shortage implies the contrast between absolute consumption and all-out receipts with fewer credits. It is equal to add up to borrowings by the public authority. In 1981-82, it was 5.4 percent of total national output (GDP). In 1990-91, it rose to 8.4 percent of GDP.

    To meet the monetary shortfall, the public authority obliges to raise advances and pay interest consequently. Consequently, because of the persevering ascent in the financial shortage, there was a relating ascend in open obligation and interest installment risk. In 1980-81, interest installment on open obligation added up to 10 percent of complete government consumption. In 1991, the measure of interest risk rose further to 36.4 percent of complete government use. There was not kidding anxiety that the public authority was quick-setting out toward an obligation trap.

    Increase in Adverse Balance of Payments:

    The equilibrium of an installment is the distinction between absolute fares and all-out imports of a nation. Exactly when outright imports outperform full-scale tolls, the harmony of portions gets threatening. Also, The public authority conceded assorted sorts of motivating forces and concessions to the exporters under the fare advancement program, yet the fare didn’t ascend to the ideal degree. It was fundamentally because in the global market our fares couldn’t contend in cost and quality.

    This was the immediate consequence of the arrangement of assurance so generously sought after by the public authority and for such a long time. As against the moderate development of fares, there was a quick expansion in imports. Subsequently, the equilibrium of installments shortfall expanded without question. The shortage of the equilibrium of installments had been rising consistently since 1980-81. For example, in 1980-81, the equilibrium of installments on the current record was unfavorable to the tune of Rupees 2,214 crore and it rose in 1990-91 to Rupees 17,367 crore. To meet this insufficiency a tremendous proportion of new credits should obtain.

    Gulf Crisis:

    Under the Iraq war in1990-91, costs of petroleum shot up. India used to get a colossal measure of settlements from Gulf nations in unfamiliar trade all that halted completely. Inlet emergency consequently further complimented as of now an antagonistic equilibrium of installments position. This has expanded the equilibrium of installments shortfall definitely.

    Fall in Foreign Exchange Reserves:

    In 1990-91 India’s new exchange saves tumble to a specific level that the identical was adequately not to cover for an import tab for even 10 days. Unfamiliar trade saves that were Rupees 8,151 crore in 1986-87 declined pointedly to Rupees 6,252 crore in 1989-90. The circumstance developed so intense that the Chandrashekhar government needed to contract the nation’s gold to release its unfamiliar obligation overhauling commitment.

    Ascend in expenses:

    In India, costs continued rising high. The normal yearly pace of expansion expanded from 6.7 percent to 16.7 percent. The fundamental explanation behind expansion or a yearly pace of expansion in costs was a quick expansion in the stockpile of cash. This, thusly, was because of the over top hotel to the shortage of financing by the public authority. Shortage financing infers getting from the Reserve Bank of India by the public authority to meet its shortfall. Bank offered this development by printing new money notes. The expense of creation takes an upward bounce because of the high pace of expansion. It unfairly impacts local and new interest in our things.

    Lackluster appearing of Public Sector Undertakings (PSU):

    In 1951 there were just 5 undertakings in the public region in India anyway in 2001 their number rose to 232. Two or three thousand crores of public resources were added to that. In the underlying 15 years, their working was very agreeable yet from that point the majority of these endured misfortunes. As a result of their terrible showing. Public area endeavors deteriorated into a risk.

    Because of the above convincing elements, it got inescapable for the public authority to embrace the New Economic Policy. It was even more important to increment mechanical yield and pull in unfamiliar capital.

    Some Basic and Advanced Achievements of Economic Reforms:

    The second economic reforms were reported in July 1991; there was an inclination that the public authority was slackening a portion of the controls. The troubles and postponements related to the previous arrangement of controls were currently expected to evaporate. Fourth biggest economy (US dollar 3 trillion GDP) as far as Purchasing Power Parity after the USA, China, and Japan. The basics of the Indian economy have got solid and stable.

    The large scale economic pointers are at present the best throughout the entire existence of autonomous India with high development, solid unfamiliar trade holds, and unfamiliar venture and powerful increment the basics of the Indian economy have gotten solid and stable. The full-scale economic markers are at present the best in the historical backdrop of autonomous India with high development, sound unfamiliar trade saves, and unfamiliar speculation and hearty expansion in fares, and low swelling and financing costs.

    Likewise, a portion of the significant achievements of economic reforms can summarize as follows:

    First achievements
    • The growth pace of the economy regarding GDP development got and arrived at a pinnacle pace of 8.4 percent in 2002-03. A novel element of the progress of the Indian economy is that it has become the second-quickest developing economy of the world in the year 2003 – 04. In the monetary year 2004 – 05, the GDP development has arrived at the midpoint of 6.9% (assessed). India has recorded one of the most noteworthy development rates during the 1990s. The objective of the tenth five-year Plan (2002-07) is an 8% development rate.
    • India’s administration area developed by 9.4% in 2004-05. Unfamiliar direct speculations have expanded from under 0.05 percent of GDP to more than 0.4 over a penny of GDP in 2002-03.
    • The unfamiliar trade holds have arrived at a record level of US dollar 138.84 billion in June 2005. Also, The agreeable circumstance of forex holds has encouraged further unwinding of unfamiliar trade limitations and a continuous move towards more prominent capital record convertibility. As per the IMF (2003 report), India’s Forex Policies by worldwide prescribe procedures.
    Second achievements
    • The unfamiliar trade save has expanded quickly. In 1990-91, the unfamiliar trade saves were sufficient to back imports for 2.5 months. In 2002-03, they are sufficient to back imports for 11 months. Unfamiliar Exchange Reserves (US dollar 138.84 billion) presently far surpass Foreign Debt (US dollar 113 billion as of September 2004).
    • The short-term obligation is under 4 percent of the stores. In March 1991 Forex Reserves including gold remained at dollar 5.8 billion as against the outer obligation of dollar 83 billion. The outer obligation to GDP proportion has improved altogether from 38.7% in 1992 to 17.8% at end of March 2004. This is one of the least among creating economies. The outer obligation in December 2004 was 120.9 billion US dollars. Of these drawn-out NRI, stores are dollar27 billion, business borrowings dollar24 billion, multilateral obligation dollar 31 billion, and respective obligation dollar 18 billion.
    Third achievements:
    • The pace of modern development likewise began ascending from 1993-94 onwards. It arrived at a pinnacle pace of 6.7 percent in 2002-03.
    • The average pace of expansion has been decreased extensively, from almost 13.6 percent in 1991-92 to around 3.4 percent in 2002-03.
    • The Government has chosen to (1) cease getting help from different nations aside from the accompanying nine: Japan, UK, Germany, USA, EU, France, Italy, Canada, and the Russian Federation and (2) to make pre-installment of all respective obligation owed to all the countries aside from the ones referenced previously. Since July 2003, India has become a net leaser to IMF, in the wake of having been a borrower before.
    • The Government has discounted obligations of US$ 30 million due from seven intensely obliged nations as a component of the “India Development Initiative” reported in February 2003. Also, The loan cost keeps on being decreased and is around 6%. This is the most minimal over the most recent thirty years and it is animating utilization and speculation.
    Forth achievements
    • Thanks to the presentation of screen-based exchanging and electronic conveyance, the financial exchange has been genuinely changed. Their joined impact has been to lessen the exchange costs in India’s securities exchange drastically.
    • India is turning into a creation base and a fare center point for assorted merchandise, from horticultural items to vehicle segments to top of the line administrations. Indian firms are presently essential for worldwide creation chains — bringing in sub-gatherings, enhancing them, and re-sending out them.
    • Taking the favorable position of its pool of top-notch logical ability, global enterprises have set up enormous R&D focuses in India. Every one of these qualities has brought about the more noteworthy joining of the Indian economy with the world economy. The exchange has ascended from 21 percent to 33 percent of India’s GDP in 10 years.
    Economic reforms Introduction Meaning Definition Importance Need and Achievements Image
    Economic reforms: Introduction, Meaning, Definition, Importance, Need, and Achievements; Image from Pixabay.
  • Economic Environment: Liberalization, Privatization, and Globalization

    Economic Environment: Liberalization, Privatization, and Globalization

    What is Economic Environment? The totality of economic factors, such as employment, income, inflation, interest rates, productivity, and wealth, that influence the buying behavior of consumers and institutions. This article we have a discussion on Economic Environment and their parts; liberalization, privatization, and globalization. Economic environment refers to all those economic factors which have a bearing on the functioning of a business unit.

    Economic Environment discusses the questions of What do liberalization, privatization, and globalization of the Indian Economy mean? Better Explanation.

    Business depends on the economic environment for all the need inputs. It also depends on the economic environment to sell finished goods. Naturally, the dependence of business on the economic environment is total and it is not surprising because, as it rightly says, business is one unit of the total economy.

    Define Economic Environment in India?

    To solve the economic problems of our country, the government took several steps including control by the State of certain industries, central planning and reduced importance of the private sector. Besides people, markets require purchasing power and that depends upon current income, savings, prices, debt and credit facilities, etc. The economic environment affects the demand structure of any industry or product. The following factors should always keep in mind by the business people to determine the success of the business.

    • Per capita income.
    • Gross national product.
    • Fiscal and monitory policies.
    • The ratio of interest charged by different financial institutions.
    • Industry life cycle and current phase, and.
    • Trends of inflation or deflation.

    Each of the above factors can pose an opportunity as well as a threat to a firm. For example, in a developing economy, the low demand for the product is due to the low-income level of the people. In such a situation a firm or company can not generate the purchasing power of the people to generate the demand for the products. But it can develop a low priced product to suit the low-income market otherwise it will slip out from the market.

    Extra Things:

    Similarly, the industry gets several incentives and support from the government if it comes under the purview of the priority sector whereas some industries face a tough task if they are regarding as inessential ones. In the industry life cycle, timing is everything when it comes to making good cycle-sensitive decisions.

    The managers need to make appropriate cutbacks before the onslaught of recession because at that time sales are bound to decline which leads to increasing inventories and idle resources and that is a costly situation.

    On the other hand, business people cannot afford to get caught short during a period of rapid expansion. This is where accurate economic forecasts are a necessity and therefore, a manager must pay careful attention to the major economic changes.

    The main objectives of India’s development plan are:

    • Initiate rapid economic growth to raise the standard of living, reduce unemployment and poverty.
    • Become self-reliant and set up a strong industrial base with emphasis on heavy and basic industries.
    • Reduce inequalities of income and wealth.
    • Adopt a socialist pattern of development — based on equality and prevent exploitation of man by man.

    As a part of economic reforms, the Government of India announced a new industrial policy in July 1991.

    The broad features of this policy are as follows:
    • The Government reduced the number of industries under compulsory licensing to six.
    • Disinvestment was carrying out in the case of many public sector industrial enterprises.
    • Policy towards foreign capital was liberalizing. The share of foreign equity participation was increasing and in many activities, 100 percent Foreign Direct Investment (FDI) was permitted.
    • Automatic permission was now granting for technology agreements with foreign companies.
    • Foreign Investment Promotion Board (FIPB) was set up to promote and canalize foreign investment in India.

    Main Features of economic Reforms or New Economic Policy:

    They are three things liberalization, privatization, and globalization. The following features of the economics below are;

    Economic Environment Liberalization Privatization and Globalization
    Economic Environment: Liberalization, Privatization, and Globalization

    Liberalization:

    Liberalization of the economy means to free it from direct or physical controls impose by the government. Before 1991, the government had imposing several types of controls on the Indian economy, e.g., industrial licensing system; price control or financial control on goods, import license, foreign exchange control, restrictions on investment by big business houses, etc. these had to dampen the enthusiasm of the entrepreneurs to establish new industries.

    These controls had given rise to corruption, undue delays, and inefficiency. Economic reforms, therefore, made a bid to reduce restrictions impose on the economy. Also, Economic reforms were based on the assumption that market forces could guide the economy more effectively than government control.

    Measures Taken for Liberalization:

    Following measures have been taking under economic reforms for liberalization of Indian economy:

    Abolition of Industrial Licensing and Registration:

    The New Industrial Policy (NIP) is the first part of the liberalization measures. Under the NIP, industrial licensing has been greatly liberalizing. All industries, except a few specified ones, have been de-licensing under the NIP and liberated from the clutches of control in a bid to eliminate the obstacles to industrial growth. De-licensing of passenger car industry, bulk drugs industry, consumer electronics industry, etc. became landmarks and several new players entered these industries.

    Industries for which licenses are still necessary are:

    • Liquor.
    • Cigarette.
    • Defense equipment.
    • Industrial Explosives.
    • Dangerous Chemicals, and.
    • Drugs.

    Small Scale Industry (SSI) de-reservation, however, has not made much progress.

    The concession from the Monopolies Act:

    According to the provisions of Monopolies and Restrictive Trade Practices Act (MRTP Act) all those companies having assets worth more than 100 crores used to declare MRTP firms and were subject to several restrictions. Now the concept of MRTP has been done away with. These firms are now no longer require to obtain prior approval of the government, at the time of making investment decisions.

    Freedom for Expansion and Production to Industries:

    As a result of the liberalization policy, industries have been giving the following freedom:

    • Before liberalization under the provisions of old policy at the time of granting the license, the government used to fix the maximum limit of production capacity. No industry could produce beyond this limit. Now, this limit has been removing.
    • Producers are now free to produce anything based on demand in the market. Previously, only those goods could produce which were mentioning in the license.
    Increase in the Investment Limit of the Small Industries:

    The investment limit of the small industries has been raising to Rs. 1 crore to enable them to introduce modernization. Investment limit of tiny industries has also been increased to Rs. 25 lakh.

    Freedom to import Capital Goods:

    Under the policy of liberalization. Indian industries will be free to buy machines and raw materials from abroad to expand and modernize themselves.

    Privatization:

    In the context of economic reforms, privatization means allowing the private sector to set up more and more of such industries as were previously reserved for the public sector. Under it, an existing enterprise of the public sector is either wholly or partially sell to the private sector.

    Measures adopted for Privatization:

    Following measures were adopted in respect of privatization under economic reforms:

    Contraction of the Public Sector:

    Initially, in the economic development of India, the public sector was according to prime importance. As observed by Dr. Manmohan Singh, priority was given to the public sector in the hope that it would help capital accumulation, industrialization, development, and removal of poverty. But none of these objectives could realize. The policy of contraction of the public sector was, therefore, adopt under the new economic reforms.

    The number of industries exclusively reserved for the public sector was reduced from 17 to 4. The Government has been divesting its stake in public sector undertakings in the light of the redefinition of its role from being a provider of goods and services to that of a policy-maker and facilitator. Between 1991-2002 the Government has privatized assets worth US$ 6.3 billion.

    Note: At present, the Government is considering disinvestment of the Shipping Corporation of India, State Trading Corporation, Minerals and Metals Trading Corporation, among others. One of the biggest privatization programs that the Government has initiated is the leasing of international airports at the four metropolitan cities of Delhi, Mumbai, Chennai, and Kolkata.

    Globalization:

    It means integrating the economy of a country with the economies of other countries under conditions of freer flow of trade and capital and movement of persons across borders.

    “ Globalization may define as a process associated with increasing openness, growing economic interdependence and deepening economic integration in the world economy.”

    Main components of Globalization of the Indian economy are as under:

    Increase in Foreign Investment:

    Under economic reforms, the limit of foreign capital investment has been growing from 40 percent to 51 percent. In 47 high priority industries foreign direct investment to the extent of 51 percent will allow without any restriction and red-tapism. Also, Export trading houses will allow foreign capital investment up to 51 percent. In this regard, the Foreign Exchange Management Act (FEMA) will enforce.

    Devaluation:

    To promote exports under the policy of globalization, the Indian rupee was devaluing. In July 1991, the rupee was devaluing to the extent of 20 percent on average. The objective was an export promotion, import substitution and attraction of foreign capital.

    Reduction in tariffs:

    To render the Indian economy beneficial internationally, custom duties and tariff impose on imports and exports are reducing gradually.

    Export Promotion:

    Several measures have been taking to meet the deficit of the balance of payments. Exports have been promoting. Special facilities like the abolition of export duties, cheaper export credit and cuts in import duty have been providing to the exports to increase the share of Indian exports in world trade. The government also enhance the duty drawback in respect of a large number of items. The greater flow of bank finance to the export sector at a concessional rate also enhances the competitiveness of exports.

    The rupee made Convertible:

    The government brought in partial convertibility of the rupee in 1992-93 and full convertibility on the trading account in 1993-94. The move supported the intention to give the exchange rate mechanism its due role in regulating the trade flow. It also serves to encourage exports.

  • Economic System: Capitalism, Socialism, and Communism

    Economic System: Capitalism, Socialism, and Communism

    The economic system divides into three groups; capitalism, socialism, and communism. The scope of private business and the extent of government regulation of economic activities depend to a very large extent on the nature of the economic system, which is an important part of the business environment.

    This article explains about the Economic System and their points: Capitalism, Socialism, and Communism.

    What is the economic system? An economic system or economic order is a system of production, resource allocation and distribution of goods and services within a society or a given geographic area. It includes the combination of the various institutions, agencies, entities, decision-making processes and patterns of consumption. That comprises the economic structure of a given community.

    As such, an economic system is a type of social system. The mode of production is a related concept. All economic systems have three basic questions to ask: what to produce, how to produce and in what quantities and who receives the output of production.

    Economic System Capitalism Socialism and Communism
    Economic System: Capitalism, Socialism, and Communism

    Broadly the economic system is divided into three groups.

    1. Capitalism.
    2. Socialism, and.
    3. Communism.

    Now, explain each one;

    Capitalism:

    What is Capitalism? Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system, and competitive markets.

    The system of capitalism stresses the philosophy of individualism believing in private ownership of all agents of production, in the private sharing of distribution processes. That determines the functions rewards of each participant and individual expression of consumer choice through a free market place.

    In its political manifestation, capitalism may fall in a range between extreme individualism and anarchism (no government) and the acceptance of some state sanctions. The capitalist system also knows as a free enterprise economy and market economy.

    Two types of capitalism may be distinguished, viz.,

    • The old, Laissez-fair capitalism, where government intervention in the economy is absent or negligible, and.
    • The modern, regulated or mixed capitalism, where there is a substantial amount of government intervention.

    Socialism:

    Under socialism, the tools of production are to organize, managed and owned by the government, with the benefits occurring to the public. A strong public sector, agrarian reforms, control over private wealth and investment and national self-reliance are the other planks of socialism.

    What is Socialism? Socialism is a range of economic and social systems characterized by social ownership of the means of production and workers’ self-management. As well as the political theories and movements associated with them. Social ownership can be public, collective or cooperative ownership or citizen ownership of equity.

    Socialism does not involve an equal division of existing wealth among the people but advocates the egalitarian principle. It believes in employing all and emphasizes suitable rewards to the efforts put in by every worker. Also called Fabian socialism, this philosophy follows in our country and other social-democratic countries in the world.

    Communism:

    What is Communism? Communism, the political and economic doctrine that aims to replace private property and a profit-based economy with public ownership and communal control of at least the major means of production (e.g., mines, mills, and factories) and the natural resources of a society.

    In political and social sciences, communism is the philosophical, social, political, and economic ideology and movement whose ultimate goal is the establishment of the communist society. Which is a socioeconomic order structured upon the common ownership of the means of production and the absence of social classes, money, and the state.

    Communism is thus a form of socialism a higher and more advanced form, according to its advocates. Exactly how communism differs from socialism has long been a matter of debate, but the distinction rests largely on the communist’s adherence to the revolutionary socialism of Karl Marx.

    Communism goes further to abolish all private property and property rights to income. The state would own and direct all instruments of production. Sharing in the distributive process would have no relationship to the private property since this right would not exist. Alternatively called maxims, communism was followed in Russia, China, and East European Countries.

    Table of Compared: Capitalism, Socialism and Communism.

    Economic System Capitalism Socialism and Communism - Table of Compared
    Economic System: Capitalism, Socialism, and Communism – Table of Compared,

  • Microeconomics and macroeconomics in what kind of difference between?

    Microeconomics and macroeconomics in what kind of difference between?

    Macroeconomics and microeconomics, and their wide array of underlying concepts have been the subject of a lot of writings. The field of study is vast; so here is a summary of what each covers. The primary difference between Microeconomics and Macroeconomics; Microeconomics is generally the study of individuals and business decisions, while macroeconomics looks at higher up country and government decisions.

    The difference between Microeconomics and Macroeconomics by Definition, and Explanation!

    When we study economics as a whole, we must consider the decisions of individual economic actors. For example, to understand what determines total consumption spending, we must think about a family decision as to how much to spend today and how much to save for the future.

    Since aggregate variables are simply the sum of the variables describing many individual decisions, macroeconomics is inevitably founded in microeconomics. The difference between microeconomics and macroeconomics is artificial since aggregates are deriving from the sums of individual figures.

    Yet the difference justifies because what is true for an individual in isolation may not be true for the economy as a whole. For example, an individual may become richer by saving than spending.

    What does mean Microeconomics?

    Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy.

    For example, microeconomics would look at how a specific company could maximize its production and capacity, so that it could lower prices and better compete in its industry. Find out more about microeconomics in How does government policy impact microeconomics?  Microeconomics’ rules flow from a set of compatible laws and theorems, rather than beginning with empirical study.

    What does mean Macroeconomics?

    Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole, not just of specific companies, but entire industries and economies. It looks at economy-wide phenomena, such as Gross Domestic Product (GDP), and how it affects by changes in unemployment, national income, rate of growth, and price levels.

    For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation’s capital account or how GDP would affect the unemployment rate.

    John Maynard Keynes is often credited with founding macroeconomics when he initiated the use of monetary aggregates to study broad phenomena. Some economists reject his theory and many of those who use it disagree on how to interpret it.

    Introduction to Micro and Macro:

    While these two studies of economics appear to be different, they are interdependent and complement one another since there are many overlapping issues between the two fields. For example, increased inflation (macro effect) would cause the price of raw materials to increase for companies and in turn affect the end product’s price charged to the public.

    Microeconomics takes what refers to as a bottom-up approach to analyzing the economy while macroeconomics takes a top-down approach. In other words, microeconomics tries to understand human choices and resource allocation, while macroeconomics tries to answer such questions as “What should the rate of inflation be?” or “What stimulates economic growth?”

    Regardless, both micro and macro-economics provide fundamental tools for any finance professional and should study together to fully understand how companies operate and earn revenues, and thus, how an entire economy manages and sustain.

    Definition of Microeconomics and Macroeconomics:

    Microeconomics is a Greek word which means small,

    “Microeconomics is the study of specific individual units; particular firms, particular households, individual prices, wages, individual industries particular commodities. The microeconomic theory or price theory thus is the study of individual parts of the economy.”

    It is an economic theory in a microscope. For instance, in the microeconomic analysis, we study the demand of an individual consumer for a good and from there we go to derive the market demand for a good. Similarly, in microeconomic theory, we study the behavior of individual firms the fixation of price output.

    The term macro derives from the Greek word “UAKPO” which means large. Macroeconomics, the other half of economics, is the study of the behavior of the economy as a whole.

    In other words:

    “Macroeconomics deals with total or big aggregates such as national income, output and employment, total consumption, aggregate saving, and aggregate investment and the general level of prices.”

    Explanation of the difference between Microeconomics and Macroeconomics:

    The following difference below are;

    Adam Smith is usually considering the founder of microeconomics, the branch of economics. Which today concerns, the behavior of individual entities as markets, firms, and households. In The Wealth of Nations, Smith considered how individual prices are set, studied the determination of prices of land, labor, and capital. And, inquired into the strengths and weaknesses of the market mechanism.

    Most important, he identified the remarkable efficiency properties of markets and saw that economic benefit comes from the self-interested actions of individuals. All these are still important issues today. And, while the study of microeconomics has surely advanced greatly since Smith’s day, he is still cited by politicians and economists alike.

    The other major branch of our subject is macroeconomics, which is concerning with the overall performance of the economy. Macroeconomics did not even exist in its modern form until 1935 when John Maynard Keynes published his revolutionary book General Theory of Employment, Interest, and Money. At the time, England and the United States were still stuck in the Great Depression of the 1930s, and over one-quarter of the American labor force was unemployed.

    Extra knowledge;

    In his new theory, Keynes developed an analysis of what causes unemployment and economic downturns. How investment and consumption are determining? How central banks manage money and interest rates? and, Why some nations thrive while others stagnate? Keynes also argues that the government had an important role in smoothing out the ups and downs of business cycles.

    Although macroeconomics has progressed far since his first insights. The issues addressed by Keynes still define the study of macroeconomics today. The two branches – microeconomics and macroeconomics – covers to form modern economics. At one time the boundary between the two areas was quite distinct; more recently, the two sub-disciplines have merged as economists have to apply the tools of microeconomics to such topics as unemployment and inflation.

    Microeconomics and macroeconomics in what kind of difference between
    Microeconomics and macroeconomics in what kind of difference between?

    Differences between them:

    The main differences between Microeconomics and Macroeconomics are as under:

    Under Microeconomics:

    • It is the study of individual economic units of an economy.
    • It deals with Individual Income, Individual prices, Individual output, etc.
    • Its central problem is price determination and allocation of resources.
    • Its main tools are the demand and supply of a particular commodity/factor.
    • It helps to solve the central problem of ‘what, how and for whom’ to produce. In the economy
    • It discusses how the equilibrium of a consumer, a producer, or an Industry attains.

    Under Macroeconomics:

    • It is the study of the economy as a whole and its aggregates.
    • It deals with aggregates like national income, general price level, national output, etc.
    • Its central problem is the determination of the level of income and employment.
    • Its main tools are aggregate demand and aggregate supply of the economy as a whole.
    • It helps to solve the central problem of the full employment of resources in the economy.
    • It concerns the determination of the equilibrium level of income and employment of the economy.

    Note: You’ll study the Difference between Microeconomics and Macroeconomics in Hindi.

  • Difference between Positive and Normative Economics

    Difference between Positive and Normative Economics

    Positive and Normative Economics: Economics is often divided into two major aspects – positive and normative. Positive economics explains how the world works. The primary difference between Positive and Normative Economics; con­cerns with what is, rather than with what ought to be. Normative economics is concerning what ought to be rather than what is. It proposes solutions to society’s economic problems. That there is unemployment in India is a problem of positive economics. What measures can adopt to solve the problem is a problem of normative economics. Normative economics also knows as welfare Eco­nomics.

    How to Explain the difference between Positive and Normative Economics?

    The distinction between positive economics and normative economics may seem simple, but it is not always easy to differentiate between the two. Positive economics is objective and fact-based, while normative economics is subjective and value-based. Positive economic statements must be able to test and prove or disprove. Normative economic statements are opinion based, so they cannot prove or disprove. Many widely-accepted statements that people hold as fact are value-based.

    For example, the statement, “government should provide basic healthcare to all citizens” is a normative economic statement. There is no way to prove whether the government “should” provide healthcare; this statement is based on opinions about the role of government in individuals’ lives, the importance of healthcare, and who should pay for it.

    The statement, “government-provided healthcare increases public expenditures” is a positive economic statement, as it can prove or disprove by examining healthcare spending data in countries like Canada and Britain, where the government provides healthcare.

    Disagreements over public policies typically revolve around normative economic statements, and the disagreements persist because neither side can prove that it is correct or that its opponent is incorrect. A clear understanding of the difference between positive and normative economics should lead to better policy-making if policies are made based on facts (positive economics), not opinions (normative economics). Nonetheless, numerous policies on issues ranging from international trade to welfare are at least partially based on normative economics.

    Positive Science or Normative Science!

    Positive science implies that science which establishes the relationship between cause and Ef­fect. In other words, it scientifically analyses a problem and examines the causes of a problem. For example, if prices have gone up, why have they gone up.

    In short, problems are examining based on facts. On the other hand, normative science relates to normative aspects of a problem i.e., what ought to be. Under normative science, conclusions and results are not based on facts, rather they are based on different considerations like social, cultural, political, religious, and son are is subjective, an expression of opinions.

    In short, positive science concerns with “how and why” and normative science with ‘what ought to be’. The distinction between the two can explain with the help of an example of an increase in the rate of interest. Under positive science it would look into why the interest rate has gone up and how can it reduce whereas under normative science it would see as to whether this increase is good or bad. Three statements about positive and normative science each are given below:

    Positive Science:

    The following topic below are;

    • The main cause of price-rise in India is the increase in the money supply.
    • It bases on a set of collected facts.
    • Prices and inequalities of income level in an economy.
    • Production of food grains in India has increased mainly because of an increase in irrigation facilities and the consumption of chemical fertilizers.
    • The rate of population growth has been very high partly because of the high birth rate and partly because of the decline in the death rate.
    • Studies with what is or how the economic problem originally solves.
    • It can verify with the original data.
    • It aims to provide an original description of economic activity.
    Normative Science:

    The following topic below are;

    • Inflation is better than deflation.
    • It bases on the opinion of the individual.
    • The government should generate more employment opportunities.
    • More production of luxury goods is not good for a poor country like India.
    • Inequalities in the distribution of wealth and incomes should reduce.
    • Studies with what ought or how the economic problem should solve.
    • It cannot verify with the original data.
    • It aims to determine the principles.

    Difference between Positive and Normative Economics
    Difference between Positive and Normative Economics

    Positive and Normative Economic Statements:

    The following Statements topic below are;

    Positive statements: Positive statements are objective statements that can test, amend, or reject by referring to the available evidence. Positive economics deals with objective explanations and the testing and rejection of theories. For example; A fall in incomes will lead to a rise in demand for own-label supermarket foods. And, If the government raises the tax on beer, this will lead to a fall in profits of the brewers.

    Normative Statements: A value judgment is a subjective statement of opinion rather than a fact that can be tested by looking at the available evidence. Normative statements are subjective statements – i.e. they carry value judgments. For example; Pollution is the most serious economic problem. Unemployment is more harmful than inflation, and. The government is right to introduce a ban on smoking in public places.

  • Economic Laws: Meaning Definition Features Nature

    Economic Laws: Meaning Definition Features Nature

    What does mean Economic Laws? The Generalization or Law is the establishment of a general truth based on particular observations or experiments. Which trace a causal relationship between two or more phenomena. But economic laws are statements of general tendencies or uniformities in the relationships between two or more economic phenomena. So, what is the question we going to study?

    The Concept of Economic Laws: first study their Meaning, Definition, Features, Nature, and finally Limitations.

    Meaning and definition of Economic Laws: Economic laws are nothing more than careful conclusions and inferences drawn with the help of reasoning or by the aid of observation of human and physical nature. In everyday life, we see that man is always busy satisfying his unlimited wants with limited means. In doing so, it acts upon certain principles.

    Marshall defined economic laws in these words,

    “Economic laws, or statements of economic tendencies, are those social laws, which relate to those branches of conduct in which the strength of the motives chiefly concerned can be measured by money price.”

    On the other hand, according to Robbins,

    “Economic laws are statements of uniformities about human behavior concerning the disposal of scarce means with alternative uses for the achievement of ends that are unlimited.”

    These two definitions are common in that they consider economic laws as statements of tendencies or uniformities relating to human behavior.

    Features of Economic Law:

    The following six points highlight the features of economic laws.

    Are not Commands:

    Economic laws are not orders of the state (government) and do not command. They formulate based on people’s behavior in the real world.

    Are not Exact:

    Since economic laws deal with the actions of human beings having free will. They are not as exact as the laws of the natural sciences. They are statements that are true only in general. For example, the statement that men will buy goods at the cheapest available market is true generally but not universally. A man inten­tionally pays a higher price to help a relative or a friend. But such cases form a small fraction of the total transactions of human beings.

    Economists tacitly ignore these excep­tional cases and frame them. Their laws on the expectation that men’s actions will, in the great majority of cases, follow a uniform pattern. This makes economic laws generally true, but less exact than physical laws. “Economic laws are probability laws, not exact relationships.” “Abnormal as well as normal patterns of probabilities occur in economics”, as Samuelson has commented.

    Statements of Cause and Effect: 

    Economic laws, like scientific laws, are statements of cause and effect. They attempt to state the effects that will follow from particular causes. Unfortunately, in economic affairs, many factors operate simul­taneously. And it is impossible to isolate each factor to find out its effects separately. The qualifying clause “other things remaining the same” (ceteris paribus), uses to get over this difficulty. But in economic life, other things generally do not remain the same. Hence, economic laws are never exact enough to enable accurate predictions or prophecies existing made.

    Hypothetical: 

    Economic laws are hypothetical Economic laws are also hypothetical, i.e. They are conclusions drawn from certain assumptions or hypotheses. But in this, economic laws do not differ from other scientific laws. The laws of science also start from certain hypotheses and deduce certain consequences.

    Predictions are Difficult: 

    As regards making predictions the following example may note. The simple and exact laws of gravitation enable astronomers to make accurate forecasts. But in the case of tides, the level of water depends on so many factors (e.g., the strength of the attracting force, geo­graphical features of the country, etc.) that it is impossible to forecast the level accurately. Marshall, therefore, says, “The laws of econo­mics are to compare with the laws of tides rather than with the simple and exact laws of gravitation”.

    There are the Same Physical Laws: 

    Some laws dealt with in books of economics deal with inanimate nature, e.g., the Law of Dimini­shing Returns. These laws borrow from other sciences.

    Nature of Economic Laws:

    The following Nature of Economic Laws below are;

    The nature of economic laws is that they are less exact as compared to the laws of natural sciences like Physics, Chemistry, Astronomy, etc. An economist cannot predict with surety what will happen in the future in the economic domain. He can only say what is likely to happen shortly. The reasons why economic laws are not as exact as that of natural sciences are as follows:

    First

    Natural sciences deal with the lifeless matter. While economics, we are concerned with the man who endows with the freedom of or may act in whatever manner he likes. Nobody can predict with certainty his future actions. This element of uncertainty in human behavior results in making the laws of economics less exact than the laws of natural sciences.

    Secondly

    In economics, it is very difficult to collect factual data on which economic laws are to be based. Even if the data stands collected it may change at any moment due to sudden changes in the tastes of the people or their attitudes.

    Thirdly

    Many unknown factors affect the expected course of action and thus can easily falsify economic predictions. Dr. Marshall has devoted one chapter in his famous book “Principles of Economies” to discussing the nature of economic laws. He writes, that laws of economics are to compare with the laws of tides rather than with the simple and exact law of gravitation.

    The reason for comparing the laws of economics with the laws of tides by Marshall is that the laws of tides are also not exact. The rise of tides cannot be accurately predicted. It can only say that the tide expects to rise at a certain time. It may or may not rise. Strong wind may change its direction to the opposite side. Instead of rising may fall. So is the case with the laws of economics.

    Scientific or Natural or Physical Laws: 

    Economic laws are like scientific laws which trace out a causal relationship between two or more phenomena. As in natural sciences, a definite result expects to follow from a particular cause in economics. The law of gravitation states that things coming from above must fall to the ground at a specific rate, other things being equal. But when there is a storm, the gravitational force will reduce and the law will not work properly.

    As pointed out by Marshall, “The law of gravitation is, therefore, a statement of tendencies”. Similarly, economic laws are statements of tendencies. For instance, the law of demand states that other things remain the same, a fall in price leads to an extension in demand and vice versa. Again, some economic laws are positive like scientific laws. Such as the Law of Diminishing Returns which deals with inanimate nature.

    Since economic laws are like scientific laws, they are universally valid. According to Robbins, “Economic laws describe inevitable implications. If the data they postulate are given, then the consequences they predict necessarily follow. In this sense, they are on the same footing as other scientific laws.”

    Non-Precise like the Laws of Natural Sciences:

    Despite these similarities, economic laws are not as precise and positive as the laws of natural sciences. This is because economic laws do not operate with as much certainty as scientific laws. For instance, the law of gravitation must operate whatever the conditions may be. Any object coming from above must fall to the ground. But demand will not increase with the fall in price. If there is a depression in the economy because consumers lack purchasing power.

    Therefore, according to Marshall, “There are no economic tendencies. Which act as steadily and can measure as exactly as gravitation can, and consequently. There are no laws of economics. Which can compare for precision with the law of gravitation”. Their control of experimentation in the natural sciences and the natural scientist can test scientific laws very rapidly by altering natural conditions such as temperature and pressure in their experiments in the laboratory.

    But in economics

    Controlled experiments are not possible because an economic situation is never repeated exactly at another time. Moreover, the economist has to deal with the man who acts by his tastes, habits, idiosyncrasies, etc. The entire universe or that part of it in which he carries out his research is the economist’s laboratory. As a result, predictions concerning human behavior are liable to error.

    For instance, a price rise may not lead to a contraction in demand rather it may expand it. If people fear the shortage of goods in anticipation of war. Even if demand contracts as a result of the price rise. It is not possible to predict accurately how much the demand will contract. Thus economic laws “do not necessarily apply in every individual case. They may not be reliable in the ever-changing environment of the real economy. And they are in no sense, of course, inviolable.”

    Non-predictable like the Law of Tide:

    But accurate predictions are not possible in economics alone. Even sciences like biology and meteorology cannot predict or forecast events correctly. The law of tide explains why the tide is strong at the full moon and weak at the moon’s first quarter. On this basis, it is possible to predict the exact hour when the tide will rise. But this may not happen. It may rise earlier or later than the predicted time due to some unforeseen circumstances.

    Marshall, therefore, compared the laws of economics with the laws of tides “rather than with the simple and exact law of gravitation. For the actions of men are so various and uncertain that the best statements of tendencies, which we can make in a science of human conduct, must need be inexact and faulty.”

    Behaviorist:

    Most economic laws are behaviorist, such as the law of diminishing marginal utility, the law of Equimarginal utility, the law of demand, etc., which depend upon human behavior. But the behaviorist laws of economics are not as exact as the laws of natural sciences because they are based on human tendencies which are not uniform. This is because all men are not rational beings.

    Moreover, they have to act under the existing social and legal institutions of the society in which they live. As rightly pointed out by Prof. Schumpeter: “Economic laws are much less stable than are the ‘laws’ of any physical science…and they work out differently in different institutional conditions”

    Indicative:

    Unlike scientific laws, economic laws are not assertive. Rather, they are indicative. For instance, the Law of Demand simply indicates that other things being equal, quantity demanded varies inversely with price. But it does not assert that demand must fall when price increases.

    Hypothetical:

    Prof. Seligman characterized economic laws as “essentially hypothetical” because they assume ‘other things being equal and draw conclusions from certain hypotheses. In this sense, all scientific laws are also hypothetical as they too assume the ceteris paribus clause. For instance, other things being equal, a combination of hydrogen and oxygen in the proportion of 2:1 will form water. If, however, this proportion is varied or/and the required temperature and pressure are not maintained, water will not be formed.

    Still, there is a difference between hypothetical elements present in economic laws and against scientific laws. It is more pronounced in the former because economics deals with human behavior and natural sciences with the matter. But as compared with the laws of other social sciences, the laws of economics are less hypothetical but more exact, precise, and accurate.

    This is because economies possess the measuring rod of money which is not available to other social sciences like ethics, sociology, etc. which makes economics more pragmatic and exact. Despite this, economic laws are less certain than the laws of social sciences because the value of money does not always remain constant. Rather, it changes from time to time.

    Truisms or Axioms:

    Certain generalizations in economics may state as a truism. They are like axioms and do not have any empirical content, such as ‘saving is a function of income,’ ‘human wants are numerous’, etc. Such statements are universally valid and need no proof. So they are superior to scientific laws. But all economic laws are not like axioms and hence not universally valid.

    Historico-Relative:

    On the other hand, economists of the Historical School regarded economic laws as abstractions that are historical-relative, that is economic laws have only a limited application to a given time, place, and environment.

    They have limited validity to certain historical conditions and have no relevance to the analysis of social phenomena outside that. But Robbins does not agree with this view because according to him, economic laws are not historical-relative. They are simply relative to the existence of certain conditions which assume to give. If the assumptions are consistent with one another and if the process of reasoning is logical, economic laws would be universally valid.

    But these are big “ifs”. We, therefore, agree with Prof. Peterson that economic laws “are not detailed and photographically faithful reproductions of a portrait of the real world, but are rather simplified portraits whose purpose is to make the real world intelligible.”

    Economic Laws Meaning Definition Features Nature and Limitations
    Economic Laws: Meaning, Definition, Features, Nature, and Limitations. Image credit from #Pixabay.

    Limitation of Economic Laws:

    One major drawback of economic laws is they lack generality. For example, the laws developed to explain the nature and functioning of capitalist economies do not have any relevance to socialist countries. For example, Alfred Marshall developed the laws of demand and supply which apply in a free market in the absence of government intervention. Such laws do not apply in erstwhile countries like the former Soviet Union where the price (market) system yielded place to the planning system.

    In a planned economy, the market mechanism replaces by government allocation or ra­tioning. So, the question of applying the laws of demand and supply does not arise. Thus, economic laws lack generality and are not universally applicable. Furthermore, some laws of economics which have been developed in the context of advanced industrial countries may not find application in devel­oping countries like India.

    As V. K. R. V. Rao has pointed out, the multiplier principle, as enunciated by Keynes in the context of the advanced countries of the world, does not work in developing countries like India. This is attributable to the structure of such economies. Similarly, the Quantity Theory of Money has been developed in the context of industrially advanced countries. It seeks to establish an exact, proportional relationship between money and prices.

    But, it cannot explain’ the present price situation in India.

    Here, inflation is not a purely monetary phenomenon as predicted by the Quantity Theory. These two examples make one thing clear at least — the laws and theories of economics devel­oped in the context of advanced countries cannot be applied in developing countries like India. There is a feeling among some groups of economists that, people in developing countries like India behave and respond differently from those in advanced countries.

    For example, greater self-consumption of farmers in India explains why the supply response of agricultural commodi­ties is not always favorable in the event of a rise in the price of agricultural products. It is often observed that, if the price of a particular commodity rises, farmers produce less of it to maintain the same level of income. Thus,’ they not only produce less at a higher price but generate less marketable surplus when the price rises. Thus, the marketable surplus of, say, wheat varies inversely with its price.

    But, in developed countries, it is observed that, as usual, the supply curve of agricultural output slopes upward from left to right, and the marketable surplus increases when the price rises. All these examples make it abundantly clear that most of the laws and principles of economics which have been developed in the context of advanced countries cannot be applied in developing countries like India.

  • Difference between Traditional and Managerial Economics

    Difference between Traditional and Managerial Economics

    The primary difference between Traditional Economics and Managerial Economics; First, the Traditional economy is an original economic system in which traditions, customs, and beliefs help shape the goods and services the economy produces and the rules and manner of their distribution. Countries that use this type of economic system are often rural and farm-based. The concept of the study explains – What is traditional economics? Meaning, and What is Managerial economics? and their difference.

    Understanding and Learn, Explain the Difference between Traditional Economics and Managerial Economics!

    Also known as a subsistence economy, a traditional economy defines by bartering and trading. A Little surplus produces, and if any excess goods are made, they are typically given to a ruling authority or landowner.

    After, Managerial economics is the “application of the economic concepts and economic analysis to the problems of formulating rational managerial decisions”. It sometimes refers to as business economics and is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units.

    What is traditional economics? Meaning.

    Traditional economics refers to the more primitive principles of modern economics, which are commonly using in undeveloped countries, who have not yet embraced technical and globalization changes in the study of economics over the years. Traditional economics relies on the use of old cultures, trends, and customs in allocating rare resources to gain profit.

    A traditional economy will definitely rely on the traditions of heritage and how the previous generations have made their production activities, which will create the basis for the production of goods. The main production activities in the traditional economy include farming, livestock activities, and hunting. In countries with such traditional economic systems, Papua New Guinea, South America, parts of Africa, and the rural areas of Asia are including.

    What is managerial economics? Meaning.

    Managerial economics refers to the branch of economics, which derives from the subject matter of microeconomics, which considers houses and firms in the economy, and macroeconomics related to employment rates, interest rates, inflation rates, and other macroeconomic variables from the country are related to the complete completion.

    Managerial economics uses mathematics, statistics, management theory, economic data, and modeling techniques to help business managers manage their operations with maximum efficiency. They help managers make the right decisions in the allocation of rare resources such as land, labor, capital to achieve high profitability while reducing costs. Managerial economics helps managers decide which products to produce, how much to produce, what prices will determine, and what channels to use in sales and distribution.

    What is the Difference between Traditional Economics and Managerial Economics?

    The upcoming discussion will help you to differentiate between traditional and managerial economics.

    The difference in Traditional Economics:
    • Traditional Economics has both Micro and Macro aspects.
    • This is both positive (existing certain) and Normative Science.
    • This deals with Theoretical aspects only.
    • Here, problems are analyzing both from a Micro and Macro point of view.
    • It studies human behavior based on certain assumptions, but these assumptions do not hold good in Managerial Economics.
    • Here, we study only the economic aspects of the problems.
    • Here, we study principles underlying rent, wages, interest, and profits.
    • Traditional Economics scope is wide and it covers various areas.
    • Here, the efficiency of the firm is not studying.
    The difference in Managerial Economics:
    • It is essentially Micro in character.
    • This is essentially Normative (setting standard) in nature.
    • While it deals with Practical aspects.
    • It studies the activities of an individual firm or unit.
    • Managerial economics deals mainly with Practical problems.
    • Here, both economic and non-economic aspects of the problems are studying.
    • Here, we study mainly the principles of profit only.
    • While the scope of Managerial Economics is limited and its scope is not so wide as that of Traditional Economics.
    • Here, the most important task is to study how to improve the efficiency of the firm.

    Another Main difference between Traditional and Managerial in without table:

    Managerial Economics has been describing as economics apply to decision-making. It may view as a special branch of Economics. However, the main points of differences are the following:

    • Traditional Economics has both micro and macro aspects whereas Managerial Economics is essentially micro in character.
    • Economics is both positive and normative science but Managerial Economics is essentially normative in nature.
    • Economics deals mainly with the theoretical aspect only whereas Managerial Economics deals with the practical aspect.
    • Managerial Economics studies the activities of an individual firm or unit. Its analysis of problems is micro in nature, whereas Economics analyzes problems both from the micro and macro point of view.
    • Economics studies human behavior based on certain assumptions. But, these assumptions sometimes do not hold good in Managerial Economics as it concerns mainly with practical problems.
    • Under Economics we study only the economic aspect of the problems but under Managerial Economics we have to study. Both the economic and non-economic aspects of the problems.
    • Economics studies principles underlying rent, wages, interest, and profits. But in Managerial Economics we study mainly the principles of profit only.
    • Sound decision-making in Managerial Economics is considering to be the most important task for the improvement of the efficiency of the business firm. But in Economics it is not so.
    • The scope of Managerial Economics is limited and not so wide as that of Economics.

    Thus, it is obvious that Managerial Economics is very closely related to Economics. But, its scope is narrow as compared to Economics.

    Managerial Economics is also closely related to other subjects, viz., Statistics, Mathematics, and Accounting.

    A trained managerial economist integrates concepts and methods from all these disciplines bringing them to bear on the business problems of a firm.

    What is the difference between economics and managerial economics? Some Explanation.

    Both managerial economics and traditional economics include production, distribution, and consumption of goods and services, and are reflecting on the basic economic theory of using. The factors of production effectively for the production of both goods and services.

    The main difference between the branches of economics is that traditional economics is ancient. And, its development is done in undeveloped and less technologically advanced economies. While the result of managerial economics globalization and the development of economics involves making managerial decisions.

    Managerial economics uses sophisticated modeling systems and statistical data to make decisions regarding quantity, pricing and distribution channels, whereas, in traditional economics, the use of farming, hunting, and livestock activities uses by individuals to meet their daily consumption requirements. Includes.

    Difference between Traditional and Managerial Economics - ilearnlot
    Difference between Traditional and Managerial Economics, Image Credit to ilearnlot.com.

  • The relationship between Economic and Market Value Added!

    Whether a company has positive or negative Market Value Added (MVA)  depends on the level of rate of return compared to the cost of capital. All this applies to Economic Value Added (EVA) also. Stewart has defined the relationship between EVA and MVA. When a business earns a rate of return higher than its cost of capital, EVA is positive. In other words, investors are earning more than their investment in that business than they could elsewhere. In response, investors bid up share prices, increasing the value of their business and driving up its MVA. Similarly, investors discount the value of businesses that earn a return below their cost of capital. Also learned, The relationship between Economic and Market Value Added!

    Learn, Explain The relationship between Economic and Market Value Added! 

    Thus, MVA is an estimate made by the investors of the net present value of all current and expected future investments in the business. In other words, it can be said that MVA is same as NPV and can be calculated as the present values of all future EVAs. Similarly, it can be the present value of future free cash flows, because discounted EVA and discounted free cash flows are mathematical equivalents.

    What Does Economic Value Added (EVA)?

    What is the definition of economic value added? EVA compares the rate of return on invested capital with the opportunity cost of investing elsewhere. This is important for businesses to keep track of, particularly those businesses that are capital intensive. When calculating economic value added, a positive outcome means that the company is creating value with its capital investments.

    Definition: Economic value added (EVA) is a financial measurement of the return earned by a firm that is in excess of the amount that the company needs to earn to appease shareholders. In other words, it is a measure of an organization’s economic profit that takes into account the opportunity cost of invested capital and ultimately measures whether the organizational value was created or lost.

    What Does Market Value Added Mean?

    What is the definition of market value added? MVA is a vital concept that investors use to gauge how well the company has been using its capital. The state of MVA, either positive or negative, can reinforce or undermine the company’s current direction. If it is negative, the firm might decide to change directions in favor of a more value-oriented approach. Also, negative MVA signals to investors that the company is not using its capital effectively or efficiently. Thus, it’s not a good investment.

    Definition: Market value added (MVA) is a financial calculation that measures the capital that investors have contributed to a company in excess of the market value of the company. In other words, it measures if the firm has created positive value or destroyed value from its investors.

    From the definition of Market Value Added (MVA), the value of the firm can be expressed as Market Value = Capital + MVA of the firm.

    However, MVA is the present value of all future EVAs. Therefore, the value of the firm can be expressed as the sum of its capital; current EVA capitalized as perpetuity and the present value of all the expected future EVA improvements.

    Market Value = Capital + Value of current EVA as perpetuity+ Present value of expected EVA Improvement

    Since market value is dependent on the market implications of all future performance, market values are sensitive to the changes in current EVA as well as expected EVA improvement. This results in an interesting problem for the management. They need to decide the level of focus on generating current results and future prospects. The solution seems to be clear. Management must focus on producing the best results today a while making significant efforts for the future simultaneously. The stress has to be in the long term and short term perspective both.

    In a nutshell, the relationship between Economic Value Added (EVA) and Market Value Added (MVA)  can be summarized as follows:

    • The relationship between EVA and MVA is more complicated than the one between EVA and The firm value.
    • MVA of a firm reflects not only expected EVA of assets in place but also expected EVA from future projects.
    • To the extent that the actual EVA is smaller than expected EVA, the market value can decrease even if EVA is higher.

    Market Value Added (MVA)  is, thus, in a way best performance measure because it focuses on cumulative value added or lost on invested capital. It is the difference between the capital investors have put in business (cash in) and the value they could get by selling their claims (cash out). It is a focus on wealth in dollar or rupees rather than the rate of return in percentage. It, therefore, recognizes all value-adding investments even if than original rate of return.

  • EVA (Economic Value Added): Definition, Calculation, and Implementation!

    EVA (Economic Value Added): Definition, Calculation, and Implementation!

    Economic Value Added (EVA) is a value-based financial performance measure, an investment decision tool and it is also a performance measure reflecting the absolute amount of shareholder value created. The Concept of EVA (Economic Value Added): Definition of Economic Value Added, Calculation of Economic Value Added, Measurement of Economic Value Added, formula, and Implementation Economic Value Added!

    Learn, Explain EVA (Economic Value Added) Meaning, Definition, Calculation, and Implementation!

    It computes as the product of the “excess return” made on investment or investments and the capital invested in that investment or investments. Also learned, EVA (Economic Value Added) Meaning, Definition, Calculation, formula, and Implementation!

    “Economic Value Added (EVA) is the net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise or project. It is an estimate of true economic profit or the amount by which earnings exceed or fall short of the required minimum rate of return investors could get by investing in other securities of comparable risk.”

    Economic Value Added (EVA) Meaning and definition is a variation of residual income with adjustments to how one calculates income and capital. Stern Stewart & Co., a consulting firm based in New York, introduced the concept of EVA as a measurement tool in 1989 and trademarked it. The EVA concept often calls Economic Profit (EP) to avoid problems caused by trademarking.

    What is the Economic Value Added (EVA)?

    Economic Value Added is the financial performance measure that comes closer than any other to capture the true economic profit of an enterprise; Economic Profit = Total revenues from the capital – Cost of capital. Also, The basic idea of this criterion is to find, in microeconomics; where it says that the main goal of a company is the maximization of profit. However, it does not mean book profit (the difference between revenues and costs) but economical profit. The difference between economic and book profit is economic profit. It is the difference between revenues and economic costs, which includes book costs and opportunity costs.

    Opportunity costs present by the amount of money lost by not investing sources (like capital, labor, and so on) to the best alternative use. Opportunity costs, in reality, represent mainly by interests from equity capital including risk-reward and sometimes lost wages too. In short; Book profit = Revenues – Costs. This leads to the conclusion that economic profit appears when its amount is higher than “normal” profit derived from the average cost of capital invested both by creditors (cost interests) and owners– shareholders (opportunity costs). Also, This is the basic idea of the new measure, EVA.

    Calculation of EVA (Economic Value Added):

    Economic Value Added (EVA) calculator is an operational measure that differs from conventional earnings measures in two ways. First, it explicitly charges for the use of capital (residual income measure). Secondly, it adjusts reported earnings to minimize accounting distortions and to better match the timing of revenue and expense recognition. As such, wealth maximization correlates with EVA maximization. Also, A positive EVA indicates that a company is generating economic profits; a negative EVA indicates that it is not; A measure of a company’s financial performance based on the residual wealth calculated by deducting the cost of capital from its operating profit after taxes. It also knows as economic profit.

    Defines:

    Economic Value Added (EVA) is defined as the estimate of true economic profit, the amount by which earnings exceed or fall short of the required minimum rate of return investors could get by investing in other securities of comparable risk. It is the net operating profit minus the appropriate charge for the opportunity cost of capital investment in an enterprise (both debt and equity). Also, The capital charge is the most distinctive and important aspect of EVA. Under conventional accounting, most of the companies appear profitable.

    However, many are actually destroying shareholder value because the profits they earn are less than their cost of capital. Also, EVA corrects this error by explicitly recognizing that when managers employ capital, they must pay for it. By considering all capital costs, including the cost of equity, EVA shows the amount of wealth a business has created or destroyed in each reporting period.

    Formula:

    Expressed as a formula, Economic Value Added (EVA) for a given period can write as:

    Economic Value Added (EVA) = NOPAT – Cost of Capital Employed = NOPAT – WACC x CE

    Where 01;
    • NOPAT: Refers to the amount of profit remaining of the business after tax and adding back interest payments. Also, It can calculate as per accounting concept after making necessary adjustments for certain non-operating incomes and expenses.
    • WACC: Weighted Average Cost of Capital. It defines as the weighted average cost of both equity capital and debt. Also, It is the weighted average of both the specified costs with weights equal to the proportion of each in total capital. The tax shield of the debt adjusts with the cost of the debt.
    • CE: Capital employed or Invested capital refers to total assets (net of revaluation) net of non-interest-bearing liabilities. From an operating perspective, invested capital can define as Net Fixed Assets, plus investments plus Net Current Assets. Net Current Assets denote current assets net of Non-Interest Bearing Current Liabilities (NIBCLS). From a financing perspective, the same can define as Net Worth plus total borrowings. Total borrowings denote all interest-bearing debts.

    OR equivalently, if the rate of return defines as NOPAT /Capital Employed; then, it tums into a more revealing formula.

    EVA (Economic Value Added) = (Rate of Return – Cost of Capital) x Capital Employed

    Where 02;
    • Rate of Return: NOPAT /Capital Employed
    • Capital Employed: Total of the balance sheet – Non Interest Bearing Current Liabilities (NIBCL) in the beginning of the year
    • Cost of Capital: (Cost of equity x Proportion of equity in Capital) + (Cost of debt x Proportion of debt in Capital)(1- Tax)

    If Return on Investment defines as above after taxes; EVA can present with the following familiar terms:

    EVA (Economic Value Added) = (ROI – WACC) x Capital Employed

    Where 03;
    • Capital Employed: Net fixed assets – Revenue reserve – Capital Work in progress + Current assets – Funds Deployed outside the business – NIBCL
    Measure:

    EVA (Economic Value Added) measures by comparing Return on Capital Employed with Cost of Capita; also called Return Spread. A positive Return Spread indicates that earning is more than the cost of capital; thereby creating wealth for owners or stockholders. A negative Return Spread means earning is less than cost-of-capital; thus reducing the wealth of owners and stockholders. Economic Value Added (EVA) is an indicator of the market value of the service center’s owner’s equity, a measure especially important to closely-held companies; which do not have the benefit of a published stock price. For publicly traded companies, EVA correlates very closely with the stock price.

    Economic Value Added (EVA) is an estimate of true economic profit and a tool that focuses on maximizing shareholders’ wealth. Also, Companies best utilize EVA as a comprehensive management tool. EVA has the strategic importance of focusing management and employees on the company’s primary goal of maximizing shareholder value. With this goal in mind, EVA can use tactically in several ways including shareholder reporting, financial benchmarking, management decision-making tools, and a foundation for incentive compensation plans.

    Measurement of EVA (Economic Value Added):

    It must note that the measurement of Economic Value Added (EVA) can make by using either an operating or financing approach. Under the operating approach, deducting cash operating expenses and depreciation from sales derives NOPAT. Interest expense excludes because it considers as a financing charge. Also, Adjustments, which refer to as equity equivalent adjustments, design; to reflect economic reality and move income and capital to a more economically based value. These adjustments consider with cash taxes deducted to arrive at NOPAT. EVA then measure by deducting the company’s cost of capital from the NOPAT value. The amount of capital to use in the EVA calculations is the same under either the operating or financing approach but calculate differently.

    The operating approach starts with assets and builds up to invested capital, including adjustments for economically derived equity equivalent values. The financing approach, on the other hand, starts with debt and adds all equity and equity equivalents to arrive at the invested capital. Finally, the weighted average cost of capital; based on the relative values of debt and equity and their respective cost rates; use to arrive at the cost of capital multiplied by the capital employed and deducted from the NOPAT value. The resulting amount is the current period’s EVA.

    Implementing EVA (Economic Value Added):

    When a company decides to adopt EVA as a corporate performance measure; here is what it must do:

    • Step 1: Run an EVA analysis of the company; its publicly traded peers and business units.
    • Step 2: Draw up a definition of EVA that is simple and meets the company’s information needs, existing accounting data, organization, and management.
    • Step 3: Work out a compensation scheme that fits into the company’s business and culture. The incentive plan has to marry the EVA design with traditional concerns of shareholders and directors.
    • Step 4: Train all employees on the basics of EVA and how it affects shareholder value.
    • Step 5: Demonstrate the difference between EVA-led decisions vis-à-vis conventional methods through computer simulation exercises.
    Positives of EVA:
    • No ceiling on the amount managers can take home as incentive pay.
    • Managers think like, act like, and are paid like owners.
    • Targets are set over a time horizon that is more than one year – usually three to five years – forcing a long-term view into managerial decision-making.
    • Cuts capital cost and inculcates financial discipline among employees.
    • Increasing EVA directly benefits the shareholder and has been found to have a positive influence on a company’s stock price.
    Negatives of EVA:
    • Involves lots of complexity. Globally, Stern Stewart is said, in some cases, to make as many as 165 adjustments to work out the weighted average capital cost of companies.
    • Works better at the individual level than team level, unless goals are appropriately structured.
    • May make companies risk-averse. Also, New investments that look risky or difficult to quantify in terms of expected payback may never be made using EVA.
    EVA (Economic Value Added) Meaning Definition Calculation and Implementation Image
    EVA (Economic Value Added): Meaning, Definition, Calculation, and Implementation; Image from Pixabay.