Unit 24 Underground Economy
"Underground economy" is a term that refers to those individuals and businesses that deal in cash and/or use other schemes to conceal their activities and their true tax liability from government licensing, regulatory, and taxing agencies. Underground economy is also referred to as tax evasion, tax fraud, cash pay, tax gap, payments under-the-table, and off-the-books.
When businesses operate in the underground economy, they illegally reduce the amount of money expensed for insurance, payroll taxes, licenses, employee benefits, safety equipment, and safety conditions. These types of employers then gain an unfair competitive advantage over businesses that comply (follow) with the various business laws. This causes unfair competition in the marketplace and forces law-abiding businesses to pay higher taxes and expenses.
Employees of the businesses that do not comply are also affected. Their working conditions may not meet the legal requirements, which can put them in danger. Their wage earnings may also be less than those required by law, and benefits they are entitled to can be denied or delayed because their wages are not properly reported.
Unit 25 Preferred and Common Stocks
Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preferred stock is that the investor has a greater claim on the company's assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders. In general, there are four different types of preferred stock: cumulative preferred stock, non-cumulative preferred stock, participating preferred stock, and convertible preferred stock. also called preference shares.
Unit 26 Economic Functions of Government
Providing legal and social framework
Set legal status of business enterprises, ensures rights of private ownership, and allows the making and enforcement of contracts. Services provided include police powers to maintain internal orders, a system of standards for measuring the weight and quality of products, and a system of money to facilitate the exchanges of goods and services.
Maintaining competition
Competition is basic regulatory mechanism in a market economy. To control monopoly primarily in two ways: a) Regulation and ownership --for some natural monopolies, regulate the prices and set the services standards or take public ownership of monopolies.
Redistribution of income
The market system is impersonal. It may distribute income with more inequality than society desires.
Society chooses to redistribute income through a variety of government policies and programs:
a) Transfers: transform payment eg. welfare cheques
b) Market intervention: by acting to modify the prices that would be established by market forces. eg. providing farmers with above-market prices for their outputs.
c) Taxation
4) Reallocation of resources
Market failure occurs when competitive market system a) produce the "wrong" amount of certain goods or services--spillovers,
b) fails to allocate any resources whatsoever to the production of certain goods and services whose output is economically justified--pubic goods
Spillover occurs when some of costs of benefits of a good are passed on to or "spill over to" parties other than the immediate buyer or seller. Spillover Costs: production or consumption costs that are inflicted on a third party without compensation. eg. environmental pollution. Correction means: Legislation and a less direct action of Specific Taxes
Spillover benefits: eg. Education. (tends to under allocation of resources) Correction means: Subsidize consumers(eg. lower interest student loan), Subsidize suppliers (provide budgets or funds), Provide goods via government. public goods and quasi-public goods: exclusion principle does not apply to public goods; there is no effective way of excluding individuals from their benefits once those good come into existence. (free-rider-problem). quasi-public goods --spillover benefits good production owned by government.
5) Stabilizing the economy
a) unemployment: adjusting government spending and taxation. Increase its own spending on public goods and services or reduct taxes to stimulate pviate spending or reduce interest rates to promote mroe private borrowing and spending.
b) Inflation:
UNIT 27 Market Segmentation
The process of defining and subdividing a large homogenous market into clearly identifiable segments having similar needs, wants, or demand characteristics. Its objective is to design a marketing mix that precisely matches the expectations of customers in the targeted segment.
The four basic market segmentation-strategies are based on: behavioral, demographic, psychographic, and geographical differences.
General market segmentation is presented on image 27.1.
Market segmentation
Service type
Business type
Not
regulated
Highly
regulated
Moderately
regulated
A market segment is a classification of potential private or corporate customers by one or more characteristics, in order to identify groups of customers, which have similar needs and demand similar products and/or services concerning the recognized qualities of these products, e.g. functionality, price, design, etc.
An ideal market segment meets all of the following criteria:
It is internally homogeneous (potential customers in the same segment prefer the same product qualities).
It is externally heterogeneous (potential customers from different segments have basically different quality preferences).
It responds similarly to a market stimulus.
It can be cost-efficiently reached by market intervention.
A customer is allocated to one market segment by the customer´s individual characteristics. Often cluster analysis and other statistical methods are used to figure out those characteristics, which lead to internally homogeneous and externally heterogeneous market segments.
“Positive” market segmentation
Market segmenting is dividing the market into groups of individual markets with similar wants or needs that a company divides into distinct groups which have distinct needs, wants, behavior or which might want different products & services. Broadly, markets can be divided according to a number of general criteria, such as by industry or public versus private. Although industrial market segmentation is quite different from consumer market segmentation, both have similar objectives. All of these methods of segmentation are merely proxies for true segments, which don't always fit into convenient demographic boundaries.
Consumer-based market segmentation can be performed on a product specific basis, to provide a close match between specific products and individuals. However, a number of generic market segment systems also exist, e.g. the system provides a broad segmentation of the population of the United States based on the statistical analysis of household and geodemographic data.
The process of segmentation is distinct from positioning (designing an appropriate marketing mix for each segment). The overall intent is to identify groups of similar customers and potential customers; to prioritize the groups to address; to understand their behavior; and to respond with appropriate marketing strategies that satisfy the different preferences of each chosen segment. Revenues are thus improved.
Improved segmentation can lead to significantly improved marketing effectiveness. Distinct segments can have different industry structures and thus have higher or lower attractiveness
Once a market segment has been identified (via segmentation), and targeted (in which the viability of servicing the market intended), the segment is then subject to positioning. Positioning involves ascertaining how a product or a company is perceived in the minds of consumers.
This part of the segmentation process consists of drawing up a perceptual map, which highlights rival goods within one's industry according to perceived quality and price. After the perceptual map has been devised, a firm would consider the marketing communications mix best suited to the product in question.
UNIT 28 Value Added Tax
A value added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits (перечисляет) to the government the difference between these two amounts, and retains the rest for themselves to offset (компенсировать) the taxes they had previously paid on the inputs.
The "value added" to a product by a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer (конечный потребитель) is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products.
VAT was first introduced in 1954. Initially directed at large businesses, it was extended over time to include all business sectors.
UNIT 29 Bull and bear market
A Bull market is associated with increasing investor confidence, and increased investing in anticipation of future price increases. A bullish trend in the stock market often begins before the general economy shows clear signs of recovery.
Bull. An investor who thinks the market, a specific security or an industry will rise. Investors who takes a bull approach will purchase securities under the assumption that they can be sold later at a higher price.
A Bear market is a general decline in the stock market over a period of time. It is a transition from high investor optimism to widespread investor fear and pessimism. According to The Vanguard Group, "While there’s no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period." It is sometimes referred to as "The Heifer Market" due to the paradox with the above subject.
Examples
A bear market followed the Wall Street Crash of 1929 and erased 89% (from 386 to 40) of the Dow Jones Industrial Average's market capitalization by July 1932, marking the start of the Great Depression. After regaining nearly 50% of its losses, a longer bear market from 1937 to 1942 occurred in which the market was again cut in half. Another long-term bear market occurred from about 1973 to 1982, encompassing the 1970s energy crisis and the high unemployment of the early 1980s. Yet another bear market occurred between March 2000 and October 2002. The most recent examples occurred between October 2007 and March 2009.
Bear An investor who believes that a particular security or market is headed downward. Bears attempt to profit from a decline in prices. Bears are generally pessimistic about the state of a given market.
For example, if an investor were bearish on the S&P 500 they would attempt to profit from a decline in the broad market index. Bearish sentiment can be applied to all types of markets including commodity markets, stock markets and the bond market.
Bear Market A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20\% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.
A bear market should not be confused with a correction, which is a short-term trend that has a duration of less than two months. While corrections are often a great place for a value investor to find an entry point, bear markets rarely provide great entry points, as timing the bottom is very difficult to do. Fighting back can be extremely dangerous because it is quite difficult for an investor to make stellar gains during a bear market unless he or she is a short seller.
UNIT 30 Franchising
A form of business organization in which a firm which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor's trade name and usually with the franchisor's guidance, in exchange for a fee. Some of the most popular franchises in the United States include Subway, McDonalds, and 7-Eleven.
Franchising began back in the 1850's when Isaac Singer invented the sewing machine. In order to distribute his machines outside of his geographical area, and also provide training to customers, Singer began selling licenses to entrepreneurs in different parts of the country. In 1955 Ray Kroc took over a small chain of food franchises and built it into today's most successful fast food franchise in the world, now known as McDonald's. McDonald's currently has the most franchise units worldwide of any franchise system.
UNIT 31 Mergers and acquisitions
Mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture.
An acquisition is the purchase of one business or company by another company or other business entity. Consolidation occurs when two companies combine together to form a new enterprise altogether, and neither of the previous companies survives independently. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquireee or merging company (also termed a target) is or is not listed on public stock markets. An additional dimension or categorization consists of whether an acquisition is friendly or hostile.
A merger refers to the process whereby at least two companies combine to form one single company. Business firms make use of mergers and acquisitions for consolidation of markets as well as for gaining a competitive advantage in the industry.
Merger types can be broadly classified into the following five subheads as described below. They are Horizontal Merger, Conglomeration, Vertical Merger, Product-Extension Merger and Market-Extension Merger.
Horizontal Merger refers to the merger of two companies who are direct competitors of one another. They serve the same market and sell the same product.
Conglomeration refers to the merger of companies, which do not either sell any related products or cater to any related markets. Here, the two companies entering the merger process do not possess any common business ties.
Vertical Merger is effected either between a company and a customer or between a company and a supplier.
Product-Extension Merger is executed among companies, which sell different products of a related category. They also seek to serve a common market. This type of merger enables the new company to go in for a pooling in of their products so as to serve a common market, which was earlier fragmented among them.
Market-Extension Merger occurs between two companies that sell identical products in different markets. It basically expands the market base of the product.
Distinction between mergers and acquisitions
Although often used synonymously, the terms merger and acquisition mean slightly different things. The legal concept of a merger (with the resulting corporate mechanics, statutory merger or statutory consolidation, which have nothing to do with the resulting power grab as between the management of the target and the acquirer) is different from the business point of view of a "merger", which can be achieved independently of the corporate mechanics through various means such as "triangular merger", statutory merger, acquisition, etc. When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.
UNIT 32 Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants.
Oligopoly is a common market form. As a quantitative description of oligopoly, the four-firm concentration ratio is often utilized. This measure expresses the market share of the four largest firms in an industry as a percentage. Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may employ restrictive trade practices (collusion, market sharing etc.) to raise prices and restrict production in much the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel.
Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be actual communication between companies)–for example, in some industries there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.
In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition. The competition in an oligopoly can be greater than when there are more firms in an industry if, for example, the firms were only regionally based and did not compete directly with each other.
Thus the welfare analysis of oligopolies is sensitive to the parameter values used to define the market's structure. In particular, the level of dead weight loss is hard to measure. The study of product differentiation indicates that oligopolies might also create excessive levels of differentiation in order to stifle competition.
General characteristics of oligopoly is presented in table32.1
Table 32.1
General characteristics of oligopoly
|
Characteristic |
Definition |
1 |
Profit maximisation conditions: |
An oligopoly maximises profits by producing where marginal revenue equals marginal costs |
2 |
Ability to set price: |
Oligopolies are price setters rather than price takers |
3 |
Entry and exit |
Barriers to entry are high.The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market |
4 |
Long run profits |
Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits. |
5 |
Product differentiation |
Product may be homogeneous (steel) or differentiated (automobiles).[ |
UNIT 33 Free Market
A free market is a competitive market where prices are determined by supply and demand. It is primarily found in countries where economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts. Free markets differ from situations encountered in controlled markets or a monopoly, which can introduce price deviations (изменение) without any changes to supply and demand. Advocates of a free market traditionally consider the term to imply that the means of production is under private and not state control or co-operative ownership. This is the contemporary use of the term "free market" by economists and in popular culture; the term has had other uses historically.
A free-market economy is one within which all markets are unregulated by any parties other than market participants. In its purest form, the government plays a neutral role in its administration and legislation of economic activity, neither limiting it (by regulating industries or protecting them from internal/external market pressures) nor actively promoting it (by owning economic interests or offering subsidies to businesses or R&D – research and development).
The theory holds that within an ideal free market, goods and services are voluntarily exchanged at a price arranged solely by the mutual consent of sellers and buyers. By definition, buyers and sellers do not coerce each other, in the sense that they obtain each other's property rights without the use of physical force, threat of physical force, or fraud, nor are they coerced by a third party (such as by government via transfer payments) and they engage in trade simply because they both consent and believe that what they are getting is worth more than or as much as what they give up. Price is the result of buying and selling decisions as described by the theory of supply and demand.
Free markets contrast sharply with controlled markets or regulated markets, in which governments more actively regulate prices and/or supplies, directly or indirectly, which according to free-market theory causes markets to be less efficient. Where substantial state intervention exists, the market is a mixed economy. Where the state or co-operative association of producers directly manages the economy to achieve stated goals, economic planning is said to be in effect; when economic planning entirely substitutes market activity, the economy is a Command economy.
In the marketplace, the price of a good or service helps communicate consumer demand to producers and thus directs the allocation of resources toward satisfaction of consumers as well as investors. In a free market, the system of prices is the result of a vast number of voluntary transactions, rather than of political decrees as in a controlled market. The freer the market, the more truly the prices will reflect consumer habits and demands, and the more valuable the information in these prices are to all players in the economy. Through free competition between vendors for the provision of products and services, prices tend to decrease, and quality tends to increase. A free market is not to be confused with a perfect market where individuals have perfect information and there is perfect competition.
UNIT 34 Barriers to International Trade
Free trade refers to the elimination of barriers to international trade. The most common barriers to trade are tariffs, quotas, and nontariff barriers.
A tariff is a tax on imports, which is collected by the federal government and which raises the price of the good to the consumer. Also known as duties or import duties, tariffs usually aim first to limit imports and second to raise revenue.
A quota is a limit on the amount of a certain type of good that may be imported into the country. A quota can be either voluntary or legally enforced.
Nontariff barriers, such as regulations calling for a certain percentage of locally produced content in the product, also have the same effect, but not as directly.
Tariffs come in different forms, mostly depending on the motivation, or rather the stated motivation.
Other nontariff barriers include packing and shipping regulations, harbor and airport permits, and onerous customs procedures, all of which can have either legitimate or purely anti-import agendas, or both.
North American Free Trade Agreement
The North American Free Trade Agreement (NAFTA) is an agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994. It superseded (вытеснять) the Canada – United States Free Trade Agreement between the U.S. and Canada. In terms of combined GDP of its members, as of 2010 the trade bloc is the largest in the world. The North American Free Trade Agreement (NAFTA) has two supplements (дополнение), the North American Agreement on Environmental Cooperation (NAAEC) and the North American Agreement on Labor Cooperation (NAALC).
UNIT Productivity
Productivity is a measure of the efficiency of production. Productivity is a ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output divided by the total input. Productivity is a measure of output from a production process, per unit of input.
At the national level, productivity growth raises living standards because more real income improves people's ability to purchase goods and services, enjoy leisure, improve housing and education and contribute to social and environmental programs. Productivity growth is important to the firm because it means that the firm can meet its (perhaps growing) obligations to customers, suppliers, workers, shareholders, and governments (taxes and regulation), and still remain competitive or even improve its competitiveness in the market place.
Characteristic of production
Economic well-being is created in a production process. Production means, in a broad sense, all economic activities that aim directly or indirectly to satisfy human needs. The degree to which the needs are satisfied is often accepted as a measure of economic well-being.
The satisfaction of needs originates from the use of the commodities which are produced. The need satisfaction increases when the quality-price-ratio of the commodities improves and more satisfaction is achieved at less cost. This kind of economic well-being cannot be measured with production data.
Economic well-being also increases due to the growth of incomes that are gained from the more efficient production. The most important forms of production are market production, public production and production in households. In order to understand the origin of the economic well-being we must understand these three processes. All of them have production functions of their own which interact with each other. Market production is the prime source of economic well-being and therefore the “primus motor” of the economy. Productivity is in this system the most important feature and an essential source of incomes.
Main processes of a producing company
A producing company can be divided into sub-processes in different ways; yet, the following five are identified as main processes, each with a logic, objectives, theory and key figures of its own. It is important to examine each of them individually, yet, as a part of the whole, in order to be able to measure and understand them. The main processes of a company are as follows:
real process
income distribution process
production process
monetary process
market value process
Productivity is created in the real process, productivity gains are distributed in the income distribution process and these two processes constitute the production process. The production process and its sub-processes, the real process and income distribution process occur simultaneously, and only the production process is identifiable and measurable by the traditional accounting practices. The real process and income distribution process can be identified and measured by extra calculation, and this is why they need to be analysed separately in order to understand the logic of production performance.
Real process generates the production output from input, and it can be described by means of the production function. It refers to a series of events in production in which production inputs of different quality and quantity are combined into products of different quality and quantity. Products can be physical goods, immaterial services and most often combinations of both. The characteristics created into the product by the manufacturer imply surplus value to the consumer, and on the basis of the price this value is shared by the consumer and the producer in the marketplace. This is the mechanism through which surplus value originates to the consumer and the producer likewise. Surplus value to the producer is a result of the real process, real income, and measured proportionally it means productivity.
Income distribution process of the production refers to a series of events in which the unit prices of constant-quality products and inputs alter causing a change in income distribution among those participating in the exchange. The magnitude of the change in income distribution is directly proportionate to the change in prices of the output and inputs and to their quantities. Productivity gains are distributed, for example, to customers as lower product sales prices or to staff as higher income pay.
Davis has deliberated[2] the phenomenon of productivity, measurement of productivity, distribution of productivity gains, and how to measure such gains. He refers to an article[3] suggesting that the measurement of productivity shall be developed so that it ”will indicate increases or decreases in the productivity of the company and also the distribution of the ’fruits of production’ among all parties at interest”. According to Davis, the price system is a mechanism through which productivity gains are distributed, and besides the business enterprise, receiving parties may consist of its customers, staff and the suppliers of production inputs. In this article, the concept of ”distribution of the fruits of production” by Davis is simply referred to as production income distribution or shorter still as distribution.
The production process consists of the real process and the income distribution process. A result and a criterion of success of the owner is profitability. The profitability of production is the share of the real process result the owner has been able to keep to himself in the income distribution process. Factors describing the production process are the components of profitability, i.e., returns and costs. They differ from the factors of the real process in that the components of profitability are given at nominal prices whereas in the real process the factors are at periodically fixed prices.
Monetary process refers to events related to financing the business. Market value process refers to a series of events in which investors determine the market value of the company in the investment markets.
UNIT 36 ECONOMIC GROWTH
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs (labour, capital, material, energy, etc.) for a given amount of output.[1] Lowered cost increases demand for goods and services, which also results in capital investment to increase capacity. New capacity is more efficient because of new technology, improved methods and economies of scale. This leads to further price reductions, which further increases demand, until markets become saturated due to diminishing marginal utility. This relationship is known as the Salter cycle.[2][3]
Economic growth is also the result of population growth and of the introduction of new products and services.
The real process generates the real output and the real income of production. Economic growth means the same as the growth of real output. The real process can be described by means of the production function. The production function is a graphical or mathematical expression showing the relationship between the inputs used in production and the output achieved. Both graphical and mathematical expressions are presented and demonstrated.
Production is a process of combining various material inputs and immaterial inputs (plans, know-how) in order to make something for consumption (the output). The methods of combining the inputs of production in the process of making output are called technology. Technology can be depicted mathematically by the production function which describes the relation between input and output. The production function can be used as a measure of relative performance when comparing technologies.
The production function is a simple description of the mechanism of economic growth. Economic growth is defined as any production increase of a business or nation (whatever you are measuring). It is usually expressed as an annual growth percentage depicting growth of the company output (per entity) or the national product (per nation). Real economic growth consists of two components. These components are an increase in production input and an increase in productivity.
UNIT PRODUCTION MODELS
A production model is a numerical description of the production process and is based on the prices and the quantities of inputs and outputs. There are two main approaches to operationalize the concept productivity. We can use mathematical formulae, which are used in macroeconomics or arithmetical models,which are used in microeconomics and management accounting. We do not present the former approach here but refer to the survey “Growth accounting” by Hulten 2009. We use here arithmetical models because they are like the models of management accounting, illustrative and easily understood and applied in practice. Furthermore they are integrated to management accounting. There are different production models according to different interests. Here we use production income model, productivity model and growth accounting model in order to demonstrate productivity as a phenomenon and a measureable quantity.
Production income model
The scale of success run by a going concern is manifold, and there are no criteria that might be universally applicable to success. Nevertheless, there is one criterion by which we can generalise the rate of success in production. This criterion is the ability to produce surplus value. As a criterion of profitability, surplus value refers to the difference between returns and costs, taking into consideration the costs of equity in addition to the costs included in the profit and loss statement as usual. Surplus value indicates that the output has more value than the sacrifice made for it, in other words, the output value is higher than the value (production costs) of the used inputs. If the surplus value is positive, the owner’s profit expectation has been surpassed.
Productivity model
The next step is to describe a productivity model by help of which it is possible to calculate the results of the real process, income distribution process and production process. The starting point is a profitability calculation using surplus value as a criterion of profitability. The surplus value calculation is the only valid measure for understanding the connection between profitability and productivity or understanding the connection between real process and production process. A valid measurement of total productivity necessitates considering all production inputs, and the surplus value calculation is the only calculation to conform to the requirement.
The process of calculating is best understood by applying the term ceteris paribus, i.e. "all other things being the same," stating that at a time only the impact of one changing factor be introduced to the phenomenon being examined. Therefore, the calculation can be presented as a process advancing step by step. First, the impacts of the income distribution process are calculated, and then, the impacts of the real process on the profitability of the production.
Growth accounting model
Growth accounting model is used in economics to account the contribution of different factors of production to economic growth. The principle of the accounting model is simple. The weighted growth rates of inputs (factors of production) are subtracted from the weighted growth rates of outputs. Because the accounting result is obtained by subtracting it is often called a “residual”. The residual is often defined as the growth rate of output not explained by the share-weighted growth rates of the inputs
UNIT 38 Substitute Goods
In economics, one way we classify goods (two or more) is by examining the relationship of the demand schedules when the price of one good changes. This relationship between demand schedules leads economists to classify goods as either substitutes or complements. Substitute goods are goods which, as a result of changed conditions, may replace each other in use (or consumption)[1]. A substitute good, in contrast to a complementary good, is a good with a positive cross elasticity of demand. This means a good's demand is increased when the price of another good is increased. Conversely, the demand for a good is decreased when the price of another good is decreased. If goods A and B are substitutes, an increase in the price of A will result in a leftward movement along the demand curve of A and cause the demand curve for B to shift out. A decrease in the price of A will result in a rightward movement along the demand curve of A and cause the demand curve for B to shift in.
Classic examples of substitute goods include margarine and butter, tea and coffee. Substitute goods not only occur on the consumer side of the market but also the producer side. Substitutable producer goods would include: petroleum and natural gas (used for heating or electricity). The degree to which a good has a perfect substitute depends on how specifically the good is defined. Take for example, the demand for Rice Krispies cereal, which is a very narrowly defined good as compared to the demand for cereal generally. The fact that one good is substitutable for another has immediate economic consequences: insofar (поскольку) as one good can be substituted for another, the demand for the two kinds of good will be bound together by the fact that customers can trade off one good for the other if it becomes advantageous to do so.