BASIC MODULE

ECONOMIC THOUGHT:
The history of economic thought deals with different thinkers
and theories in the subject that became political
economy and economics, from the ancient world to the
present day in the 21st Century. This field encompasses many
disparate schools of economic thought. Ancient Greek writers
such as the philosopher Aristotle examined ideas about the
art of wealth acquisition, and questioned whether property is
best left in private or public hands. In the Middle
Ages, scholasticists such as Thomas Aquinas argued that it was
a moral obligation of businesses to sell goods at a just price.

 What is Economics:
Economics is the study of how society uses its limited
resources. Economics is a social science that deals with
the production, distribution, and consumption of goods
and services.
Microeconomics vs. Macroeconomics: An
Overview:
Economics is divided into two different categories:
microeconomics and macroeconomics. Microeconomics is the
study of individuals and business decisions,
while macroeconomics looks at the decisions of countries and
governments.
While these two branches of economics appear to be
different, they are actually interdependent and complement
one another since there are many overlapping issues between
the two fields.
Microeconomics

Microeconomics is the study of decisions made by

people and businesses regarding the allocation of resources
and prices of goods and services. It also takes into account
taxes and regulations created by governments.

Microeconomics focuses on supply and demand and

other forces that determine the price levels in the economy. It
takes what is referred to as a bottom-upapproach to analyzing
the economy.
 In other words, microeconomics tries to understand human
choices and resource allocation.
Having said that, microeconomics does not try to answer or
explain what forces should take place in a market. Rather, it
tries to explain what happens when there are changes in
certain conditions.
For example, microeconomics examines how a company could
maximize its production and capacity so that it could lower
prices and better compete in its industry. A lot of
microeconomic information can be gleaned from the financial
statements.

Microeconomics involves several key

principles including (but not limited to):
 Demand, Supply, and Equilibrium: Prices are determined
by the theory of supply and demand. Under this theory,
 suppliers offer the same price demanded by consumers in
a perfectly competitive market. This creates economic
equilibrium.
 Production Theory: This is the study of production.
 Costs of Production: According to this theory, the price of
goods or services is determined by the cost of the
resources used during production.
 Labor Economics: This principle looks at workers and
employers, and tries to understand the pattern of wages,
employment, and income.

MACRO_ECONOMICS:
Macroeconomics, on the other hand, studies the behavior of a
country and how its policies affect the economy as a whole. It
analyzes entire industries and economies, rather than
individuals or specific companies, which is why it's a top-down
approach. It tries to answer questions like "What should the
rate of inflation be?" or "What stimulates economic growth?"

Macroeconomics examines economy-wide phenomena such

as gross domestic product (GDP) and how it is affected by
changes in unemployment, national income, rate of growth,
and price levels.
Macroeconomics analyzes how an increase or decrease in net
exports affects a nation's capital account, or how GDP would
be affected by the unemployment rate.

Macroeconomics focuses on aggregates and econometric

correlations, which is why it is used by governments and their
agencies to construct economic and fiscal policy. Investors of
mutual funds or interest rate-sensitive securities should keep
an eye on monetary and fiscal policy. Outside of a few
meaningful and measurable impacts, macroeconomics doesn't
offer much for specific investments.
John Maynard Keynes is often credited as the founder of
macroeconomics, as he initiated the use of monetary
aggregates to study broad phenomena. Some
economists dispute his theory, while many of those who use it
disagree on how to interpret it.
Statistics in Economics:
A lot of economic experts have their fair share of opposition
and support for the policies put forward by our finance
minister. Of course, these future-defining policies aren’t a
shot in the dark. So how are these formulated? The answer is
statistics, and specifically statistics in economics.

What is Statistics in Economics?

Generally, the subject matter of statistics deals with the
quantification of data. It revolves around concrete figures to
represent qualitative information. Simply, it is a collection of
data. But that’s not all. As economics students, we need to
learn about the techniques of dealing with a collection of
data, tabulation, classification, and presentation of data.
Further, we need to learn about reduction and condensation
of data. Lastly, we also need to gain insights into the
techniques for analysis and interpretation of data.
Statistics in a Plural Sense:
We are concerned with statistics in economics in its plural
sense. That is to say, statistics are numerical statements or
quantitative data in scenarios placed in relation to each other.
In simpler words, a way to identify a plural statistical
statement is that there should be an aggregate for an entity
that is placed in comparison with another entity. For example,
an average Indian is expect to live for 65 years compared to a
mere 57 in Bangladesh.
Features of Statistics in its Plural Sense:
 It is numerically expressed: Statistics in economics deals
with numbers and is quantitative. Qualitative adjectives
like rich, poor, tall etc. have no attached significance in
the statistical universe.
 Reasonably accurate: A statistical conclusion should be
reasonably accurate which depends on the purpose of an
investigation, its nature, size and available resources.
 Can involve estimation: If the field of study is large, for
example, the number of people attending a rally, then a
fair bit of estimation can do the trick. However for small
fields of study, take, for example, the number of students
in each field of study in a college, exact number
calculation is easy and essential.

 Systematic collection of data: Collection of data should

be done systematically, which means, accumulating just
raw data without any information about its origin,
purpose etc. is not valid in the statistical universe.
 Relative: Statistics in economics in its plural sense has the
feature of comparability. This means that the same kind
of data from different sources can be compared.
 Multiple factors: Statistics is affected by a large number
of factors and not just a single factor. For example rise in
 the price of a commodity is not because of a change in
one factor but it is an effect of a large number of factors.
 Aggregation: Statistics is a game of averages or
aggregates. A number expressed for a single entity is no
way related to statistics. For example, the height of a
single student is not a statistical data but the average
height of students in a class is.

Statistics in its Singular Sense:

Whenever we employ statistical methods for the collection,
classification, presentation, analysis, and interpretation of
quantitative data, we term statistics as a singular noun.
Further, this involves grasping the various stages of the
statistical study. Each stage has its respective tools to effect a
particular job. These are:
 Stage 1- Collection of data: We first need to collect
statistical data to commence the journey for statistical
study. Census and sampling techniques are generally
used for this stage.
 Stage 2- Organisation of data: Of course data in a raw or
chaotic format is hard to interpret. This is the reason the
second stage deals with the organization of the collected
data. The organization of data is done with the help of
arrays of data and tally bars.
 Stage 3- Presentation of data: After organization, this
data needs to be nicely presented. Presentation of data is
widely achieved with the help of tables, graphs, and
diagrams.
 Stage 4- Analysis of data: Before moving on to the final
stage, we need to first find percentages, averages and so
on to draw inferences about the data. Percentages,
averages, correlation and regression coefficients form the
toolbox for analysis of data.
 Stage5- Interpretation of data: Finally, we need to
interpret the data and hence conclude or form opinions
about the data. This is done with the help of magnitude
of percentages, averages, and degree of relationship
between different economic variables.
Positives of Statistical study:
It’s impossible now to imagine economics without its
statistical section. It has emerged as a major player and
pushed economics to new heights by making it more of a
concrete science. The various positives about statistics in
economics are:
1. Quantitative Expression
As has been mentioned time and again, statistics adds a touch
of reliability and concreteness to economics by quantitatively
expressing data. Evidently, our first step towards solving an
economic problem is to gain an idea about its magnitude
using statistical data.
2. Deduction of Economic Theories
A statistical agreement is a very significant step towards
establishing a general statement about economic entities.
Therefore, statistics in economics helps in establishing
theoretical concepts and models by providing evidence.
3. Identification of Patterns and forecasting Economic Events
Armed with statistical tools, economists can easily study data
for a particular purpose and identify patterns in the data.
What it does is puts them in a great position to predict future
trends. Moreover, such knowledge can be used for future
planning.
4. Formulation of Policies
The policies introduced can make or break the progress of a
nation. Such important decisions are made after a rigorous
study of the nation’s statistical data. In fact, this is done with
the help of statistical tools.
5. Economic Equilibrium
Economic equilibrium is the point of operation of both
producers and consumers. This is because, at this point, both
of them are satisfied with the events in the market.
Remember that market equilibrium id deduced with the help
of statistics in economics.
6. Inter-sectoral and Inter-temporal Comparisons
Comparisons for a department of inquiry in terms of time or
sectors facilitates the purpose of comparison. This means it
allows for a wider sense of comparison and also helps in
checking progress. Further intersectoral comparisons mean
comparison across different sectors. Whereas, inter-temporal
comparisons means comparison across different time periods.
Statistical Limitations
Similar to everything, statistics in economics are also not free
of limitations. These are as follows:
1. Only Quantitative Study
The biggest advantage of statistics is also one limitation of the
same. Although it is good at studying quantitative data, it fails
at analyzing qualitative entities like honesty, wisdom, health
etc.
2. Study of Aggregates
Another shortcoming of statistics is that it deals only with
aggregates and cannot handle data about a single entity.
3. Homogeneous Data
One essential requirement for statistics is that data should be
uniform and homogeneous. As statistics involves comparison,
heterogeneous data cannot be compared.

4. Specific Usage
Statistics can be used specifically by people who possess
knowledge about the statistical methods. Interestingly, it
makes no sense to those who have no knowledge of statistical
methods.
5. Prone to Misuse and Questions Common Sense
Statistical data can be manipulated easily by those who have
good knowledge about this subject to propagate false
statements. Further, statistics can question common sense.
For example, suppose a class of 30 students has an average
shoe size 8. That doesn’t mean that the school authorities
should buy shoes of size 8 for all the 30 students.
6. Reference is Required for Final Analysis
Blindly trusting statistical results does no good. Instead, we
need to study about the conditions under which conclusions
are drawn. For example, assume that a cloth manufacturer
earns a profit of 3000, 2000, and 1000 in a span of three
months and a paper manufacturer earns a profit of 1000,
2000, 3000.
Both would have averages of 2000, which can lead to a
conclusion that both businesses are equally rewarding.
However, it can be clearly seen that this is not the case
because profits from the cloth manufacturing business are on
a drop.
A Solved Example for You
Q: What is the first stage of statistical study in a singular
sense?
Ans: The first stage of singular statistical study deals with the
collection of data. There are a few methods of collecting this
data including sampling. After such data is collected then we
organize this data to make sense of it.
BUSSINESS FINANCE:

Business finance is the money you need to establish and run

your business, which includes modernizing or diversifying
operations and expansion. The more successfully you manage
your money, the higher your odds are for profitability. The
term "business finance" includes the ways in which a
company obtains and uses money, usually in reference to
loans. And in the broader context, business finance is about
strategies for earning, saving and investing revenue.

Introduction :
Money required for carrying out business activities is called
business finance. Almost all business activities require some
finance. Finance is needed to establish a business, to run it to
modernize it to expand or diversify it. It is required for buying
a variety of assets, which may be tangible like machinery,
furniture, factories, buildings, offices or intangible such as
trademarks, patents, technical expertise etc.
Also, finance is central to run a day to day operations of
business like buying materials, paying bills, salaries, collecting
cash from customers etc. needed at every stage in the life of a
business entity. Availability of adequate finance is very crucial
for survival and growth of a business.
The Scope of Business Finance:
Scope means the research or study that is covered by a
subject. The scope of Business Finance is hence the broad
concept. Business finance studies, analyses and examines
wide aspects related to the acquisition of funds for business
and allocates those funds. There are various fields covered by
business finance and some of them are:
1. Financial planning and control
A business firm must manage and make their financial analysis
and planning. To make these planning’s and management, the
financial manager should have the knowledge about the
financial situation of the firm. On this basis of information,
he/she regulates the plans and managing strategies for a
future financial situation of the firm within a different
economic scenario.
The financial budget serves as the basis of control over
financial plans. The firms on the basis of budget find out
the deviation between the plan and the performance and try
to correct them. Hence, business finance consists of financial
planning and control.
2. Financial Statement Analysis
One of the scopes of business finance is to analyze the
financial statements. It also analyses the financial situations
and problems that arise in the promotion of the business firm.
This statement consists of the financial aspect related to the
promotion of new business, administrative difficulties in the
way of expansion, necessary adjustments for the
rehabilitation of the firm in difficulties.
3. Working capital Budget
The financial decision making that relates to current assets or
short-term assets is known as working capital management.
Short-term survival is a requirement for long-term success and
this is the important factor in a business. Therefore, the
current assets should be efficiently managed so that the
business won’t suffer any inadequate or unnecessary funds
locked up in the future. This aspect implies that the individual
current assets such as cash, receivables, and inventory should
be very efficiently managed.
Nature and Significance of Business
Finance:
Business is related to production and distribution of goods
and services for the fulfillment and requirements of society.
For effectively carrying out various activities, business
requires finance which is called business finance. Hence,
business finance is called the lifeblood of any business a
business would get stranded unless there are sufficient funds
available for utilization. The capital invested by
the entrepreneur to set up a business is not sufficient to meet
the financial requirements of a business.

Solved Example
Q1. The IDBI extends financial assistance to _________.
a. small industries
b. medium industries
c. transporters
d. all of the above
Sol. The correct answer is the option ”d”. IDBI stands for
Industrial Development Bank of India. IDBI is an apex financial
institution in the arena of development banking. It provides
financial assistance in the form of long-term loans,
debentures, etc. to industries which helps an all-round
development of small industries, large industries, medium
industries, industries providing transportation service.

BIBLIOGRAPHY OF FM:
Financial markets are markets where financial transactions
are conducted. Financial transactions generally refer to
creation or transfer of financial assets, also known as financial
instruments or securities. Financial transactions channel funds
from investors who have an excess of available funds to
issuers or borrowers who must borrow funds to finance their
spending.
Since the early 1970s, financial markets in various countries
have experienced significant development. As a result, world
financial markets are larger, are highly integrated, and have a
wide range of financial instruments available for investing and
financing.
THE STRUCTURE OF FINANCIAL MARKETS:
Financial markets comprise five key components: the debt
market, the equity market, the foreign-exchange market, the
mortgage market, and the derivative market. From the 1980s,
each component market has been expanding in size, and an
extensive array of new financial instruments have been
initiated, especially in the mortgage market and the derivative
market.
Debt instruments are traded in the debt market, also often
referred to as the bond market. The debt market is important
to economic activities because it provides an important
channel for corporations and governments to finance their
operations. Interactions between investors and borrowers in
the bond market determine interest rates. The size of the
world bond market was estimated at around $37 trillion at the
start of 2002 (all currency figures are in U.S. dollars). Bonds
denominated in dollars currently represent roughly half the
value of all outstanding bonds in the world.
Equity instruments are traded in the equity market, also
known as the stock market. The stock market is the most
widely followed financial market in the United States. It is
important because fluctuations in stock prices effect
investors’ wealth and hence their saving and consumption
behavior, as well as the amount of funds that can be raised by
selling newly issued stocks to finance investment spending.
FOREX:
Foreign-exchange markets are where currencies are converted
so that funds can be moved from one country to another.
Activities in the foreign-exchange market determine the
foreign-exchange rate, the price of one currency in terms of
another. The volume of foreign-exchange transactions
worldwide averages over $5 trillion daily.
A mortgage is a long-term loan secured by a pledge of real
estate. Mortgage-backed securities (also called securitized
mortgages) are securities issued to sell mortgages directly to
investors. The securities are secured by a large number of
mortgages packaged into a mortgage pool. The most common
type of mortgage-backed security is a mortgage pass-through,
a security that promises to distribute to investors the cash
flows from mortgage payments made by borrowers in the
underlying mortgage pool. A 1980s innovation in the
mortgage-backed security market has been the collateralized-
mortgage obligation (CMO), a security created by
redistributing the cash flows of the underlying mortgage pool
into different bond classes. Mortgage-backed securities have
been a very important development in financial markets in
the 1980s and 1990s. The value of mortgage principal held in
mortgage pools increased from $350 billion in 1984 to nearly
$2,500 billion in 1999.
Financial derivatives are contracts that derive their values
from the underlying financial assets. Derivative instruments
include options contracts, futures contracts, forward
contracts, swap agreements, and cap and floor agreements.
These instruments allow market players to achieve financial
goals and manage financial risks more efficiently. Since the
introduction of financial derivatives in the 1970s, markets for
them have been developing rapidly. In 2001 global exchange-
traded futures and options contract volume reached 4.28
billion contracts, and the top three types of contracts—equity
indices, interest rates, and individual equities—are all
financial derivatives. Together they accounted for
88.7% of total contract volume.
CLASSIFICATION OF FINANCIAL MARKETS:
Financial markets can be categorized in different several ways,
revealing features of various market segments. One popular
way to classify financial markets is by the maturity of the
financial assets traded. The money market is a financial
market in which only short-term debt instruments (original
maturity of less than one year) are traded. The capital market
is a market in which longer-term debt (original maturity of
one year or greater) and equity instruments are traded. In
general, money-market securities are more widely traded and
tend to be more liquid.
Another way to classify financial markets is by whether the
financial instruments are newly issued. A primary market is a
financial market in which a borrower issues new securities in
exchange for cash from investors. Once securities are sold by
the original purchasers, they may be traded in the secondary
market. Secondary markets can be organized in two ways.
One is as an organized exchange, which brings buyers and
sellers of securities together (via their representatives) in one
central location to conduct trades. The other is as an over-the-
counter (OTC) market, in which over-the-counter dealers
located at different sites but connected with each other
through computer networks undertake transactions to buy
and sell securities “over the counter.” Many common stocks
are traded over the counter, although shares of the largest
corporations are traded at organized stock exchanges, such as
the New York Stock Exchange.

THE ROLE OF FINANCIAL MARKETS:

By channeling funds from investors to issuers and borrowers,
financial markets enhance production and allocation
efficiencies in the overall economy. Financial markets also
perform the important function of price discovery. The
activities of buyers and sellers in a financial market determine
the prices of the traded assets, which provide guidance on
how funds in the economy should be allocated among
financial assets.
Additionally, financial markets provide a mechanism for
managing risks. Various financial assets traded in financial
markets provide different payment patterns, and this
redistributes and reallocates the risk associated with the
future cash flows among issuers and investors.
Financial markets also offer liquidity by providing a
mechanism for investors to sell or purchase financial assets.
The presence of organized financial markets reduces the
search and information costs of transactions, such as the
money spent to advertise the desire to sell or purchase a
financial asset. In an efficient market, the market price reflects
the aggregate input of all market participants.
THE INTERNATIONALIZATION OF
FINANCIAL MARKETS:
The internationalization of financial markets has become an
important trend. The significant growth of foreign financial
markets has been driven mainly by deregulation of markets in
financial centers worldwide and technological advances
enabling more efficient communication, as well as market
monitoring and analysis.
The internationalization of financial markets has also been
prompted by numerous studies on the benefits of
diversification that includes international stocks. Specifically,
including securities from different countries in a portfolio may
lower the portfolio’s risk without reducing its expected return.
The benefits of diversification arise from the fact that asset
prices across international financial markets are not highly
correlated.
The nature and extent of the internationalization of financial
markets are well reflected by developments in international
bond markets and world stock markets, Because financial
markets are internationalized, issuers and investors in any
country need not be limited to their domestic financial
markets. The internationalization of financial markets is
having a profound effect by leading the way to a more
integrated world economy in which flows of goods and
technology between countries are more commonplace.