Role of market and govt in an economy

Role of Market and Govt

Market and Govt are two important factors that will affect people’s life in the world.

Govt and Market are peopled by both individual agents,groups. Social and economic factors.

Govt make the rules of market boundaries and operations through various process and deliberations.

Govt and market in a country are interrelated and interdependent on each other.

In today’s global economy business mens and emerging entrepreneurs are said to be the driving forces of economy.

In a planned economy government holds control of shaping the business activity of the country.

For maintaining a steady and upward economic growth the govt must try to make suitable for the market.

The market must follow the laws of government to run the business smoothly and making sure there is a level playing field.

Role of MarketDefinition of MarketA regular gathering of people for the purchase and sale of provisions, livestock, and other commodities.

Transaction of Product ,Services and Money

Provide Place for Market.

Generation of Employment.

Index of Economic Situation.

Supply Versus Demand Adjustment.

A company sets the price of its product at $10.00. No one wants the product, so the price is lowered to $9.00. Demand for the product increases at the new lower price point and the company begins to make money and a profit.  

The company could lower the price to $5.00 to increase demand even more, but the increase in the number of people buying the product would not make up money lost when the price point was lowered from $9.00 to $5.00.

Regulatory Role of Govt

Direct Administrative Control : Industrial Licensing ,Price and distribution Controls.

Industrial Licensing is justified as the mechanism by which government can control industrial investments and allocate resouces.

Indirect Controls:

Indirect Control are usually exercised by various fiscal and monetary incentives or disincentives or penalties

For ex : High import duty may discourage imports and tax waiving scheme and incentives may develop Export oriented units.

The financial tools available in the hands of the Reserve Bank of India to control the monetary and fiscal policies are:

Bank Rate: It is the Discount Rate, rate which the central bank charges on loans and advances to commercial banks (Short term).

Repo Rate: It is the rate at which the RBI lends money to commercial banks, a short term for repurchase agreement. A reduction in the repo rate will help banks to get money at a cheaper rate. It is equivalent to the discount rate of US. (Long term).

Reverse Repo Rate: It is the rate at which Reserve Bank of India (RBI) borrows money from banks.

Cash Reserve Ratio (CRR): It indicates the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method to drain out the excessive money from the banks

Statutory Liquidity Ratio (SLR): It is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. SLR rate is determined and maintained by the RBI in order to control the expansion of bank credit.

Encourage Savings and Investment:

Individual saving means spending less on consumption that available from one’s disposable income.

Encourage Investments from Abroad:

1. Foreign Direct Investment

It refers to long term participation by one Country into the other.

2. Foreign Portfolio investment

Entry of fund into a country where foreigners makes purchases in the country stock and bond markets.

Imagine that you are a multi-millionaire based in the U.S. and are looking for your next investment opportunity. You are trying to decide between (a) acquiring a company that makes industrial machinery, and (b) buying a large stake in a company or companies that makes such machinery. The former is an example of direct investment, while the latter is an example of portfolio investment.

Now, if the machinery maker were located in a foreign jurisdiction, say Mexico, and if you did invest in it, your investment would be considered as FDI. As well, if the companies whose shares you were considering buying were also located in Mexico, your purchase of such stock or their American Depositary Receipts (ADRs) would be regarded as FPI.

Foreign Exchange management Act 2000 defines foreign portfolio investment as buying and selling of shares, convertible debentures of indian companies and units of domestic mutual funds at any of the indian stock exchanges.

The company leaves the price set at $9.00 because that is the point at which supply and demand are in equilibrium. Raising the price would reduce demand and make the company less profitable, while lowering the price would not increase demand by enough to make up the money lost.

To Promote Education

Economists believe that human capital is even more important than physical capital because of positive externalities.

Major Problem of Poor Countries is “Brain Drain”.

If educated workers comes up with new and better ways of producing goods and services everyone in the country will be benifited.

To promote health and nutrition :

Efficiency of workers depends considerably on their health

It reduces production losses caused by worker illness

It increases the enrollment of children in schools

Secure Property Rights and political Stability

Property rights refer to the ability of people to exercise authority over the resources they own.

Physical Capital : Consume less and save more today to have more physical capital in future

Human Capital : Attend School and forgo wages today to have more human capital in the future.

Promote Free Trade :

A County which eliminates trade restrictions will experience the same kind of economic growth .

Research and Development:

Government should encourage the development of new technologies through research grants