Category Archives: Economics terms

India’s Telecom Subscriptions and Teledensity for the Year 2013

India's Telecom Subscriptions and Teledensity for the Year 2013

India’s Telecom Subscriptions and Teledensity for the Year 2013

Total Number of Telephone Subscription in India:
India’s 73% of population has Wireline or Wireless subscription.
Over 91 Cr of Population is subscribed to Telecom devices (Wireline / Wireless).

What is Teledensity?
Teledensity is the Number of Telephone Connections for Every Hundred
Individuals living within an area. It is also used as an Indicator of
Economic Development of the Country or specific Region. In India 73 out of 100 people are having Telecom (Wireline and / or Wireless) devices.


Indian monetary policy review for Q1 2013-14 Dated 30 July, 2013 by RBI.

Indian monetary policy review for Q1 2013-14 Dated 30 July, 2013 by RBI.

Indian monetary policy review for Q1 2013-14 Dated 30 July, 2013 by RBI.

Indian monetary policy review for Q1, 2013

What is Basel III Accord and Its Requirements and Impacts on Indian banking sector?

Basel III or Basel 3 released in December, 2010  is the third in the series of Basel Accords.  These accords deal with risk management aspects for the banking sector.   In a nut shell we can say that Basel iii is the global regulatory standard (agreed upon by the members of the Basel Committee on Banking Supervision)  on bank capital adequacy, stress testing and market liquidity risk.  (Basel I and Basel II are the earlier versions of the same, and were less stringent)

Basel III Accord and Its Requirements and Impacts on Indian banking sector

What does Basel III is all About?

According to Basel Committee on Banking Supervision “Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector”.

Thus, we can say that Basel 3 is only a continuation of effort initiated by the Basel Committee on Banking Supervision to enhance the banking regulatory framework under Basel I and Basel II.   This latest Accord now seeks to improve the banking sector’s ability to deal with financial and economic stress, improve risk management and strengthen the banks’ transparency.

What are the objectives / aims of the Basel III  measures?

Basel 3 measures aim to:

  • Improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source
  • Improve risk management and governance
  • Strengthen banks’ transparency and disclosures.

Thus we can say that Basel III guidelines are aimed at to improve the ability of banks to withstand periods of economic and financial stress as the new guidelines are more stringent than the earlier requirements for capital and liquidity in the banking sector.

How Does Basel III Requirements Will Affect Indian Banks :

The Basel III which is to be implemented by banks in India as per the guidelines issued by RBI from time to time, will be challenging task not only for the banks but also for GOI.  It is estimated that Indian banks will be required to rais Rs 6,00,000 crores in external capital in next nine years or so i.e. by 2020 (The estimates vary from organisation to organisation).   Expansion of capital to this extent will affect the returns on the equity of these banks specially public sector banks.  However, only consolation for Indian banks is the fact that historically they have maintained their core and overall capital well in excess of the regulatory minimum.

What are Three Pillars of Basel II Norms or What are the changes in Three Pillars of Basel iii Accord ?

Basel III: Three Pillars Still Standing :  

Any one who has ever heard about Basel I and II,  is most likely must have heard about Three Pillars of Basel.   Three Pillar of Basel still stand under Basel 3.

Basel III has essentially  been designed to address the weaknesses that become too obvious during the 2008 financial crisis world faced.   The intent  of the Basel Committee seems to prepare the banking industry for any future economic downturns.. The framework enhances bank-specific measures and includes macro-prudential regulations to help create a more stable banking sector.

The basic structure of Basel III remains unchanged with three mutually reinforcing pillars.

Pillar 1 : Minimum Regulatory Capital Requirements based on Risk Weighted Assets (RWAs) : Maintaining capital calculated through credit, market and operational risk areas.

Pillar 2 :  Supervisory Review Process : Regulating tools and frameworks for dealing with peripheral risks that banks face.

Pillar 3: Market Discipline :   Increasing the disclosures that banks must provide to increase the transparency of banks

What are the Major Changes Proposed in Basel III over earlier Accords i.e. Basel I and Basel II?

What are the Major Features of Basel III ?

(a) Better Capital Quality :   One of the key elements of Basel 3 is the introduction of  much stricter definition of capital.  Better quality capital means the higher loss-absorbing capacity.   This in turn  will mean that banks will be stronger, allowing them to better withstand periods ofstress.

(b) Capital Conservation Buffer:    Another key feature of Basel iii is that now banks will be required to hold a capital conservation buffer of 2.5%.  The aim of  asking to build conservation buffer is to ensure that banks maintain a cushion of capital that can be used to absorb losses during periods of financial and economic stress.

(c) Countercyclical Buffer:   This is also one of the key elements of Basel III.   The countercyclical buffer has been introducted with the objective to increase capital requirements in good times and decrease the same  in bad times.  The buffer will slow banking activity when it overheats and will encourage lending when times are tough i.e. in bad times.  The buffer will range from 0% to 2.5%, consisting of common equity or other fully loss-absorbing capital.

(d) Minimum Common Equity and Tier 1 Capital Requirements :   The minimum requirement for common equity, the highest form of loss-absorbing capital, has been raised under Basel III from  2% to 4.5% of total risk-weighted assets.  The overall Tier 1 capital requirement, consisting of not only common equity but also other qualifying financial instruments, will also increase from the current minimum of 4% to 6%.   Although the minimum total capital requirement will remain at the current 8% level, yet the required total capital will increase to 10.5% when combined with the conservation buffer.

(e) Leverage Ratio:     A review of the financial crisis of 2008 has indicted  that the value of many assets fell quicker than assumed from historical experience.   Thus, now Basel III rules include a leverage ratio to serve as a safety net.  A leverage ratio is the relative amount of capital to total assets (not risk-weighted).   This aims to put a cap on swelling of leverage in the banking sector on a global basis.   3%  leverage ratio of Tier 1 will be tested before a mandatory leverage ratio is introduced in January 2018.

(f) Liquidity Ratios:  Under Basel III, a framework for liquidity risk management will be created. A new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are to be introduced in 2015 and 2018, respectively.

(g) Systemically Important Financial Institutions (SIFI) : As part of the macro-prudential framework, systemically important banks will be expected to have loss-absorbing capability beyond the Basel III requirements. Options for implementation include capital surcharges, contingent capital and bail-in-debt.

Comparison of Capital Requirements under Basel II and Basel III :


Under Basel II

Under Basel III

Minimum Ratio of Total Capital To RWAs



Minimum Ratio of Common Equity to RWAs


4.50% to 7.00%

Tier I capital to RWAs



Core Tier I capital to RWAs



Capital Conservation Buffers to RWAs



Leverage Ratio



Countercyclical Buffer


0% to 2.50%

Minimum Liquidity Coverage Ratio


TBD (2015)

Minimum Net Stable Funding Ratio


TBD (2018)

Systemically important Financial Institutions Charge


TBD (2011)

The Multiplier Effect: Its effects on an Economy!

The multiplier effect

Every time there is an injection of new demand into the circular flow there is likely to be a multiplier effect. This is because an injection of extra income leads to more spending, which creates more income, and so on. The multiplier effect refers to the increase in final income arising from any new injection of spending.


The size of the multiplier depends upon household’s marginal decisions to spend, called the marginal propensity to consume (mpc), or to save, called the marginal propensity to save (mps). It is important to remember that when income is spent, this spending becomes someone else’s income, and so on. Marginal propensities show the proportion of extra income allocated to particular activities, such as investment spending by UK firms, saving by households, and spending on imports from abroad. For example, if 80% of all new income in a given period of time is spent on UK products, the marginal propensity to consume would be 80/100, which is 0.8.

The following general formula to calculate the multiplier uses marginal propensities, as follows:


Hence, if consumers spend 0.8 and save 0.2 of every £1 of extra income, the multiplier will be:


= 1/0.2

= 5

Hence, the multiplier is 5, which means that every £1 of new income generates £5 of extra income.

The multiplier effect in an open economy

As well as calculating the multiplier in terms of how extra income gets spent, we can also measure the multiplier in terms of how much of the extra income goes in savings, and other withdrawals. A full ‘open’ economy has all sectors, and therefore, three withdrawals – savings, taxation and imports.

This is indicated by the marginal propensity to save (mps) plus the extra income going to the government – the marginal tax rate (mtr) plus the amount going abroad – the marginal propensity to import (mpm).

By adding up all the withdrawals we get the marginal propensity to withdraw (mpw). The multiplier can now be calculated by the following general equation:

1/1- mpw

When to refer to a ‘multiplier effect’

The multiplier concept can be used any situation where there is a new injection into an economy. Examples of such situations include:

  1. When the government funds building of a new motorway
  2. When there is an increase in exports abroad
  3. When there is a reduction in interest rates or tax rates, or when the exchange rate falls.

The downward  or ‘reverse’ multiplier

A withdrawal of income from the circular flow will lead to a downward multiplier effect. Therefore, whenever there is an increased withdrawal, such as a rise in savings, import spending or taxation, there is a potential downward multiplier effect on the rest of the economy.


source: .economicsonline

What’s Crude? Difference between WTI, Brent, OPEC Crude Oil and How it affects our Economy:

Crude oil prices measure the spot price of various barrels of oil, most commonly either the West Texas Intermediate or the Brent Blend. The OPEC basket price and the NMEX futures price are also sometimes quoted.

Crude  Oil, WTI, Brent, OPEC Crude Oil

West Texas Intermediate (WTI) crude oil is of very high quality, because it is light-weight and has low sulphur content. For these reasons, it is often referred to as “light, sweet” crude oil. These properties make it excellent for making gasoline, which is why it is the major benchmark of crude oil in the Americas. WTI is generally priced at about a $5-6 per barrel premium to the OPEC basket price and about $1-2 per-barrel premium to Brent.

Brent Blend is a combination of crude oil from 15 different oil fields in the North Sea. It is less “light” and “sweet” than WTI, but still excellent for making gasoline. It is primarily refined in Northwest Europe, and is the major benchmark for other crude oils in Europe or Africa. For example, prices for other crude oils in these two continents are often priced as a differential to Brent, i.e., Brent minus $0.50. Brent blend is generally priced at about a $4 per barrel premium to the OPEC Basket price or about a $1-2 per barrel discount to WTI.

The OPEC Basket Price is an average of the prices of oil from Algeria, Indonesia, Nigeria, Saudi Arabia,Dubai, Venezuela, and Mexico. OPEC uses the price of this basket to monitor world oil market conditions. OPEC prices are lower because the oil from some of the countries have higher sulphur content, making them more “sour”, and therefore less useful for making gasoline. The NYMEX futures price for crude oil is reported in almost every major U.S. newspaper.

It is the value of a 1,000 barrels of oil, usually WTI at some agreed upon time in the future. In this way, the NYMEX gives a forecast of what oil traders think the WTI spot price will be in the future. However, the futures price usually follows the spot price pretty closely, since the oil traders can’t know about sudden disruptions to the oil supply, etc.

How Crude Oil Prices Affect the U.S. Economy:

Higher crude oil prices directly affect the cost of gasoline, home heating oil, manufacturing and electric power generation. How much? According to the EIA, 96% of transportation relies on oil, 43% of industrial product, 21% of residential and commercial, and (only) 3% of electric power. However, if oil prices rise, then so does the price of natural gas, which is used to fuel 14% of electric power generation, 73% of residential and commercial, and 39% of industrial production. (Source: EIA, U.S. Primary Energy Consumption by Source and Sector, 2004)

How Crude Oil Prices Affects You:

For this reason, higher oil prices increase the cost of everything you buy, especially food. That’s because a lot of food costs depends on transportation. High oil prices will ultimately increase inflation.
Crude oil prices most directly affect you in higher gasoline prices and higher home heating oil prices (primarily for those of you who live in the Northeast U.S.) Crude oil accounts for 55% of the price of gasoline, while distribution and taxes influence the remaining 45%.

Crude Oil Price Trends:

Oil prices usually go up in the summer, driven by high demand for gasoline during vacation driving times. Sometimes it will drop further in the winter, if there is lower than expected demand for home heating oil, due to warmer weather. During 2008, there was fear that economic growth from China and the U.S. would create so much demand for oil that it would overtake supply, driving up prices. However, most analysts now realize that such a sudden increase in oil prices was due to increased investment by hedge fund and futures traders.
In addition, oil prices seem to be rising earlier and earlier each spring. In 2013, prices started rising in January, reaching a peak of $118.90 in February. In 2012, oil prices started rising in February. The price for a barrel of WTI crude broke above $100 a barrel on February 13, 2012. In 2011, prices didn’t break $100 a barrel until March 2, and didn’t peak until May at $113 a barrel.
Fortunately, none of these peaks were as high as the June 2008 all-time high, when the price of WTI crude oil hit $143.68 per barrel. By December, it plummeted to a low of $43.70 per barrel. The U.S. average retail price for regular gasoline also hit a peak in July 2008 of $4.17, rising as high as $5 a gallon in some areas. By December, it had also dropped to $1.87 a

Difference between GDP at market price and GDP at factor price?

There is one important difference that arises when calculating the level of GDP from the spending side of the economy rather than summing the values added in production. This difference arises because the price paid by consumers for many goods and services is not the same as the sales revenue received by the producer. There are taxes that have to be paid, which place a wedge between what consumers pay and producers receive.

Taxes attached to the transactions are known as indirect taxes. Thus, if a consumer pays 100 for a meal in a restaurant the owner may receive only 86, the remaining 14 will go to the government in the form of VAT. The term factor cost or basic price is used in the national accounts to refer to the prices of products as received by producers. Market prices are the prices as paid by consumers.


Thus, factor cost or basic prices are equal to market prices minus taxes on products plus subsidies on products.


source: wiki.answers

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