Free Market: Definition

What do you mean when you say "I believe in the free market"?

Television pundits often say "I believe in the free market" but it isn't at all clear what is believed when this is said.

Thanks again to William for raising this query.

I think I can say that the core definition of free market should be “a market economy based on supply and demand only; where buyers and sellers, the only two entities, transact freely based on a mutual agreement on price”. Rest everything added to the definition is superfluous. The word “Government” is almost inevitably used in the definition of FM. The emphasis on this word isn’t required in the definition. Rather we should understand that government is just an example of external control which takes the market away from being governed by pure supply-demand law. This control can come from even inside the market, through buyers and sellers, for example from coercion between buyers, sellers or buyers and sellers. What the word government symbolizes is a control which interferes with the free functioning of market.

To recapitulate, none of the buyers, sellers or any external agency should have the power/ability to influence a FM economy which in turn should be ruled only by supply and demand.

Here I would like to add that more often than not the reference of "Free Market" is made only when it is being suggested that the market should not be influenced by any force which undermines the supply and demand principle.

When the pundits use FM they usually try to emphasize that they want any external interference or influence to be removed from the market.

Visit the below link for a very informative discussion on the above topic.

 http://www.linkedin.com/answers/finance-accounting/economics/FIN_ECO/365554-2378437?browseIdx=12&sik=1238529999126&goback=.ama

 

Is lower interest rate need of the hour?

Lower interest rate for helping industry in India

Yesterday, we found all industry leader asked lower interest rates to help big companies.

As far as a non financial person, I understand they are asking for consumer loan at lower interest rates so consumer can borrow from banks and buy their products.

In this economic crisis, pushing the demand on borrowed money is safe or dangerous ?

US people rides [sic] on borrowed money for long and that trigered sub prime crisis - will history get repeated here in India as well?

What can happen is

few job cuts -> people without monthly income -> can't pay EMI (irrespective whether loan is at higher interest rate or lower) -> banks are in trouble because of bad debts

is demand of industry leader is justified for lower interest rate ??         

Well intersting question posed by Vikas ...

My take :

Let’s first understand what has happened to the Indian economy. Has anything so grossly wrong happened to our economy? I don’t think so. If you follow the financial results then u will see that still most of the companies have shown rise in profits in successive quarters. However, their stock prices are going down. Y is this happening? 

Western financial institutions with very high exposure to sub-prime loans went bust. These companies were highly leveraged. Now many of them have gone bankrupt and others have been left bleeding. They had to liquefy their assets to pay back their debts and they had no choice but to pull out from their money from the Indian market. That is exactly what they are doing n it’s not bcos now they av lost confidence in Indian corporate but they av no other choice. 

Well, as the market came down crashing due to FIIs so did the confidence of Indian domestic investors. Also as your asset prices drop so does your tendency to splurge. This is simple phenomena. Thus demand goes down. So we need to understand here is that there is no real problem with the Indian economy. May be I should just repeat what Paul Krugman always says “Bad things can happen to good economies”. This is the time when Gov. should act to boost demand. There is nothing wrong with Indian corporate… 

So here I support slight lowering of interest rates to boost domestic demand. In any case our interest rate is still high compared to western economies. You might say that it will trigger inflation. I would say it will not. The inflation we saw in recent past was more bcos of the cost push (soaring oil prices and bullish commodity market which pushed prices). Now commodity market has seen correction and oil is trading low as well… So there is not much reason for a cost push inflation. Moreover, we are already seeing a drop in demand which will need an adequate boost and it isn’t likely that this boost in demand will suddenly go so high that it will bring demand pull inflation.

Now when the question of inflation is out, let’s see the scenario of job cuts that you have pointed out. If you notice we have heard of job cuts in int’l markets primarily in the financial sector. I haven’t heard of too many layoffs in IT/Auto/Manufacturing, etc . In India, Jet and Kingfisher (KF) have gone for major layoffs (Though now they av reinstated their employees). I believe their situation has got more to do with the cut throat competition in the aviation industry, low operating margin and soaring oil prices. They have hundreds of crores of unpaid bills to AAI and oil co. To add to it, KF is again a very highly leveraged company. So what can happen in such period is that losses of a not so financially sound firm can get amplified.

These are minor fall offs of a global financial crisis. So my suggestion would be to cut interest rate, boost demand. It would not trigger inflation. There is nothing wrong with Indian corporate across sectors. Indian banks are sound. They are transparent. Top 10 Indian banks have less than 2% of NPAs. Even few job cuts can’t derail this economy.

BTW u just need to wait and watch, the interest rates will come down sooner than later. There is no way RBI will let liquidity crunch in global market disrupt our economy so easily.

Free Market

Can economy in free fall in "free-market" system reverse the course on it's own without some external intervention?

Catch some good discussion at 

http://www.linkedin.com/answers/finance-accounting/economics/FIN_ECO/378467-11211089?browseIdx=3&sik=1238529999125&goback=.ama

Sectors to look for in Recession

what sectors of a country's economy is less adversely affected by any economic downturns?

Some of the sectors which came out at top (after a discussion on Linkedin) were Defence, Food, Pharma, Agro, Consulting and Infrastructure. However, I don't particularly agree with Infrastructure being untouched by recession...

Check some interesting discussions on the topic at

http://www.linkedin.com/answers/finance-accounting/economics/FIN_ECO/369082-19311410?browseIdx=8&sik=1238529999125&goback=.ama

http://www.linkedin.com/answers/management/business-analytics/MGM_ANA/350239-512811?searchIdx=0&sik=1227196565242&goback=.asr_1_1227196565242

Russia Recognizes Independence of South Ossetia and Abkhazia. Will Cooler Heads Prevail, or is the Confrontational Escalation with the West now Inexorable?

http://iht.com/articles/2008/08/26/europe/27russia.php

On a deeper level: It should be noted that while some argue primarily economic interests at stake here, nonetheless, both sides are arguing primarily "humanitarian" concerns. Have we now irrevocably entered the era of "humanitarian wars"? And, if so, what does this forebode for the future, when all over the globe, there are "humanitarian issues" just waiting to explode? 

Thanks Trevor for your question.

Well I believe that this step of Russia was neither due to economic nor humanitarian reason. I am not so naive to believe that Putin would shed thousands of dollars on war for humanitarian reasons. Also a small region of South Ossetia can't bring any economic benefit to Russia.The reason I see behind this is the old wounded Russian pride... Russians lost not only the super-power status but also lost vast regions which they controlled for decades.... What Russia wants to show all those newly independent countries which were formed after the disintegration of USSR that they need the support and protection of Russia to survive and thrive... and without the help from Russia they can't grow...This is also the reason why Russians don't want NATO interference in many of the break away countries because Russia doesnt want them to get help from any other agency but itself... Russia wants to make them realize that breaking away from USSR was an inherently wrong decision and they now either have to suffer or show allegiance to Russia....

I also don't see Russia directly or indirectly confronting the west European nations. They don't gain anything by doing so. Russia or erstwhile USSR have never shown any noticeable ambition on west european nations... (except for probably spreading socialist governance). I don't foresee any major conflict in near future between Russia and west europe which can't be settled through talks/negotiations...

"Pride" here has lot of negative connotations, like unreasonable and inordinate self-esteem, A sense of one's own worth, and abhorrence of what is beneath or unworthy of one; lofty self-respect; Proud or disdainful behavior or treatment; insolence or arrogance of demeanor; haughty bearing ...

Russia has not yet been able to accept the reality that it has lost the status and power but it doesn't want to let go...

So this is what Russia's pride is...

More more views click on 

http://www.linkedin.com/answers/international/international-law/INT_ILW/305518-23979812?browseIdx=16&sik=1238529999126&goback=.ama

China's PPI>CPI... WHY?

What do you think about China's PPI >CPI?

Thanks Tiger for your question.

Well producer's cost has to come to consumers until and unless it is absorbed by some other external agency, say gov. I dont think this is what is happening in China. Its just a matter of time when CPI will start reflecting rising PPI....

But we also need to keep in mind the basket used to calculate PPI and CPI. May be the items such as food grains, which form a very integral part of CPI and is also given high weightage in the calculation of CPI isn't showing very high rise in prices or may be gov is taking appropriate measures to keep their prices down. Thus this can be another reason for lower CPI.

Well Harsha also pointed out an interesting observation. Well the reason might b this:

If you see China's growth. it has grown in and around particular areas and provinces (like mushrooms in different parts usually east coast). This is because of their SEZ policies which particularly pushed those areas to prosperity. But they av an interesting policy of having export oriented SEZs. Thus these SEZs get all sorts of tax breaks (almost zero taxes) but they can only export the produce and they cant sell it in the domestic market. This is because the gov doesnt want to cannibalise the domestic markets. Thus if they want to sell the same product in China, they have to pay very very high taxes which then means higher prices for consumers. This can just b one reason but i seriously dont think tht chinese currency is over valued.

Code Coverage Analysis

How effective is Code Coverage Analysis ? 

In your opinion who should do this activity ?

Code coverage analysis(CCA) to achieve quality is as good as the cases considered while coding and then testing. CCA can only find out "wasted efforts" (in unreachable codes) and effectiveness of "test cases". So CCA can be effective to ensure quality only if the test cases are exhaustive. Ofcourse it can't ensure quality through performance, brevity of code, memore usage, etc. So effectiveness of CCA and its association with quality is extremely limited. 

The result of CCA needs to be analyzed carefully because say a high coverage can result even due to inexhaustive test cases.

In my opinion, CCA should not be done by the developer. Using a person who was not involved in the development is a simple way to avoid negligence due to confidence in one's code and
negligence due to boredome which many developers feel as they would have exceuted most the test cases in the development/ UT process also.

For more discussion on this topic, check 

http://www.linkedin.com/answers/technology/software-development/TCH_SFT/250828-155544?browseIdx=27&sik=1238529999127&goback=.ama