Banking Notes
Banking Notes
Banking Notes
OUTLINE
Introduction & history of Bank
Definition
Simple definition
Expert Views
Comprehensive Definition
Types of banks
On the basis of Function
On the basis of Ownership
On the basis of Registration
History of bank
Money is very important and necessary to satisfy human
wants. Man has been needy in every era due to which the collection
and supply (receipts and payments) of money has been an essential
part of human life. Different commodities have been used as money
in different ages, like, stones, metals, animals, different eatables and
minerals. The concept of money, its sources and uses have been
passing through from the revolutionary stages along with the
evolution of human culture. Even a good number of people directly
started dealing in money e.g. merchants, gold smiths, and money
lenders etc. the concept of loan, interest, written documents i.e.
cheque a bill of exchange came into time light only because of them
Origin of the word “BANK”
Opinion differs regarding the origin of the
word “BANK”. According to some authorities, the word “BANK’ is
derived from the Italian word “BANCO”, “BANCUS”. Which mean
that “a bench upon which Italian money changers used to sit with
their cons to transact business”.
The German experts says about the word “BANK” is originally
derived form the word “BACK” which means a join stock firm or
fund. This word was Italianized into “Banco” when Germans were
masters of great part of Italy.
Generally it is said that “A financial institution which deals in money
and credit. It borrows and lends money and credit. It borrows money
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According to H.L.Hart
“A banker is one who, in, the ordinary
course of his business, honours cheques drawn upon him by
persons from or for whom he receives money or current
account”.
According to Prof. Crowther
“ A bank collects money form those who have it
spare or who are saving it out of their incomes. It lends money to
those who require it.”
Comprehensive Definition
According to Banking companies’ ordinance 19
“Banker means a person transacting the
business of accepting for purpose of lending or investing of
money from the public, repayable on demand or otherwise
with draw able by cheque, draft, and order or otherwise.
Kinds of Banks:-
(a) On the basis of Functions
(b) On the basis of Ownership
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Agricultural Banks:-
Pakistan is an agricultural country and most
of our exports consist of Agro-based products. So well organized
agriculture sector is necessary for the development of a country.
Agricultural banks provide loan for this purpose. ADBP,
Agriculture credit advisory committee and rural credit banks are the
few examples of “Agriculture Banks in Pakistan”.
Saving Bank:-
The banks are established for encouraging and
collecting savings of people. Saving banks are not banks in the real
sense of term. They only provide saving facility. These banks
usually invest their funds in Govt securities. The well-Known Post
Office savings Banks is an institution of this type. Commercial
banks are also providing the service of saving banks in Pakistan.
Investment Banks:-
The bank is opened to buy and sell shares
and other securities. It also provides loans for purchase of shares
and debenture etc. It keeps new companies by under writing the
share, bonds & other securities.
At the end of June, 1992 Seventeen investment Banks, both
Pakistani and foreign were functioning in Pakistan.
Merchant Bank:-
The bank provides services like acceptance of
bills of exchange, corporate finance, Leasing, hire-purchase and
insurance broking. It is a whole sale bank and accepts large sums
for fixed term from individual, companies and financial institutions.
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Definitions:
Simple definition:
“Banks are Financial Departmental stores”
Experts Views:
Primary Functions
1. Accepting deposits
Bank accept deposits form those who have extra
money out of their income in their hands, but they can’t use it in a
profitable way so banks give them opportunity to deposit their
money and enjoy profit.
a. Current Account
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3. Govt loans
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Conclusion
“Commercial banks play a vital role in promotion economic
development by mobilizing the financial resources of the country. As
well as through commercial banks provided multiple services to their
customers for the purpose of increasing their business and becoming
reliable entity for their customers”
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Conclusion
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Outline
Definition
Banker
Customer
Relationship
General relationship
Special relationship
Termination of
relationship
Banker
Definition
G. crowther
“A banker is a dealer in debt of his own and other
peoples”
J.W.Gilbert
“A banker is a dealer in capital or more properly a dealer
in money. He is an intermediate party between the borrower
and the lender. He borrows from one party and lends to
another”
Customer
Definition
By dr. hart
“A customer is one who has an account with the banker
or for whom a banker habitually underrates to act as such”
By Justice Lindley
“Customer is a person who has some sort of account
either deposit or current account or some similar relation with
a banker”
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Relationship
General Relationship
Debtor and creditor
“The basic relationship is that of debtor and creditor. If
a customer deposits money in the bank he is the creditor and
the bank is debtor. If the customer has an overdraft balance
then he is the debtor and bank is the creditor”
Special Relationship
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Q # 6 defines banker and customer. Discuss the
Right and Duties of Banker and Customer in detail.
Outline
Definition
Banker
Customer
Right and duties of customers
Right and duties of banker
Banker
Definition
G. crowther
“A banker is a dealer in debt of his own and other
peoples”
J.W.Gilbert
“A banker is a dealer in capital or more properly a dealer
in money. He is an intermediate party between the borrower
and the lender. He borrows from one party and lends to
another”
Customer
Definition
By dr. hart
“A customer is one who has an account with the banker
or for whom a banker habitually underrates to act as such”
By Justice Lindley
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Rights of customers
1. Right to encash a cheque
It is the right of the customer that his cheque is to be
encashed. He should be given the amount as per the
balance.
2. Right to receive documents
It is the right of the customer to receive the pass book,
cheque book, and statement of account from the bank.
3. Right to sue against wrongful dishonor
A customer has the right to sue a bank if the bank
dishonors the cheque with out and positive reason.
4. Secrecy
It is the right of customer that bank can be kept his
account secret and not disclosed to any one.
5. Right to interest
It is the right of customer to receive the interest and
bank, is bound to pay, and depends upon the nature of
account.
Duties of customer
1. Obey banking hours
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Duties of banker
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OUTLINE
Definition
Simple definition
Expert views
Objectives of monetary policy
Methods of monetary policy
Qualitative methods
Quantitative methods
Limitations of monetary policy
Conclusion
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Economic growth
A good policy of credit control ensures economic growth. The
decisions regarding sanction of credit to deferent sectors of the
economy greatly affect the rate of economic growth.
Increase in investment
State bank give the instructions to commercial banks provides loan
to productive sectors, with the help of it industry promote and as
well as employment also increased
Increase in exports
With the help of monetary policy the commercial bank issued loan to
exporters of the countries. And due to this facility country get
foreign currency, and economic growth automatically enhanced
Price stability
The economic growth depends on stable price level. For this central
bank fixing the credit limit for the commercial bank, then supply of
money is controlled. Due to this effect industries control the price
level till it become stable
Stable in money market
The central bank must keep stable money market. The demand and
supply of credit must be adjusted in the best of interest of the
country.
Quantitative control
1. Bank reserve rate policy
Bank reserve rate means the rate that is deposited by
commercial bank to central bank
a. In case of inflation
When there is inflation on the country,
then central bank for the purpose of control over the inflation
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BRR SM i I p
inflation decrease
b. In case of deflation
In case of deflation central bank
decreased the reserve rate due to this supply of money
increased and price is also increased and at the end deflation
decreased
Symbolically
BRR SM i I Pro.
Eco. Growth
2. Qualitative control
1. Consumer credit control
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4 Moral persuasions
The central bank can use this method of moral persuasion as
leader of commercial bank. It regularly advises and guides
commercial banks to follows a particular policy for loans.
Limitations of monetary policy
1. Co-operation of banks
It is very difficult for central bank to control to credit, if
commercial banks do not extend their full co-operation
2. Conflicting objectives
The greatest difficulty in controlling credit is the
simultaneous, achievement of conflicting objectives of
price stability, economic stability etc.
3. Conventional techniques
In under developed countries like Pakistan the
conventional techniques of credit control namely bank
rate policy open market and reserve ratio are not all
powerful.
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Conclusion
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Outline
Introduction
Definition
Simple definition
Expert views
Assumptions
Process of credit
creation
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Limitations of
credit creation
Conclusion
Introduction:-
Credit: -
The term credit is an evolution of a Latin word “credo”
which means “I entrust and i put my faith in. The word credit
has been described by GIDE in the following ways.
“An exchange which is complete after the expiry of certain
period of time after payment”.
In simple words credit means a Loan.
Credit Creation: -
The creation of credit or deposit is one of the most important
functions of commercial banks. Like other corporations banks aim at
earning profits. Credit creation is the multiple expansions of banks
demand deposits. When a bank advances a loan, it does not pay the
amount in cash, but it opens a current account in his name and
allows him to withdraw the sum by cheque. In this way the banks
create deposit or credit. It is an open secret that banks advance a
major portion of their deposits to the borrowers and keep smaller
part of them for payment to the customers on demand.
Definition
Simple definition
“The tendency on the part of commercial banks to expend
their demand deposits as a multiple of their excess cash reserves is
known as creation of credit”
Expert views
According to Prof Crowther:-
“ The important work of bank is to
provide easy people. Banks are considered as manufacturer of credit.
It means they are not only the dealer of money but in actual meaning
they are creator of credit.”
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20% the bank can be lend 80% of deposit to the needy people. The
position of first category bank after credit creation is as follow:-
500 500
0 0
Liabilities Rs Assets Rs
Deposits 400 Cash 20 % 800
0 Loan 80% 320
0
400 400
0 0
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Liabilities Rs Assets Rs
Deposits 320 Cash 20 % 640
0 Loan 80% 256
0
320 320
0 0
The process is not yet complete. It will continue further. The whole
process can be settled in a summary form as follow.
Expansion of bank deposits
Deposits * 100
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Cash reserve %
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by frank Henious
“A letter of credit is a written instrument, issued by the buyer’s
bank, authorizing the seller to draw in accordance with certain
terms and conditions”
By Pritchard
A letter of credit is a commitment on the part of the buyer’s to
pay or accept draft, drawn upon it, provided such drafts, do not
exceed specified amount.
Parties in letter of credit
Buyer/ Importer/opener
The person who wants to purchase goods and commodities
from foreign as well as at whose request letter of credit is
opened is called importer.
Importer bank/ Buyer bank
The bank, which opens the letter of credit at the buyer request
is called buyer bank
Exporter/seller
The person who wants to sell the goods to foreign country as
well as to whose favor letter of credit is open
Exporter bank/ seller bank
The bank which makes the payment to the exporter after
receiving the letter of credit is called seller bank.
Requirements of opening letter of credit
Sales contract
First of all there must be a contract between buyer/importer and
seller/exporter of sales and purchase, and they agreed all term and
conditions as well as mode of payment
Import License
The banker demands the applicant about import License, and
indent of goods to be imported. After checking such document
allow importer to file on application on printed form.
Application form
Its means the agreement for irrevocable letter of credit, i.e.
filled up by the banker and signed by the Importer. As well as
it contain all term and conditions of the sale agreement.
Completion and scrutiny of the form
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on the other hand importer bank also give the guarantee to importer.
So the seller gets double protection of payment.
Unconfirmed letter of credit
A letter of credit in which the exporter bank does not gives and
guarantee to exporter about payment. The bank give payment if the
importer the provided the payment to exporter bank.
Documentary letter of credit
In which the payment is made after receiving following documents
Invoice
Packing list
Insurance policy
Bill of lading
Clean letter of credit
A letter of credit in which there is no condition of document
attached for the payment.
Fixed letter of credit
It is a letter of credit in which the credit is available for a fixed
total amount payable in one or more than one draft.
Revolving letter of credit
In which the amount of credit can be revolved or renewed on the
fulfillment of credit conditions.
And all the term and conditions can be renewed by the
commitment of both parties.
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Conclusion
Introduction
A system of direct exchange of one commodity or service for
another without the use of money is called barter. One has to
exchange the product which one has in excess with those who have
other surplus product with themselves.
Definitions
By R.H.Parker
Barter is the direct exchange of goods and services with out the use
of money as either a means of payment or a unit of account.
By Sloan
Direct exchange of commodity or services for another without use of
money
By G.Thomas
Barter is a form of trading in which goods are exchanges directly for
other goods without the use of money as an intermediary.
Inconveniences of Barter system
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Q No. 11. What is paper money? Describe its different forms? Also
discuss the advantage and disadvantage of paper money?
OUT LINE
Introduction of paper money
Definitions
Forms of paper money
Advantages and disadvantages of paper money
Conclusion
Introduction:
Paper money means the currency notes issued by central bank of
country. In the present age paper money has got a significant place in
place of metallic money. Paper money is convenient to carry and
easy to handle and store. It is the most advance form of money. It
fulfils nearly all the characteristics of ideal money. It is believed that
different attempts are make or introduce paper money i.e. In China
during 9th century, Iran 13th century and finally paper money was
originated by gold smith of England in early 17th century. Now in all
developed and underdeveloped countries of world, Inconvertible
paper money is used as medium of exchange and standard of value.
Definitions
Prof. Hanson
“Paper money means the paper instruments such as bank notes,
cheque, bills and other forms which act as a currency”.
ACCORDING TO F. PERRY
“Paper money is document representing money such as bank notes,
promissory notes, bills of exchange etc”.
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INTERATIONAL TRADE
The present state of international trade also owes great to paper
currency. Different type of paper money can be conveniently
interred changed and used in different parts of world. This has
increased the liquidity of world’s economy.
PRINCE MECHANISM
Our market forces of demand and supply works because of price
mechanism. Paper money has greatly help in making price
mechanism workable and effective.
MONETARY MANAGEMENT
As the supply of paper money can be regulated by central bank so,
monetary management becomes easy. The volume of circulation of
money central bank.
Disadvantages of paper money
Limited acceptance
Demerit of paper money is that it has a limited acceptance. Its
acceptance is limited with in the boundaries of home cont ray. It is
not legal tender money in other countries.
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Danger of inflation
The biggest demerit is that paper money is over issued then it brings
inflation in the country which is harmful for purchasing power.
Lack of durability
Normally paper money has a short life than metallic money. There
are chances of damages to paper. Fire may burn it. Paper money
loses its good appearance and shape.
Small denominations
Paper money is not suitable for small monetary denominations such
as 1, 2, 5, 10, 25, and 50 paisa. In this case metallic money gets
preference over paper money.
Balance of payment
When paper money over issued in the market then it cause the
inflation, and in which prices will be higher on the other hand value
of money decrease and balance of payment becoming unfavorable
day to day with the affect of inflation.
Less stability
There is less stability in the value of the paper money as compared to
metallic money. Some time it is over issued and people lose
confidence in the value of money and they prefer to keep their
savings in terms of gold and silver.
Loss due to fire and water
Although the paper money is not affected by and apparent wear and
tear or loss of colour yet it can be damaged due to fire or water.
DANGER OF MISMANAGEMENT
Paper money is useful only when it is efficiently managed. If the
monetary authority is not vigilant and does not issue the paper
currency as required, it often leads to inflation deflation.
PRICE INSTABILITY
Paper money has given rise to wide scale price fluctuation in
different countries of world. The fluctuations in exchange rate
market also produce serious effects on the general price level in the
economy. Weak paper money fails to enjoy. The confidence of the
people and cause price instability.
CONCLUSION
From above discussion we concluded that paper money has also
some defects. It is better than metals and it is also helpful for
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OUTLINE
Introduction
Definitions
Assumption of Quantity Theory of money
Equation of Exchange
Numerical Presentation
Graphical Presentation
Criticism of Theory
Conclusion
Introduction
The quantity theory of money was first introduced by Davan Zat in
the 16th century. After it David Hume and J.S Mill had worked on
this Theory in 17th and 18th centuries. But the Theory is most famous
in 19th centuries by Irving Fisher, American economist in his book
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Equation of Fisher
Professor Fisher expressed the following equation.
PT =MV+M1V1
OR
P = MV+M1V1
T
Where:
PT = total demand for money.
P = General Price level
M =quantity of legal tender money.
M1 =quantity of bank/credit money.
V = velocity of circulation of legal tender money
V1 = velocity of circulation of bank money.
T = total Transactions
P= MV+M1V1
T
= 100*3+100*2
100
= 300+200
100
= 500
100
= Rs.5
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P= 200*3+200*2
100
= 600+400
100
= 1000
100
= Rs 10
The general price level has doubled by doubling supply of money.
Now we half the supply of money and keeping other variables
constant.
P=50*3+50*2
100
= 150+100
100
=250
100
= Rs.2.50
Now we can see general price level is half when we half the supply
of money.
Graphical presentation
The quantity theory of money can be explained with the help of
following diagrams
P2
Price level
P1
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X
M1 M2
Quantity of money
VM1
Value of money
VM2
O
X
M1
M2
Quantity of money
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Criticism
Circulation of money
It is very difficult to measure the circulation of the legal money and
credit money, therefore velocity of money can not be measured in a
country.
Ignore demand for money
The theory discusses only of money as the main determinant of price
level and the value of money. It ignores the role of demand for
money in determining price level. Therefore it may be called one
sided theory.
Assumption of fully employment
In this theory assumed about the full employment in the country, it is
not possible for any country to provided full employment.
Proportional change
When the price level of goods is changed then on the other hand the
quantity of money not changed at the same proportion. Like if
quantity of money increase by 10% meanwhile it is not compulsory
the price level is also increased by 10%, may be it can decreased.
Static theory
The economist says that it is static theory because in every economy
up and downs and changed must occurred. But in this theory does
not mention about the changing.
Useless assumptions
All the equation and diagram are made on the base of some
assumptions without them theory is useless, as well as such
assumption also useless
Ignores short Run
Lord Keynes says that it ignores the changes in prices in short run
period and it considered only long run period.
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Trade cycle
As in early ages business faced the situation of depression, like in
1930. Then that time many countries tired to raise general price level
by increasing the supply of money. But it was not successes able in
that time. So it proved that this theory does not take into account the
phases of trade cycle.
Conclusion
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required against the notes issued in the form of gold, foreign bills or
cash at some foreign banks where gold standard prevails.
Advantages
1. Elastic
This system also has the beauty of elasticity. Central bank can
increase and decrease the quantity of notes according to
requirement of industries and consumers.etc.
OUT LINE
Definition of money
Significance & importance of money
Conclusion
Definition of money
According to R.P Kent
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2. Easy Production
In barter economy the production of goods so much
difficult, because problem of raw material, hiring labour,
and after it selling output of the goods. But now with the
evolution of the money production process is easy, with
money availability of factor of production (land, labour,
capita, and organization) is possible.
And finding out the cost of goods in term of money no more
problems.
3. Facilitates exchange Transaction
In barter system exchange of goods according to demand of
different people so much difficult, due to
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9. Capital formation
It is a process of increasing physical and human capital of a
country through best utilization of resources. With the help
of money we can increase the quantity of capital, as per
industry needs.
10. Monetary policy
The monetary policy gives momentum to the economic
activities. It can only be formulated and implemented in
money economy.
Introduction
It represents the rise in general price level. Basically when the state
bank of the country issue the over demanded notes then it decrease
the value of money. Meanwhile raises the general price level in the
market.
Some authors define the inflation as follows
By J.M.Keynes
“Inflation is a rise in price level after the full employment has been
achieved”
By R.P Kent
“Inflation is nothing more than a sharp upward movement in the
price level”
By Crowther
“In the state of Inflation the prices are raising, i.e. the value of
money is falling”
On the basis of causes
1. Demand pull Inflation
In which inflation arises due to increase in demand of goods.
On the other hand supply of the goods not according to demand
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2. Walking inflation
In walking as the word represent, price level increase in
continuous form with fast speed as compare to creeping
inflation. The rate of inflation around 5% annually.
3. Running inflation
In which general price level near about 8% to 10% annually is
called running inflation.
4. Trotting inflation
In trotting inflation price level rise with double digit i.e. 20%
annually. Some authors say about percentage 5% to 20%
annually. Pakistan faced the trotting inflation during 1970-80
and 1990-2000.
5. Galloping inflation
When the rate of inflation across the limit of 20% per annum.
Then galloping inflation arrived. Maximum limit of galloping
inflation is 1000% P.A. during 1980-93 Argentina faced such
inflation with the rate of 423.4% p.a.
6. Hyper inflation
When the rate of inflation is more than 1000% p.a. we can say
it’s a final stage of inflation. In Poland the rate of inflation was
more than 1000% in 1898. Germany also experienced with
hyper inflation during 1922-24.
On the basis of degree of control
1. Open inflation
When inflation get out of control of the Govt. in which all
measurement and polices are failed to control the price level as
well as inflation in the market,
2. Suppressed inflation
If the Government can control over the inflation is called
suppress inflation. But on the other hand some other problems
are created like hoarding, corruption, and black money.
Other types
1. Partial inflation
According to J.M, Keynes, partial inflation occurs when the
price level rises partly due to an increase in the cost of
production on goods and partly due to rise in supply of money
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Conclusion
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“Inflation is a rise in price level after the full employment has been
achieved”
By R.P Kent
“Inflation is nothing more than a sharp upward movement in the
price level”
By Crowther
“In the state of Inflation the prices are raising, i.e. the value of
money is falling”
Causes of Inflation
Demand pull Inflation
In which inflation arises due to increase in demand of goods.
On the other hand supply of the goods not according to demand
of consumers at the result price level increase of existing
goods, this situation creates the inflation in the market.
Causes of Demand pull inflation
1. Increase in supply of money
Rapid increase in supply of money creates the demand pull
inflation. Due to it income of people rises, and they demanded
more goods but on the other hand supply not according to
demand of goods, at the result price level of existing goods will
rise, after it inflation occur.
2. Deficit financing
When government of the country borrows money from banks
or prints more notes to finance the projects. These projects
become productive after sometimes but the income of the
factors engaged with these projects increase suddenly. This
increase in income causes increase in aggregate demand for
goods. At the result price level of existing goods will rising up.
3. Foreign Remittance
When foreign income of the people increase, due to this
purchasing power of the peoples also rising up. But supply of
goods not according to requirement of consumers, after it price
level of exiting goods will increase due to increase in demand
of goods.
4. Rapid increases in population
When the rate of population rises very sharply, then goods are
more demanded in the market. But supply of goods and
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Introduction:
History tells us about the ups and down in Business cycle. In
which some time good trade of the business that shows the Profit
period of it, and some time bad trade of the business that shows the
loss period of it. Such good or bad Trade is called the business Cycle
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Economic activity
Time
Depression/ Contraction
A period of trade in which business experienced with low
profit ratio, as well as suffering loss, with low productivity and
sales. In simple words we can say it’s a period of Bad trade.
It’s characterized as under:
1. Low productivity
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Boom, Peak
A period of good trade is called boom. We can say it is the end of
recovery period.
It’s characterized as under:
1. New investment in all sectors of the economy.
2. Revival in all industries
3. High level of national income.
4. High per capita income.
5. High propensity to consume.
6. High prices
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Conclusion:
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10. Protectio
n to Drawee The banker is The Drawee is
The Drawee is not protected if he pays a protected.
protected if he makes cheque under forged
payment under forged endorsement.
endorsement.
11. Noting Noting and protesting Noting and
and Protesting are not required. protesting are not
Noting and required.
sometimes protesting It can be made payable
is required to the maker or It cannot be made
12. Payable Drawer payable to the maker
to but to payee or
It can be made endorsee.
payable to the drawer In case of cheque the
13. Liability liability of the drawer In case of promissory
of Drawer is secondary: he is note, the liability of
In case of B/E, the liable only when the the maker is primary
liability of the drawer acceptor refuses to and absolute.
is secondary; he is pay.
liable only when the
acceptor refuses to The maker may jointly The maker may
pay. as well as severally jointly as well as
14. Responsib responsible severally responsible
ility
The acceptors of B/E It is written by the It is written by the
are jointly responsible debtor debtor
only.
15. Who Cheque is order to pay Promissory note is
Draws promise to pay
It is drawn by the
creditor There are usually three There are usually
16. Order Or parties involved in two parties involved
Promise Cheque a) Drawer in P/N, a) Maker, b)
Bills of exchange is b) Drawee c) payee payee
order to pay
17. Parties
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involved
There are usually
three parties involved
in B/E i.e. a) Drawer
b) Drawee c) payee
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Introduction:
It refers a situation in which quantity of money becoming fall
as per demand, and value of money rises due to shortage of
money, also fall in price of goods. When deflation occurs then
people don’t have money to buy goods and services. There is
over production in the economy. New investments are not
made.
Definition:
By Prof. Crowther
“Deflation is that state of the economy where
the value of money is rising or prices are falling.”
By James Phillips:
“Deflation is a period during which level of
prices declines and the value of money rises.”
By William J. Baumol:
“Deflation refers to a sustained decrease in
the general price level.
Causes of Deflation
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Remedies of Deflation
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5. Public works
The Govt. can start public works programmed to
climate deflation. The amount is transferred from govt.
to general public. The demand for goods increases and
there is increase in production.
6. New investment
The investment can be made to set up new factories
and mills. The production and employment increases
due to new investment.
7. Production control
The control over production can help to control
deflation. The producers can fix production quota for
each producer. The control over supply is necessary to
maintain price level.
8. Increase in exports
The exporters can play their part for selling extra out
put in the overseas market. The businessmen can
reduce the worries of deflation.
9. Increase in wages
The wages of workers can be increased to control the
deflation. The govt fixes the minimum wage rate the
increased wages raise the income level of worker they
go to market for purchase of goods and services.
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Introduction
The government headed by Z.A. Bhutto privatized all industrial units
and banks. The consumer goods industries, steel industries, cement
industries automobile industries and all banks ere taken over by the
government. Banks are also nationalized with the effect form July 1,
1974 under Nationalization of bank act 1974.
Definition
Its means taking over the management and control of organization
owned by private individuals, called nationalization.
Advantages of Nationalization
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7. Abolition of Malpractices
The banks and other private sector enterprises were
nationalized to stop the malpractices like that of unlawful
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Advantages of Privatization
1. Increase in productivity
2. Increase in efficiency
3. Improvement in quality
4. Healthy competition
5. Increase in exports
6. Extension of market
7. Increase in employment
8. Adoption of modern technology
9. Mobilization of resources.
10. Encouragement to private sector
11. Increase in output
12. Price stability
13. Increase in taxes
14. Acceleration of economic growth
Disadvantages of privatization
1. Increase in inflation
2. Artificial shortage
3. Increase in smuggling of food items
4. Commercial approach
5. Focus on advertisement
6. Exploitation of consumers
7. Increase in poverty
8. Class conflict
9. Increase in crime values
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4. Money supply
The change is money and credit supply has a major effect upon
the level of economic activity. An expansion money and credit
supply. Stimulates economic activity and its contraction brings
down economic variables over period of time.
5. Over investment
Excessive investment in capital goods industries brings
upswing and a fall in investment brings downswing in
economic activity.
6. Marginal efficiency of capital
Keynes claims that fluctuations in marginal efficiency of
capital are the main cause of trade cycles. The expansionary
phase of the trade cycle commence when the marginal
efficiency of capital is higher than the rate of interest an vice
versa brings the contraction phase.
7. Aggregate market
The business cycle can also be caused by changes in aggregate
demand and change in aggregate supply. The contraction phase
of the business cycle is caused by decline in aggregate demand
and expansion phase by increase in aggregate demand.
External causes
1. Wars
During war the resources are used for the production of
armaments. As such the output of capital and consumer goods
greatly falls. The fall in output, income, profit etc, causes
contraction in economic activity.
2. Population
The population increases aggregate demand. The investment,
employment and income go up. There is tendency towards
boom. High rate of inflation will make the bankers nerves.
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They will take back loan due to which investment level will
shrink.
3. Science and technology
The discovery of new material, machines, and methods helps to
produce more at low cost. The invention leads to high level of
competition in the economy. There is big investment in the
economy. There is tendency towards boom.
4. Government polices
Govt. polices at home an abroad bring changes in total
spending and hence in the level of economic activity.
5. Surplus exports and forging Aid
Surplus exports and foreign aid raise the level of consumption
and investment spending. The output income and employment
are boosted.
6. Weather
The good and bad weather affect the production in agriculture
sector. When weather conditions are bad threes low production
in agriculture, as well as low production in industrial sector.
The demand is the same but output is low so price level goes
up.
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3. Reserve ratio
The central bank can increase or decrease the reserve ratio. The
ratio of reserve is decreased during depression and increase in
expansion.
4. Selective control
The central bank can provide credit to one sector at low rates
and at high rate for another sector. The central bank can check
the loans granted by commercial banks, to control trade cycle.
Fiscal policy
1. Public work
The government can start public words program during
depression and stop construction of various projects during
good trade period. Public works program help to control trade
cycle.
2. Taxes
The state can increase or decrease rates of taxes. The
government can raise more taxes for
Contraction of money supply. The tax rates may be lowered to
provide excess money supply.
3. Budget
The government can prepare surplus budget during boom
period. There is need of deficit budget during deflation. The
government can use budgetary measure along with other
methods to control trade cycle.
4. Public debt
The government must take loans during depression to meet
various needs. In case of boom the debt should be repaid. The
government can overcome the difficulties of low business
activity through public debt.
5. Imports
The government can allow import of goods, which are needed
by public. During depression there is no need to import the
items, but when there is boom period the supply of goods can
be maintained through imports.
International measures
1. Production
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3. Investment control
The government may allow investment in an area where there
is low investment. Excess investment in any sector may lead
towards depression. There is need for balanced investment in
all economic sectors.
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One year is selected in the past as base. The index number for
the base in 100 changes in prices is expressed in percentage
from the base year.
2. Selection of commodes
A number of commodities are selected. The class of consumers
must be decided to select the goods. The selection depends on
the purpose for which the index number is prepared.
3. Market price quotations
The price quotations are obtained from selected market only,
the price of each commodity is noted.
4. Weighting
Each commodity is a weight. The weight shows the importance
people give to different commodities
5. Percentages changes
The percentage change in prices is calculated.
6. Calculation of average
The average of individual index is calculated. The individual
indices are added up and divided by no of weights. This
average figure is called index number.
Construction of simple & weighted index number
Simple interest:
According simple index number all items are equally
important for the people. But in practical life it is not so. The
commodities should be given due importance according to their
consumption
Formula R price in current year * 100
Price in base period
. OR
P1 * 100
P0
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N=5
∑R = 875
1. 25/20*100 =125
2. 10/5*100 = 200
3. 30/15*100 = 200
4. 50/40*100 = 125
5. 450/200*100 =225
∑W=2 ∑WR=4
4 450
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4. Weighting
The weight of goods i.e. people give to different
commodities in base year may be changed, in current period
due to change in taste and income etc.
5. Average
An index number is an average. An average can not give a
complete picture of the situation.
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3. Finance companies
The finance companies are providing the service of short term
financing. These institutions are not common and know to people
but have contribution in promoting small business. For example
small business finance corporation SME bank, Khshhali bank etc.
4. Customers
Sometimes a company receives a part of total payment from the
customers by way of advance. It is also a sort of short term
finance
5. Pledging the accounts Receivable
Some business enterprises obtain loan by pledging their accounts
receivable with bank. This is the least used method in Pakistan.
Intermediate financing
To finance a business for a period of more than a year but less
than 5 years is called intermediate financing
Sources of intermediate financing
1. Commercial banks
Commercial banks provide intermediate term finance to traders
and manufactures against security.
2. Insurance companies
Insurance companies provide finance to manufactures against
the security of assets.
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