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AN INTRODUCTION TO DIFFERENTIATED LEARNING TOOLS
Participants in flexible learning programs have limitations on the nature of the
time they can spend on learning. Typically they are employed fully or partially,
pursuing higher studies or have other social and familial responsibilities.
Availability of time is a great constraint to these students.
To aidthe participants,we have developedfour unique learningtools as below:
 Bullet Notes : Helps in introducing the important concepts in each unit
of curriculum, equip the
student during preparation of
examinations and
 Case Studies : Illustrate the concepts through real life experiences
 Workbook : Helps absorption of learning through questions based on reallife nuggets
 PEP Notes :Sharing notes of practices and experiences in the Industry will help the student to
rightly perceive and get inspired to learn concepts at the cutting edge
application level.placementinterviews
Why are these needed?
 Adults learn differently from B. School or college going
students who spend long hours at campus.
 Enhancing analytical skills through application related learning
kits trigger experiential learning
 Availability of time is a challenge.
 Career success increasingly depends on continuous learning
and success
What makes it relevant?

How is it useful?


Where does this lead to?
As and when you get 5 to 10 minutes you can read one of these and absorb and comprehend.
Spending more time is your choice.
You can use the time in travel, waiting for meetings, lunch time, small breaks or at home
usefully.
Through these tools, the learning bytes are right sized for ease of learning for time challenged
participants.
The content starts from practice and connect to precept making it easy to connect to industry
and retain.
They can be connectedto continuous assessment process of the academic program.
Practitioners can use their real life knowledge and skill to enhance learning skills.
Immediate visualization of the practical dimension of the concept will offer a rich learning
experience.

 Easier to move ahead in the learning process.

 Will facilitate the student to complete the program earlier than
otherwise.Helpsstay motivated and connected.
When is it useful?


PEP Notes
Ec onomic s for
Managers


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ii

INTRODUCTION
Participants in ICFAI University Programs are eager to apply theory to practice. They realize that
application orientation can enhance their learning and subsequent usage of management precepts and
practices. Picking out the principle behind real world events is critical to this learning. Towards this end
the institution has introduced the PEP Notes.
The PEP Notes (Practice, Experience and Perspective Notes) is a collection of annotative notes on
practices, experiences and perspectives from industry as appearing in articles fromreputed sources such
as Harvard Business Review, Economist, McKinsey Quarterly, Accenture, Bain Consulting etc.
Practice : Organizations follow practices based on their past learning
Experience: Based on changing context, they face fresh experiences
Perspective: Organization learns from the experience and the practice to gain fresh perspective
These notes connect the three dimensions of the real world to key concepts in the subject. Each note is
brief – about one to two pages and is adapted from the art icle referred to in the note. The concept
underlying the note is highlighted in a box. The concept is also connected to the article through an
introductory abstract in a boxat the beginning.
The learning outcomes expected are:
1. Real world Application based approach significantly enhances absorption and retention.
2. Exposure to the current trends,practices with illustrations connect back to theory.
3. Thoughts from leading sources.
The PEP Notes may be used for Assessment.
iii

CONTENTS
Block I: Microeconomics – I 6
1. Welfare Implications of Micro Economic Activities - A Case of Carbon Tax 7
2. Cost-effective production through Innovations – A Case of PP F of Apparels 8
3. Demand Determinant “Consumer Preference” -A Case o f Green Products 9
4. The Boomerang Effect of Projected Consumption Expenditure on Supply 10
5. Impact of New Generation Consumer Behavior on Market Choices - A Case of U.S.
Millennial Consumers 12
6. Consumer Surplus and Online Media 13
7. Production Decisions - Global Shale-gas Development Race 14
8. Acquisition – Reaping Economies of Scale through Value Crea tion and Risk 15
9. Scale of operations – A case of ‘Tesla’ an Electric Car Company 16
10. Mexico’s Emergence as a Star Performer – Case of Cos t Competitiveness 17
Block II: Microeconomics - II 18
11. Perfect Information – Its Importance in Perfect Compet ition 19
12. A Route Map to Perfect Competition – A Case of Content M arkets 20
13. Staying Big by Acting Small: Non- Price Competitive Strategies 21
14. Creation of Demand for IT Consumption – A Case of Intel India 23
15. Lessons from First Movers – Case of Oligopoly 24
16. Housing Prices and Housing Rents – A Case of Housing Pric es Trajectory in U.S. 25
17. Wage determination and its Distributional Effects – Case of Minimum Wage 26
18. Milton Friedman’s ‘Profit’ – A Critique 27
19. The Most Important Figure in Finance: “Interest” – A Case of LIBOR 29
20. Decision Making and Risk Minimization 31
21. Investments and Growth – A Case of Deliberate Capital Al location 32
Block III: Macroeconomics - I 33
22. Macro-Economic Interventions to Usher Economic Growth –
The Case of African economy 34
23. Effectiveness of Well-Designed Macroeconomic Policies –
A Case of Solar Energy Policy 35
24. Japan’s never–ending Workforce Challenges- Impact on GDP 37
25. Private Financial Wealth – An Important Variant of National Income 38
26. The Glittering Power of Cities for Luxury Growth – Industr y’s Aggregate Demand 40
27. Role of Macro-Economic Policy in Public-Private Participation (PPP) 42
28. Supply Side Economics towards Sustaining Growth – The Case of ASEAN 43
29. Economic Crisis, Policy & Schools of Thought: A Re-visit 45
iv

30. One Objective: One Policy - The case of distortion in India 47
31. What Controls investments? – A Case of Mining 49
32. Financial Inclusion in India 51
33. Money Supply – A Case of Quantitative Easing 53
Block IV: Macroeconomics - II 55
34. Effectiveness of Monetary Policy on Inflation and Interest Rates 56
35. Monetary Policy: An Effective Growth Enhancer 57
36. Who Bells The Cat? – A Classic Case of Raising Inflat ion in Euro-Zone 59
37. Demand-pull inflation – Case of India 60
38. Gaps between International Trade Theories and Practices – Case of US CoalExports 61
39. ASEAN: Taste of Success as Trade Bloc and Its Challenges 62
40. Are Growth Drivers Driving Growth in Emerging Economies? 64
41. Intellectual Capital – The Missing Link 66
42. Growth of Global Economies: Causal of Business Cycle in US Economy 68
43. Automation Vs Employment 69
44. Inter link between Education and Equality 71
v

Block I:
Microeconomics - I
1. Welfare Implications of Micro Economic Activities - A Case of Carbon
Tax
2. Cost-effective production through Innovations – A Case of PPF of
Apparels
3. Demand Determinant “Consumer Preference” - A Case of Gre en Products
4. The Boomerang Effect of Projected Consumption Expenditure on Supply
5. Impact of New Generation Consumer Behavior on Market Choices - A
Case of U.S. Millennial Consumers
6. Consumer Surplus and Online Media
7. Production Decisions – Global Shale-gas Development Race
8. Acquisition – Reaping Economies of Scale through Value C reation and
Risk
9. Scale of operations – A case of ‘Tesla’ an Electric Car Comp any
10. Mexico’s Emergence as a Star Performer – Case of Cost Com petitiveness
6

Block I: Microeconomics - I
1. Welfare Implications of Micro Economic Activities
- A Case of Carbon Tax
Micro Economics is a study of economic problems of a market. Micro Economics
enables decision makers to find solutions for economic problems under the conditions
of market failure. Carbon tax is one such move of the governments.
Production activities generate carbon dioxide as a by-product. These by-products in-turn leads to
deterioration of welfare of the society by creating social and environmental costs (external costs) in the
form of ill health, environmental pollution, etc. Economic theories of free market discussed in
microeconomics cannot address these problems due to absence of a market for damages frommarketable
production activities. These costs are called negative external costs and these costs are not covered by the
price. This further leads to over consumption and social inefficiency. To address such problems an
alternative way of improving efficiency (welfare economics) becomes inevitable. One such method of
improving efficiency is carbon tax.
Polluter pay principle: Internalization of negative externality means producer of CO2 has to pay the
tax on its emissions and this tax will be included in the price of the product.From there on,
economic theory operates.
Scarcity and choice govern production and consumption activities. A carbon tax helps in preserving
and securing the scarce resources – the twin objectives of resource preservation and resource
security attained.
Search for cleaner production methods: To avoid carbon tax or to minimize pollution, companies
will look for better techniques,such as solar power instead of thermal power that leads to reduction
of pollution and improvement in social welfare.
Efficient spending of raised revenues: Government can offer subsidies on cleaner methods of
production from the revenue generated through carbon tax.
Results in social welfare: As people paythe tax,this will have a burden on theindividual budgets andpeopletendtoconsume
less of those products andthis in turnresults in socially optimum distribution.
Positiveeffectsofcarbontax:
Production in the tax imposed countries may decline but the gap will be compensated by production
in a no tax or less tax countries,as in the case of US coal production.
Measurement of social cost is very difficult.
Socially optimum distribution is possible only for price elastic goods but not for price inelastic
goods.Here tax imposition does not result in reduction in the consumption nor production, because
tax burden can be shifted to consumers.
International price rises due to global carbontax,could leadto richcountries affordingtobuy andnot the poorcountries. This
may furtherwiden the gap between developedandunder developedworld.
Issuesincarbontaximposition:
When operations of producers at market equilibrium fail to arrest inefficiency in the markets then it
results in creation of cost to society. Market mechanism fails to find a proper equilibrium price. By
imposition of tax, government will try to reduce the burden of social costs and finds a socially
efficient solution for economic problems of producers.
Discussion Questions:
1. Why market fails to find a socially efficient price?
Hints: market equilibrium - covers private costs and benefits – social costs not covered.
2. How relevant are micro economic principles to find socially efficient solutions for market economic
problems?
Hints: evaluate policies and improve efficiency – find alt ernative wyas.
Source: Tejvan Pettinger (2013): Carbon Tax – Pros and Cons, Economics. help, January 2013
Unit / Section Topic Course
1.4 Introduction to Micro Economics Relevance of Micro economics Economics for Managers
7

PEP Notes: Economics for Managers
2. Cost-effective productionthrough Innovations
– A Case ofPPF of Apparels
Productionpossibilityfrontiers (PPF’s)or curves are reflectors ofa country’s capacityor potential to
produce at a given point oftime,by using existing and available factors ofproduction.It also explains
how innovations and better techniques of production shifts a PPF to the right.
Managing labor costs and enhancing productivity are always a concern of a business. In-order to achieve
these objectives and in search of better opportunities industries like apparels will move fromone place to
another place where labor costs are cheap and continue to operate there till this advantage exhaust. This
tendency may result into erosion of resources and also increase labor costs everywhere, making cheap
labor a scarce resource. So, in-order to gain better results within existing resources and shifting to
improved production frontiers, apparel companies have to focus on other alternatives instead of cheap
labor.
Innovation – it will improve the chances for speedier and efficient production such as mechanized
looms, fabric fasteners,modern sewing machines, etc. Techniques like bonding and gluing are
capable of producing a fabric within a time less than 30 to 40 percent of traditional techniques.All
these efforts finally lead to reduce the time gap between customers and manufacturers by replacing
labor with capital. Some more techniques innovated in apparels are digital printing, waterless or dry
dyeing, etc.
Collaboration – Collaborating with suppliers will improve chances for better cost management and
transparency and it further leads to productivity. Three important costs that can be managed and
minimized through collaboration are material costs,time of production and cost per unit of
production.While material cost depend on the availability of resources,time and transportation
costs,time of production can be best achieved through division of labour and specialization. Labour-
intensive techniques also can be adopted in labour abundant countries.A proper flow of market
information can help regulate the cost of production.Transparency in costing will lead to savings
and margin enhancement throughout the supply chain.
Proliferation –Improving relations with suppliers fora bettercoordination will help in uninterrupted
supply ofrawmaterials by following any ofthe following ways – (i) excellent material engineering:A
betterportfolio ofrawmaterials, like limiting the counts offabric and largerquantity ofeach quantity,
instead ofvariety ofcountsand smallamounts ofeach count offabric like 80 count,60 count,40count in
silk yarn.(ii) Value chain management forbettertimely orders.(iii) Integratedsupply chains with fashion
trends,value creation andwinning customerloyalty by providing complete brand
experience.Waysandmeansforapparel companies to attain this goal:
A rightward shift in the production possibility curve is possible with improvement in technology,
given the level of economic resources at a given point of time. Innovations, collaborations and
proliferations manage costs as that of labour cost management.
Discussion questions:
1. Why labor as a factor of production is important in the production decisions?
Hints: mobility of labor, skilled labor
2. What are various ways to manage costs ofproduction?
Hints: labor cost management, International trade, Innovations,supply chain management
Source: Jessica Distler, Javier Fernandez-Seara, Holger Gottstein, Volker Haemmerle, Stefan Rasch, and Stefan
Rohrhofer Apparel at a Crossroads (2014): The End of Low-Cost-Country Sourcing, bcg.perspectives, NOVEMBER
19, 2014.
1.6 Introduction to Micro Economics Production Possibility Curve Economics for Managers
8

3. Demand Determinant “ConsumerPreference”
- A Case ofGreen Products
Demand for a given product at given point of time depends on various factors like
price of the product, income, tastes and preferences, prices of related products,
promotional expenditure and future expectations.
Changed consumer preferences are driving new demand for green products in retail and bulk sale.
Organic and eco-friendly products have now become the core product line in these outlets.Responsible
The consumption of eco-friendly products or socially conscious consumers is about 15% of sales in
retail grocery outlets.
The change in consumption pattern is mapped to responsible consumption behavior attached to
emotional benefits of the consumer
Socially conscious consumption has grown by about 9% in last few years .On the whole, the total
growth of green products was almost 70% of the total market.
Almost same trend was observed across various developed countries.
Surveys across the globe found that the future growth of green products in the total production is
depending on what consumers prefer.
If producers want to be in the market they need to produce more and more socially conscious
consumption category products.
Higher prices and superior packing can serve as a new kind of conspicuous consumption driving
these responsible consumers
This growth trend is not seen in established brands,but is observed in traditional and specialized
retailers.
If this trend continues for coming years, then the established brands or companies may lose demand
of their products for about 1/3rd of current or existing demand.
By avoiding production of green products, established brands may enjoy the advantages of scale of
operations and distribution, but in the area of socially responsible consumption goods, production
companies failed to win the trust of the consumers.
To build trust on the claims made on green products, claims from NGOs and highlighting the under-represented brands can be
undertaken.consumptionisdrivingthischange..Research studies in the USA indicate the following:
To be at par with the changing preferences of the responsible consumers, companies can start new brands
or takeover brands with green products to cater to the socially responsible category, which is on a
growing spree.
Business decisions like what to produce, for whom to produce etc., depend majorly on existing
demand and changing behavioural pattern of consumers. Demand for eco-friendly products like
green products is one of the classic examples of how changing preferences of consumers guide the
business decisions in the market. 78
1. Why production decisions are dependent on consumer preferences?
Hints: choice of consumers,tastes,habits,conspicuous consumption.
2. What are the different determinants of demand? How consumer knowledge influences the decision
making?
Hints: various influencing factors, change of preference due to acquired knowledge.
Source: Marty Smits, Dan Wald, Diederik Vismans, and Emmanuel Huet 92014) - An Imperative for Consumer
Companies to Go Green-When Social Responsibility Leads to Growth, BCG. Perspectives, June 12, 2014
2.3 Theory of Demand and Demand Theory - Determinants of Economics for
Supply demand Managers
9

4. The Boomerang EffectofProjectedConsumption
Expenditure on Supply
Supply is that quantity which a supplierwants to supply at a given price and at a given point of time.
Over the coming decades millions of Indians and Chinese are projected to join the middle income class
group that would lead to a major shift in the demand for goods and therefore the consumption pattern.
The new affluent consumers are expected to shift their expenditure pattern as well due to increased per
capita income and create an impact on the rest of the world, specially to the Western and European
countries through what is known as the boomerang effect.
This boomerang effect is expected to work the following way. Increased consumption expenditure in
these two countries would seek new business opportunities, drive investments and increase primary
demand and derived demand for goods traded globally. However, this would strain the supply -
constrained commodities. Resources are scarce. Increased demand not met by substantial increase in
supply due to its inelastic nature would hike the prices of commodities further creating shortage in all the
inter-linked countries.
Per-capita income of households to increase three times
Approximately two billion consumers would move to an economically comfortable zone
Demand for better quality housing will increase; concentration on densely populated cities.
By 2020 both the countries collectively would spend for about 10 trillion dollars per year.
In these years consumers in India and China will create demand for commodities like fertilizers, cement, oil and gas,
steel, corn, copper, etc. Supply in such cases is limited by its inelastic nature of production due to resource
shortage leading to inflation.ProjectedIndiaandChina’sconsumptionexpendituretrends through 2020:
Production of supply-constrained products such as farm products will have its impact on imports and
its prices. The effect of these changes will create almost similar impact on producers and consumers.
These trends in consumption will create world-wide boomerang effect and the competition in the
farm products will lead to price rise, to almost cut-throat competition in the international market.
Consumption expenditure of this size, for almost 10 trillion dollars per year, will affect the already
stagnated countries like USA,
By 2020 real income in USA will grow very little, may be around 0.4 percent.
Shortages in output due to increase in demand will have trickle-down effect in U.S. and European
economies causing price rise in these countries as well. As shown by the study,a rise in chicken
consumption by China, say, would increase the cost or rearing poultry for slaughter. The poultry
food price like the soya beans and corn would increase manifold. This would increase the general
price of chicken in the international market affecting the normal family in the U.S. whose per capita
income would have remained the same as before, making it highly unaffordable, which was
otherwise affordable previously.
Countries in the international arena may indulge into farm produce wars ultimately creating water
wars to produce farm products like soya and corn.
The solution for these problems of increased costs of production due to boomerang effect lie in
‘innovative production practices’ that will enable huge product ion with lesserprices to meet the
increased demand.Boomerangeffects:
In growing markets, demand no longer confines to available goods in domestic markets but it creates
market for new products with the changing lifestyle. A shift in demand can have a manipulative effect
on supply conditions creating boomerang effects. A solution for this can be devised through better
and innovative production methods and investments which enable high productivity at low costs.
10

Discussion questions:
1. How does a shift in demand affect supply? Explain with the help of a graph.
Hints: inelastic supply,shortage of resources – shift in suppl y.
2. How do you see boomerang effect of a shift in demand as a concern on supply curve? What are the
solutions?
Hints: creates shortage – stagnant economies; innovations an d capital investments
Source: Michel J. Silverstein, Abheek Singhi, Carol Liao and David C. Michael (2013): The Boomerang effect, BCG
Perspectives, March 2013.
2.5 Theory of Demand and Supply Theory – Law of Supply and Economics for Managers
Supply determinants of supply
11

5. Impact of New GenerationConsumerBehavior on Market
Choices - A Case ofU.S. Millennial Consumers
Consumer behaviour is predominantly being guided by the ‘utility’or ‘satisfaction’derive d
from a good or a service and this in turn determines whether to demand a product or not.
Consumers of 18 to 34 years age group of today are known as ‘Millennials’ in U.S. Due to their specific
consumer behavior, they are very important for marketing and estimating the demand pattern. These
groups of people contribute for about 1.3 trillion USD in the total expenditure in the U.S.
Millennial category consumers are developing a unique kind of shopping preferences and habits.
Consumers are more associated with brands on a mutual basis.
Millennials have got the power to strongly influence the opinion of current and potential consumer
generations.
Online media is identified as the strong aid in the marketing process for the millennial consumer
behavior.
Consumers publish their reviews and opinions in the online social media and that will in-turn influence the market in both ways, i.e.,
for good and bad feedback. This acts as a strong externality.
FewobservationsofthestudyreleasedbyBCGduringJan2014:
A new approach – a reciprocal ecosystem depending on new m illennial consumer behaviour: The
reciprocal influence of business ecosystem (means, seller - consumer interface in a market) and the
resulting incorporation of changes by the seller has a strong bearing on millennial consumers’ behaviour.
Companies should provide a wide range of brands through various channels,especially media
channel
Referral market is expanded by involving consumers and by laying emphasis on signifying thesocial values
attached on buying a particular brand.
So,
Consumer behaviour towards a product or service is influenced by the satisfaction or ‘utility’
derived from it by the consumer. But the preference of these consumers, especially by those belonging
to younger generations, whose size is expected to be significantly high, is influenced by referral
groups and digital media. This behaviour of consumer is a resultant of interface with reciprocal
ecosystem where in consumers are greatly influenced by peer group opinions or feedback about the
products.
1. Why a consumer, though sovereign,is dependent on others to buy a product or service? Hints:
utility; maximum satisfaction ; decision based on information and peer group influence.
2. What are the most influential sources of information for a young consumer in the modern era of
millennial consumers?
Hints: millennial consumers are young and tech savvy; Interface with reciprocal ecosystem
Source: Christine Barton, Lara Koslow, and Christine Beauchamp (2014): Follow the Surplus: How U.S.
Consumers Value Online Media, bcg.perspectives, January , 2014
3.3 Consumer Behavior Choice and Utility Economics for Managers
12

6. Consumer Surplus and Online Media
Consumer surplus is the positive difference between the willingness price to pay for a
given goods or service and the actual price paid. This is a net value created by
consumers to themselves by an informed buying decision.
Online media is a medium that largely creates value to consumers. A research study done by BCGfound
that the net value created through online media (about 970 USD per consumer) is more than the net
benefits (about 900 USD per consumer) that a consumer derives from offline media. As a concept this
net benefit can be considered as “consumer surplus”.
Continued growth of online media is due to qualitative and quantitative information and the range of
products available.
Easy access to consumer for online purchase through devices like laptop, mobile, computer,
ipad/Tabs,etc.
Established advertising modes, new product lines and services,monetization of data that is available
on the internet media etc., help to realize gains from online media
Books, radio and music, magazines and newspapers , TV and video games, usergenerated content
(UGC) and other social media networks are the categories of media network which have got the
scope to derive benefits to consumer through online media .
Facebook, YouTube, etc., are the highest generators of surplus because consumer hardly incurs any direct cost. On the
contrary, offline business of books generates more surplus than online media even for fast-selling
books.Observationsregarding consumersurplus from the study (2013):
New technology, time spent online per week, liberal norms of government on internet media and the
open minded consumers considering new options are few other important reasons that led to the growth
of online media.
Consumer surplus is the difference between the price which a person is willing to pay and what he
actually pays for a good; it emerges when a consumer is capable of taking informed buying decisions.
Some research finding observed that consumer surplus is possible especially in online purchases due
to availability of wide array of goods or choices and almost complete information at ‘zero’ transport
cost.
1. What is Consumer Surplus and how can it be created?
Hints: consumer surplus definition ; price difference between actual and willingness to pay.
2. What are the different factors which creates consumer surplus?
Hints: info from new technology and digital media network; Easy access to internet; No/less direct
costs
Source: Jean-Manuel Izaret, John Rose, Neal Zuckerman, and Paul Zwillenberg (2013): Follow the Surplus: How
U.S. Consumers Value Online Media, bcg.perspectives, February 2013
3.8 Consumer Behavior Consumer Surplus Economics for Managers
13

7. Production Decisions -Global Shale-gas DevelopmentRace
Production function is a relationship between inputs and output.
In the late 1990s, improved technologies led to a large scale production of shale gas in the US. With the
development of Barnett Basin in Texas, the production of shale gas increased manifold. Production of
shale gas increased by 35% from a mere 2% ten years ago and is expected to increase by 45% in the
coming 6 to 8 years. This success in US has created interest in other countries too, to explore shale gas.
It has createdattractiveinvestment opportunities
Been a level player in fixing the prices of oil
Created a huge impact on related sectors to develop and complement business decision through
ripple effect like
 Expansion of onshore contract drilling market, the pivot for core production activity of shale gas 
 Pressure pumping market which is highly dependent on shale wells hydraulic drilling
 Proppant Market, an access to sand mines and transporting sand to wells is another essential
requirement to the tracking process.
 Oil Country Tubular Goods market; with these pipes and tubes the fracturing process can withstandthe stress resulting from
the process.Thenewtechnologycarrieswithitcertainpositive,significant economic impacts:
Apart from the above, the spill-over effects of shale gas production will lead to the development of
subsidiary markets as well like fracturing fluids, pipelines and railcars, real estate and water
management, petrochemicals, etc.
However, identification of shale gas wells and input of various factors for propelling production may not
always culminate into desired levels of output. Factors other than the traditional inputs may hinder
production. Such factors are posing a challenge for various countries that had undertaken shale gas
production following US’ success. Other than technology and favourable government policies, there are
issues like geology, economics, regulation and social acceptability of shale gas development which
In Argentina the oil wells are productive and suitable to use better technology like hydraulic
fracturing, but difficulty in arranging foreign capital and suitable price-mechanism for producers are
matters of concern.
There are many oil wells in Poland but output does not match the number after drilling.
Ukraine has many independent conventional gas fields but they face lot of political and business environmental hindrances causing
negative effects on its development.influenceproductiondecisions.Followingarefewsuchexamplesthatmarproduction of shale gas:
Production of shale gas is a highly lucrative field, opening up opportunities for other manufacturing units
to develop simultaneously. Nevertheless, apart from the cost of production, other clandestine issues
related to production needs to be addressed to drill output of shale gas to the expected level.
Any business entity has to make various decisions with respect to its business operations or
production. Introduction of disruptive technology in shale gas exploration has helped US to increase
oil production substantially. The case-let illustrates how some of the oil producing countries has
encountered problems in production levels of shale gas due to bottle necks in policies / resource
inputs.
1. What factors affect production decisions otherthan efficiency?
Hints: government policies; Socio-economic factors etc.
2. What is the role of external factors on improving scale of operation other than the size?
Hints: development of othersupportive sectors,Economies of agglomeration and conglomeration
Source: Iván Martén and Eric Oudenot (2013): The Great, Global Shale-Gas Development Race-Where to Focus
Commercial Resources, BCG Perspectives, JULY 17, 2013
4.7 Production Function Production function and Technological Economics for Managers
change
14

8. Acquisition – Reaping Economies of Scale through
Value Creation and Risk
Value creation in businesscan take place because of large scale operations by
means of economies of scale in pecuniary or real or technical dimensions.
Most of the consumer goods industries these days practice acquisition of new companies for value
creation, however, not without the risk of overlapping product line and cultural division. With proper and
cautious running of integration, acquirers can create value for shareholders in absolute terms. In
consumer goods industry about 30 value creators made many acquisitions between 2002 and 2012.
The acquiring companies will have benefits of scale within categories as against earlier trend of
diversification; this is especially true for fast moving non-durable consumer goods. When the scope for
organic growth is low, the company will have the opportunity to improve the business through
acquisition where markets are developed and cost savings exists. Improvements in logistics networks for
last 15 years in the FMCG (especially non-durable goods) industry led to a significant reduction in costs
and enabled companies to manage greater volumes and scope. The acquirer company also have an
advantage over differentiated costs of similar goods sold and can gain a comparative advantage over
competitive price. The benefits of product design and production methods can be harnessed through
effective acquisitions. As far as overhead costs are concerned, a direct gain will take place by the
acquirer while working the administrative costs. Cost-savings also occur in information-technology
spend and utilization of working capital and capital reserves.
Marketing costs are reduced through centralized marketing activities like distribution, market
research, media-related expenses etc. Acquirers try to synergize with various complementary goods
to improve the scale of production;
Selling costs are decreased by 40% against estimated costs due to integration ; expenses on
facilitating route-to-market network and international distribution reduces;
Close collaboration between leaders of the acquirer and acquired lead to optimization decisions
ranging from portfolio investment to the number of salesperson to play in the market;
Combined value creation of the acquirer and the acquired boosts product salesCostsavingsandrevenuegrowthfosterthenetpresentvalueoftheacquisitioninthe following ways:
Nevertheless, for the smooth functioning of large scale business operations, proper sorting of cultural
divisions and selling of one brand at a time post acquisition by both sets of sales & marketing persons
(acquirer and acquired) is inevitable.
Business expansion through positive economies of scale is possible either by increasing the size of
operations by expanding the capacity with additional investments in the existing plant or acquiring
new ones. These benefits accrue in the form of integrating diversified operations, widening the
existing markets, exploring new markets, cost savings through better and cheaper procurement,
reduction in overhead costs, better marketing and selling practices, etc.
1. How does acquisition result in large scale operations and further to economies of scale?
Hints: define acquisition; integration of products and markets
2. What are the benefits of large scale operations?
Hints: economies of scale; Access to developed markets and cost savings
Source: Chris Barrett, Daniel Friedman, Jeff Gell, Marin Gjaja, and Steve Maaseide (2012): PMI for Consumer
Goods - Finding the Opportunities, bcg.perspectives, OCTOBER 04, 2012
Unit Topic Course
4. Production Function Scale of Operations Economics for Managers
15

9. Scale of operations – A case of ‘Tesla’ an Electric Car Com pany
Economies of scale do not always result from a firm’s expansion of
capacity,especially for new products or innovations.
Success of any business, especially small business, is dependent on the scaling factor. When small
business firms introduce innovative products in the market, it is difficult for themto retain the advantages
of innovation due to its insignificant size. This may culminate into lack of reach. If the size of operations
of a company is significant, it creates a way to measurable and comparable quantities of demand for its
products.
Tesla, an electric car company run on battery technology with zero emission did the same to create a path
by “patent open source”. By patent open source, it allowed ot her business firms to use the patented
technology. This was an open invitation for collaboration and gelling with other small business firms; a
business technique to integrate with other firms to expand business clientele. Expansion of client base
can bring in the required scale of operations what expansion of capacity could not achieve. This is the
key to long term success. Tesla tried to agglomerate with other small business firms. These firms had the
resources while Tesla had the expertise. Sharing helps the industry grow at large. Firms in the industry
also grow alongside. With delivering teams available with other small businesses, Tesla wanted to make
use of these teams and channelize them through gutsy delegation. This is a brilliant way to scale up the
business and grow with the industry.
Why Tesla has done this?
Valuable part of Tesla’s business is its battery technology. It has an innovation without a supportive
strong customer base. By opening out its patent rights on battery run electric car technology, the
followers will come out with more electric cars, thus enhancing the sale of Telsa batteries. It is the
battery technology that required demand by Tesla and not its electric car. The dual benefits of
agglomeration and economies of scale can be enjoyed by Tesla,
In this case, Telsa tried to create scope for economies of scale by creating avenues for expansion of
the industry through sharing or by making its patented battery technology available to its potential
competitors. By doing so, the product has a wider reach. The industry grows simultaneously through
increased demand brought by this reach.
1. How can economies of scale be interpreted?
Hints: economies of scale – external economies and internal econo mies; economies of
agglomeration
2. What are various avenues for a new product or a new innovation to experience advantages oflarge
scale operations?
Hints: patent open source – make use of other firms’ market know ledge.
Source: Ted Devine (2014): Turn to Tesla's Example in Steering a Startup to Success, Entrepreneur.Com, August
2014.
5.7 Analysis of Cost Economies of Scale Economics for Managers
16

10. Mexico’s Emergence as a Star Performer – Case of
Cost Competitiveness
Cost is the expenditure incurred on buying inputs for production. Cost competitiveness
makes a firm competitive by enabling the company to produce products at relatively
cheaper cost of production.
Ten years ago, the manufacturing sector in Mexico was in doldrums due to tough competition from US
and China. The revival has started as the FDIs started flowing back to Mexican manufacturing industries -
Sharp, Sony; Samsung etc. have invested about 33% of their total investments. During the revival period
between 2006 and 2013 the exports of electronics have more than tripled and reached production worth
78 billion dollars. Mexico has widened its manufacturing strength by developing industrial clusters like
transport equipment, home appliances, auto-parts and computer hardware.
A significant shift in cost competitiveness is the major reason behind the revival.
Manufacturing costs were less by 4% than in China. China’s costs were high due to rising labor costs
and falling productivity. In Mexico, between 2004 and 2014 almost 67% hike in manufacturing
wages was covered by improved productivity and depreciation of Peso against US dollar.
A reasonable good amount of energy cost advantage due to reduced energy and natural gas prices,
almost by 37%, due to cheaper energy alternative from the shale gas revolution in the U.S.
Good work ethics and relatively less labour disputes due to betterlabour laws and these further
resulted in less loss of labour hours due to strikes, etc.
By providing better infrastructure and investment environment Mexico wanted to improve its
competitiveness.Whatarethereasons behindMexico’s revival?
A cost-output relationship plays a significant role in any firm / industry. Cost competitiveness can
be achieved by cautious and deliberate efforts in increasing output. Expansion of industrial clusters by
providing scope for cost competitiveness is one such method to improve cost-output relationship.
1. What is the role ofcost in development ofa sectorora firm? Hints:
cost function – change in output and determinationofprice.
2. What are different ways to become cost competitive?
Hints: high productivity; currency depreciation; low input costs ; development of industrial clusters
Source: Eduardo León (2014): Cost Competitiveness – A country view, bcg.perspectives, August 2014.
5.4 Analysis of costs Cost Function and Production Function Economics for Managers
17

Block II:
Microeconomics - II
11. Perfect Information – Its Importance in Perfect Compet ition
12. A Route Map to Perfect Competition – A Case of Content M arkets
13. Staying Big by Acting Small: Non- Price Competitive Strategies
14. Creation of Demand for IT Consumption – A Case of Intel I ndia
15. Lessons from First Movers – Case of Oligopoly
16. Housing Prices and Housing Rents – A Case of Housing Price s Trajectory
in U.S.
17. Wage determination and its Distributional Effects – Case o f Minimum
Wage
18. Milton Friedman’s ‘Profit’ – A Critique
19. The Most Important Figure in Finance: “Interest” – A Case of LIBOR
20. Decision Making and Risk Minimization
21. Investments and Growth – A Case of Deliberate Capital All ocation
18

Block II: Microeconomics - II
11. Perfect Information – Its Importance in Perfect Compe tition
In Perfect competition all the firms in a given industry produce similar or homogenous products,
charge uniform prices and market with prefect knowledge ofinformation.
The financial market is one of the closest examples of perfect competition due to its homogeneity,
availability of product information to all, multiple sources of sale and the uniform regulatory framework
under various acts. These features are common in all economies.
Do the characteristics of the competitive market make a financial market a perfect market? Does available information on the
website about the product mean perfect knowledge to consumer?
TheKeyQuestionshauntingthefinancialmarketsare:
Complete information about the product to the consumer is important under perfect competition.
Whether the amount of information available to a consumer leads to positive outcomes from the market
place can be inferred only when the available information is drawn for decision making. So, along with
availability of data it is equally important to have the capability to understand and infer the data
Availability of information
Prioritization of the available information
Extraction of information from the source to suit the needs
Net positive contribution of available information
Application of the information &
Interpretation of the information once appliedcorrectly.Someissuesthatcropupinthefinancial markets are:
In investment decisions, understanding of available information is more important than just availability.
In many occasions ‘complete information’ do not necessar ily imply ‘full information’; in other words,
segregation of available information as important and unimportant is necessary. So complete information
to look at is very simple but to use this information for ‘efficient decision making’ is the reality check
that promises the existence of perfectly competitive markets.
The issue in financial markets is whether the market (the investors) is taking an informed decision
based on the provided information. Just provision of complete information does not serve any purpose
but deciphering and understanding the information is more important, especially in the case of
financial products. Due to these lacunae, complete information about the product cannot be
considered as a base to describe market as perfect market when a consumer is unaware of what he
knows and what decision to take based on this information.
1. Is financial market a perfect market?
Hints: characteristics of perfect markets
2. Why can’t we consider availability of complete information about a product to a consumer is enough
for buying decision?
Hints: complete information – full information – interpretatio n of information.
Source: Eadmin (2014) – Complete Information, incomplete perspectiv es, institutional-thought leadership,
September, 2014
6.3 Perfect competition Characteristics of perfect competition Economics for Managers
19

12. A Route Map to PerfectCompetition – A Case ofContent
Markets
Content markets are the markets where information is available in various websites for users to
explore. These markets provide uniform information in various websites. Perfect markets are the
markets where all the content providers are supplying homogenous products.
The content suppliers are mushrooming through various social media firms. This content market mimics
a perfect market and comprises of suppliers of content production tools along with suppliers. The
existing and developing features of this market necessitates decision makers and the strategists to focus
on the market structure in which they are operating for the sustainable development. Otherwise it may
change the economics of content market. Suppliers of content production tools and distributors include
Bloggers, iPhones, smart phones, Twitter, Face book, Google +, YouTube, WhatsApp etc.
Overlapping of the content always take place. For example, say, an article in a newspaper by ‘X’ is
tweeted by his friend in twitter and he in turn blogs it in the Facebook viewed by many. They
forward the same to many otherand likewise the chain continues via different social media. This can
be viewed as provider of same content by numerous suppliers as in perfect competitive markets.
Large number of sellers and large number of users are there in a perfect market.
 Free entry and exit takes place in the market. For example, if any one supplier in this supply or
content forwarding chain exits, he/she can be easily replaced. For example, channels like Star
Sports, ESPN, Ten Sports, CNN IBN, Regional news channels etc., though not perfect
substitutes, allocate time for sports news; it is a reflection of substitutability; in such a market a
continuous supply of suppliers is observed – mimics feature of substitutability.

 For the next feature of perfect competition, the information available on source like Google
reflects complete information as in a perfect competitive market.

 No or very negligible externalities and transportation costs such as registration fee exist.

 Content suppliers or bloggers can move from one website to another website or can develop
their own blog – perfect factor mobility. Whateverbe the niche market the supplier of content
development has made can be easily replaced by anothersupplier. The users also conveniently
shift to the new supplier of content.SomeimportantfeaturesofContentMarket
Content market is one of the closest examples of perfect market due to its product homogeneity and
no or nil transport costs. In the long run the number of firms in the competition increase leading to
large number of consumers and suppliers. Perfect factor mobility is its another important feature.
1. How does content markets transform into perfect markets in the long run?
Hints: incorporates the features of a perfect market.
2. How a market can preserve its uniqueness and avoid competition?
Hints: product differentiation; niche strategies; entry barriers
Source: Adrian Blake (2014): Why the content market is becoming perfectly competitive, Adrian Blake blog –
Strategy, Social Media, February 2014.
6.6 Perfect Competition Long run equilibrium Economics for Managers
20

13. Staying Big by Acting Small: Non- Price Competitive Strategies
Some companies operate in a different way than that of market condition,become leaders and
earn good profits.
In March 2013 a group of strategists discussed the emerging theory and practice of outliers – analyzing
the strategy and the performance of four outliers. The performance of an outlier company is totally
different from the incumbent company. Till the recent past, companies especially under imperfect
competition were under the strong opinion that “scale of e conomies” strategy is dominant. But with the
advent of new school of thought coined as ‘mavericks’, (who are als o called as small outlier companies),
they are under constant threat of disruption.Mavericks do things differently by identifying the gaps in the
existing practices of mature companies (incumbents) in the industry and grow as a challenging
competitor to the existing dominant firms.
Deploying novel business models with low-cost processes
Changing the industry’s collaboration model
Identifying the customer needs not satisfied by the existing companies’ services or
practices Quick adoption of inter-industry learning
Being more adaptable to the changing environment than the incumbents
Converting shortcomings and shortages in the industry as business opportunitiesSomeofthestrategiesadoptedbyoutliercompaniestobecomemarketleaders:
These companies should learn to foresee the future changes or changing trends in the markets and
can learn to be open minded, adaptable and be swift to the changes.
They should also foresee the outliers as possible threats.Incumbents were once mavericks too.
Outliers can be seen as researchers who could forecast the future of the industry.The changes they
bring can be implemented by incumbents as they are strong in position,scale and resources.
Customer segmentation and customization processes of outliers pave way for incumbents to imitate the strategyof small
companies.Learningforincumbentcompanies:
Issues in following mavericks by incumbents and few remedies for its longevity of
Size of outliers may not attract the attention of the incumbents or may get ignored by them.
Incumbents may overlook the changing trends in the business beyond the successfuloutliers.
Underestimation of outliers to be avoided by the incumbents.
While financially weak outliers adopt shoe-lace models, incumbents often rely on internal
innovation and less focus given on new strategies.
Incumbents should focus on peripheral changes as a potential challenge.
Understanding the moves of the outliers or the thinking process,incumbents may proceed with
acquisition/ merger/ alliance with them; or have to establish a suitable new unit to compete with
outliers.leadership and growth:
Any company, in its nascent stage in the industry, will get an opportunity to become market leader
(incumbents). In certain cases, new entrants (mavericks) operating under imperfect competition, by
being adaptive to change, bridging the gap of dissatisfied consumers through small innovative ways
and also by thinking different, earn good profits.
1. Size operations vs. innovative practices - discuss
Hints: scale of economies; profitability; average cost; Efficiency of factors of production through
innovation
21

2. Irrespective of scale of operations,what factors contribute to success in business?
Hints: innovation; conception of business idea as per the customer needs; adapting to changing
environment
Source: Martin Reeves, George Stalk, and Jussi Lehtinen (2013); Lessons from Mavericks: Staying Big by Acting
Small, bcg.perspectives, June 2013
7.1 Imperfect Competition Imperfect Competition Economics for Managers
22

14. Creation of Demand for IT Consumption – A Case of Intel India
Demand for technology-related products is a typical case of higher purchasing
power and creation of need. Non-price competitive strategies will help companies to
create demand for such products under imperfect competitive markets.
Increase in technology-related product consumption is one of the important measures to increase or
create demand for computer products. Existing Indian technology market has expertise in meeting the
global IT market but the usage of IT within India is very limited. Only 10% of the population in India has
access to personal computers and is comfortable in using computers. According to Ms. Debjaini Ghosh,
Vice President, Sales and Marketing Group & Managing Director, South Asia, Intel, ‘digital illiteracy’ is
the biggest challenge in India and it is the important limiting factor for the size of technology market.
In order to increase the demand for computer chips in Indian market, Intel India planned to take certain
measures to unplug the blocks and move strategically to drive its future growth. Consolidation of market
for devices like PCs / smart phones, tablets can be segmenting the market based on the screen size.
Indian technology devices market can be divided into two parts (i) price sensitive markets with cheap
devices and poor performance (ii) high priced high-end device market. The gap between these two
markets is what Intel is strategically trying to concentrate to create demand for Intel devices.
Accordingly, it has planned to provide relatively good performance oriented PCs at affordable prices.
Intel India has taken certain measures to create demand for technology consumption and to tap the
Exploring market where non-English speaking and semi urban crowd is situated,innovations in
hardware and software, particularly in software, like interacting in the local language,to connect
people with PCs
The critical area for smart infrastructure is e-commerce and government services like e-seva. Intel
has plans to concentrate on data centers and cloud centers and has tried to explore the growing
opportunities especially with the vision of new government to work in a strong technology based
environment.
By forging into a strategic partnership with Asus and Lenovo, Intel would like to focus on certain
specific strategies to eliminate the competition from smart phones at mass level.
To improve its future market by focusing more on ‘easy to carr y’ gadgets with a compact screen
size.
With these measures Intel India wants to proceed for creating demand for PCs and thereby computer chips in the domestic
market.unexploredIndiandigital/technology market by:
Growth of technology market and demand for technological products is generally constrained by low
usage due to ‘digital illiteracy’. Creating demand for such products necessitates a change in the socio-
cultural environment and cautious market segmentation based on users’ profile. Non-price
competitive methods. will help create demand under imperfect competitive conditions.
1. What is non-price competition and how it creates demand?
Hints: definition, creation of demand, innovation, product differentiation and market segmentation.
2. What is the role of government policies in business development?
Hints: constructive policies, long run goals.
Source: Gireesh Babu (2014): Business Standard, B2B Bureau, Chennai, September 06, 2014
7.5 Imperfect Competition Monopolistic Competition – Non-price Economics for Managers
competition
23

15. Lessons from First Movers – Case of Oligopoly
Market share, be it underperfect or imperfect structure,influence the decisions of business
entities,their leadership and theirprofits. In is more pronounced in an oligopoly market.
Generally, being a pioneer in improvised products is considered to give a competitive edge to lead the
market. In Pharma industry, an oligopoly market, a large lead time after the introduction of a fresh,
improved drug is essential for any firm to sustain in the race of a profitable leader. Many a times, the first
mover may not enjoy the fruits of both being a leader and earn profits. This is typical in a Pharma
industry.
In one of the articles published by a leading consultancy firm, the authors have identified few advantages
and disadvantages of being a first mover in the competition after analyzing 492 drug launches in 131
classes over a period of 27 years between 1986 and 2012.
First market players have for about 6% market share advantage over late entrants,but it is only in the
50% drug categories.
First mover is advantageous in the prescriber level, but it is small in number. In primary care, this
effect is very weak.
Injectable drugshave betteroutcomesforfirst movers than oraldrugs; this could be dueto specialty and
prescription leveloftreatment; here too,the advantageis insignificant at primary health care level
The chance of not gaining much by being first movers is dependent on the speed and lag time of the
competitors. If the first mover is weak in the market share, late entrants can grab the market.
Better placed if the first mover is a large scale or an experienced company in a therapeutic than a
small or an inexperienced firm.
The product label within the first five years oflaunch is a decisive factor to own the largest market share.Advantagesasidentifiedbytheresearcher
In spite of above mentioned advantages, late entrants will have a chance to have better market hold for
about 50% of drugs as they know the shortcomings of the first entrants and get time and space for
rectification.
If the lead time is less than three years with the possibility of multiple competitors entering the
market, it may lead to cut-throat-competition.
Clinical and commercial developmental strategies are equally important as much as the lead time. A joint venture of small and
large firms will turn out to be mutually beneficial.
Disadvantagesandfewsuggestionsbytheresearcher
Some of the industries are dominated by large number of small firms and presence of few very large
firms. Many of the firms have made their presence felt through production of differentiated
products. The entry barriers in specific products are relatively high. The present case-let is a typical
example of an oligopoly market,
1. What factors contribute for an oligopoly firm to be a market leader as an early mover in the
competition?
Hints: gaining market share – entry barrier through innovation.
2. An early mover may not always enjoy the market leadership. Why?
Hints: quantumof market share decides leadership – imitators – price competitive imitation.
Sources: i. Myoung Cha and Flora Yu (2014): Pharma’s first-to-market advantage, McKinsey & Company
SEPTEMBER 2014
ii. http://www.mckinsey.com/insights/health_systems_and_services/pharmas_first_to_market_advantage
7. 6 Imperfect Competition Oligopoly and Market leadership Economics for Managers
24

16. Housing Prices and Housing Rents – A Case of Housing
Prices Trajectory in U.S.
Rent is a reward for land.The price of land is determined by the quality and also the availability ofit.
Returns on housing and real estate investments are connected to growth in wage rate. Any rise in wage
has an impact on rental which in turn drives housing prices high. The wage-rent relationship is not
directly linked though.
While comparing Dallas and Philadelphia, though median household income is same, housing prices
are more in Philadelphia.
In certain cases,rise in housing prices are due to technology and consumer preferences to reside in
high rental areas due to their perceived values.
In certain cases loose government regulations leads to more supply of housing and increased
population
Anotherfactor that determines the relationship between prices of real estate and rents is the interest
rate.
Housing investments on one side provides a facility of shelter (utility) and on the otherit avoids
payment of rent from the consumer’s income.
If interest rates are more, then people tend to invest less in housing thereby housing prices fall and
vice versa.
Central Banks intervene by controlling interest rates; however, if housing prices stabilize, so will the
rents, in the long run.
Housing prices and rents are expectedto be maintainedat equilibrium at some stable interest rate, but when housing
prices shows signs of increase rents would also increase to be at par with the inflationary
situation.Thereisarelationbetween rent andwage. This article speaks of this relationship between cities.
Rents are such reward for land – with inelastic supply - is det ermined basically by its availability and
wage rates. Wage determines the capacity of wage earner to invest in housing or real estate or pay
higher price for rented ones. Other than this, rent is also determined by government policies of ceiling
prices, stringent regulations and land use pattern. This phenomenon is similar in all economies.
1. How wage and rent are related?
Hints: Definition of wage and rent – relationship between the two.
2. How supply and demand for housing influences rent?
Hints: determinants of demand and supply – equilibrium rent based o n demand and supply.
Source: Karl Smith (2013): The housing bubble back, MB Blog, Forbes, March 2013
8.6 Rent and Wages Relationship between rent and price Economics for Managers
25

17. Wage determination and its Distributional Effects – Case
of Minimum Wage
Wage is a component of factor cost which is determined by the demand for and supply of labor.
In many cases, wages are determined by market forces. Wage, a component of cost to the employer, also
determines the purchasing power of the employee. So it has its effect on both supply and demand
conditions in an economy. This nature of wage necessitates policy makers to evolve with some minimum
wage level that can create demand through improved consumption expenditure; the latter being an
inducement to invest and produce; this cycle will result in better growth rate of the economy.
Revision of minimum wages from time to time is necessary by the government not just as a
developmental policy measure to remove inequalities, but also as an adjustment for inflationary
tendencies. Revision of minimum wages in nominal terms took place in USA recently. Mr. Obama,
President of USA, proposed a hike in the minimum wages; and, this would improve the nominal wage to
9 dollars per hour by 2015. In real terms, this hike will match the value of wage to its 1979 level. In spite
of hike in wages, median wages are still lower than that of many other developed countries. As per some
economists, minimum wages may distort the demand for labor. However, this theory has been margined
by the data shown in UK during 1999 post Minimum Wage Act. Data from many other countries too,
dispose off this theory. Higher the minimum wages, more disposable income, more demand for goods,
more supply to meet the demand, triggering an expansion of the economy. When it expands, it increases
job opportunities and help in reducing the poverty level. It is a chain reaction.
On the contrary, David Neumark and William Wascher say that high minimumwages does not guarantee
better growth, because, high minimum wages sacks the less-skilled and unskilled workers fromjobs, this
will have an adverse effect on growth rate.
Wages, an important factor payment for the production factor (labour), is important from the
producers, suppliers of labour and from the point of view of policymakers. Wage is to be determined
at a reasonable level – the basic minimum should offset / reduce poverty and create employment
opportunities. If the market mechanism fails to guarantee this minimum wages, then it is the
government’s responsibility to fix it as policy matter. Else, it will lead to stagnation in the economy in
the long run.
3. What is the role of wages in economic development?
Hints: define nominal and real wage – interconnection between wa ge, demand, growth, minimum
wages.
4. What is minimum wage? Is it important for government to interfere in market mechanism?
Hints: define minimum wage – administered wages / price mechanism – labor exploitation
Source: Economist (2013): Raising minimum wage – Trickle-up economics , Economist-Washington, DC, Print
edition, Feb, 2013
8. Rent and Wage Theories of wages Economics for Managers
26

18. Milton Friedman’s ‘Profit’ – A Critique
Profit is a residual income after meeting the production expenses.It is this
element of businessthat motivates business to grow.
‘The sole purpose of a firm is to make profits,’ went viral when Milton Friedman stated thus in his article
published in 1970. This created a lot of uproar among the academia and the management gurus.
Business is to derive profits and create value to its shareholder.
Chief executives of corporations are employees of shareholders.
Corporates are mere “legal fictions”.
A corporate’s money is assumed and treated as shareholders money
Expenses by a corporate executive on social interest would mean spending shareholder’s money
The money spent on social interest would be compensated through price hike and thus money taken
away from consumers.
To make better profits, the executives should be made shareholders by the firm who will in turn work for
themselves.AccordingtoMiltonFriedman, as critiqued by the author, the following notions are displayed:
However, after the failure of GE’s stock performance, Jack Welch himself who was a strong believer of
shareholder value, stated that shareholder value is the dumbest idea in the world. Also, a leading
consultancy firm Deloitte developed the Shift Index to help executives understand and take advantage of
the long-term forces of change shaping the US economy. Shift Index was first released in 2009 and was
updated annually. The Shift Index made on 20,000 US firms concluded that the shareholder value theory
failed between 1965 and 2009 in terms of “making money”. It provi ded a comprehensive view of
Rates of return on assets and capital during the period under study reduced by 75% as shown by the
‘shift index’.
A big blow to the notions of “making money for the shar eholder” and functioning of firms on
“stockbased executive compensation approach”
During recession,companieswere losing theirvalue more than the impact that recession created; the
decline in the value ofassets/ firmnot necessarily due to adverse business cycle but due to bad
performance throughthe years.underlyingtrendsnotcapturedbyshort-termeconomic indicators.
A chief executive is an employee of the organization. Corporate have to consider employees,
customers and society along with the shareholders
Shareholder value is only a part of business strategy but not the only strategy.
Short term profit should not be an obstacle for long term sustenance ofthe business.
Any revival strategy coupled with regulations to be viewed with a positive outlook; else the policies
will be ineffective marking the doom of the future of business.
According to Peter Drucker and Thomas Kuhn a change in the attitude of the firms is required and
the change necessitates a paradigm shift from the old belief systems - shareholder value and stock
performance strategies - to sustainable and practical systems (Long term sustainable practices and
customer oriented strategies).
OtherSchoolsofthought:
Traditional views on profit are more of shareholders or investor centric; so creating value to share
holders was the motive of CEOs of the firms. According to modern thinkers, profits should not be
shareholder centric, if they want to sustain for a longer period. Companies should be with a view that
profits are result of strategies but not a strategy by itself. This approach will ensure better performance
of the company and a strong support fromemployees, customers and society, under any odd situation.
27

1. Define profit. Is profit the only legible remuneration of a producer?
Hints: define profit – traditional view vs. modern view on p rofits.
2. Why traditional view about profits is criticized by modern thinkers?
Hints: it is not just value created for shareholders – other roles of a firm while making profits.
Source: Steve Denning (2013): The Origin of ‘The World’s Dumbest Idea’: Milton Friedman, Leadership, Forbes,
June 2013
9.5 Interest and Profit Concept of Profit Economics for Managers
28

19. The MostImportant Figure in Finance: “Interest” – A Case of
LIBOR
Interest rate is determined in financial markets by establishing equilibriumbetween demand for
supply of capital and it is regulated by Central Bank of the country with a given lending rate.
The most important finance term ‘Interest’, determines t he flow of funds and most importantly
investment inflows in an economic system. The determination of this rate is not only crucial in the factor
market, but also important for a countries development. If such rates are not determined with utmost care
and integrity that results not just to a fraud in a bank, but interest rates like LIBOR (London Interbank
Offer Rates) leads to a global disaster.
LIBOR is offered rate for 10 currencies & 15 types of maturities. Until scandal broke out in 2010,it was
determined by 18 leading banks including the 300- year old Barclays. The pricing of LIBOR was
published daily in London by British Bankers Association. Important and dominant banks in London
charge a benchmark rate (LIBOR) determined by inter- continental exchange in international fianance, it
will be the base to charge the interest rate on its loans to other country’s banks and borrowing banks in-
turn fix their market rate of interest to its lenders. LIBOR guides interest rate determination in the market
for various financial products. It helps in determining the most critical interest rates like derivatives,
student loans to common housing loan rates etc.
If such rates are determined based on a fraudulent information’s and benchmark rates then it finally leads
to a major financial crisis.
Howthe LIBOR is finalized?
LIBOR is fixed each day by taking estimates from the panel what they think they would have to pay to
borrow if they needed money. Top four & bottom four estimates would be discarded. Then the LIBOR
would be the average of those left. The rates would be announced at 11am and the submissions of the
participants are published with each day's LIBOR.
Barclays and otherbanks tried to influence the final LIBOR fixing, with an objective to increase
profits (or reduce losses)on their derivative exposures.
Wrong information about their interest rates reveal an incorrect picture about banks’health and its
creditworthiness.
During that time there was almost 800 trillion US dollars’ worth of interest cum principal payments
received and paid by various parties through rate determined by LIBOR.
If the fraud is proved 1000s of crores should be compensated to all those sufferers due to the fraud;
because the interest rate charged is not the actual interest that they are supposed to pay if the banks
had given the actual interest rates to LIBOR. The offer rate would have been different.
For about 20 banks have been listed out by investigating agencies who were allegedly involved in
the scandal.
This interest rate scandalcan be viewed as a ‘Tobacco Movement’, where, after knowing the
negative effects of fraudulent interest rates,negligence was shown by the banks. This resulted in
breach of trust by banks. People lost their faith in the banking systemand its activities.
By principle, LIBOR is expected to be a fairer rate of interest that guides all other interest rates.
TheLIBORScandal-Fewinsights:
LIBOR is based on banks’ information and not on the demand and supply of borrowings / lendings
Every chance that the banker may breach the trust and reveal faulty information
Lack of transparency, the most important requirement in the financial sector
Reasonsthatledtothefraud–inherentflawsinLIBORdetermination
The rate should be determined based on market condition in maximum cases
Functioning of the banking systemwith utmost integrity
An integratedfinancial sector withtrust worthy creditors anddebtors
Needofthehourisforacleanprinciple
29

During February 2014, ICE Benchmark Administration Ltd. took responsibility for administrating the
London Inter Bank Offered Rate (LIBOR) which used to be maintained by the British Bankers
Association (BBA). This was an outcome of Martin Wheatley Review which was set up by UK
government following the allegations of LIBOR manipulation in July 2012. The Wheatley Rev iew
recommended that the Hogg Tendering Advisory Committee for LIBOR be mandated by HM Treasury
and the Financial Conduct Authority (FCA) to oversee a selection process for a new administrator of
LIBOR and make a recommendation to the BBA based on that process. Following the recommendations
of the Wheatley Review in September 2012, the Hogg Tendering Advisory Committee had identified
NYSE Euronext Rate Administration Limited as new administrator for LIBOR.
Financial markets operate both at national and international level with stipulated regulations. Interest
rate plays a pivot role in the functioning of financial market. Any deviation or fraudulent information
about interest rates will negatively affect international financial environment, because, borrowing and
lending activities based on interest rates determine the health of the financial transactions.
1. What is interest? How is it determined?
Hints: definition of Interest; demand for and supply of capital in the market; role of banks in
determination of interest rates
2. Is LIBOR a crucial rate in determining the market rate of interest? What are its various effects on the
financial system?
Hints: define LIBOR – its role; determination of offer rate – t ransactions based on offer rate at
national and international leels – any violation will lea d to disaster.
Source: Economist (2012): The LIBOR Scandal – The rotten heart of finan ce, Economist Print edition, July 2012
9.4 Interest and Profit Theories of Interest and Interest rate Economics for Managers
determination
30

20. Decision Making and Risk Minimization
Risk minimization and preparing one-self for uncertainties are the two major objectives of
decision making.Proper and timely decision is key to a successful business.
Planning for a city which can withstand or minimize loss during worst case scenarios such as natural
disasters has become a challenge, both for officials and businesses. A study by UNDP reveals that over
the last 20 years, in a year, on an average, 220 million people get affected by natural disasters. According
to UN, it was estimated that the cost of disasters since 2000 was around USD 1.3 trillion and the loss was
$380 billion in 2011 alone.
Role of Business: A study based on a survey of 200 sampling units in various countries explored few
Prepare for a crisis management team for identifying the probable occurrences of damage or loss,the
moment an alert is issued.Take measures to minimize such loss and prepare for a stand-by support
system.
Before, during and after the disastrous event staffshould be provided safety.They should be assisted
in managing the impact. The mode of communication should be good.
Identify an alternative work station till normalcy is restored, for undisrupted flow of work.stepsthatacompanycanfollowforminimizingtheeffectsofcertainuncontrollabledisasters.
In addition businesses can include a few measures as part of the organizational DNA for continued
Companies should plan for back-up sites,if possible,in off-shore locations. They should have a
permanent second operationalsite to avoid inconveniences or further loss due to aftermath effects.
Authorities and companies should join hands in addressing the climate change issues not as a reactive measure
but as a focused and proactive action.
businessplanning:
Business need to plan in advance for uncertainties and risks in anticipation of crisis. Crisis
management is all about preparing business for unforeseen conditions and to minimize loss.
Particularly, during natural disasters, cities will fall short or may be even cut off from many basic
facilities which are important for a business to continue post crisis. During such situations, companies
have to arrange for back-up work stations that will come handy, during and post crisis.
1. What is risk and uncertainty? How does it affect business?
Hints: definition of the concepts – types of risks and uncertainti es – loss due to risk and uncertainty.
2. What are the functionalities of crisis management?
Hints: crisis management team – backup system – alternate communic ation system.
Source: Jordi Martin (2014): How can cities better cope with storms?, World Economic Forum, September 2014.
10.5 Forecasting and decision making Risk and Uncertainty Economics for Managers
31

21. Investments and Growth – A Case of Deliberate
Capital Allocation
Capital is the source of growth and development of business. A proper allocation of
capital will drive the growth on a desired direction with minimal risks.
For ensuring growth, a deliberate and cautious ‘Capital allocation’ by CEOs and CFOs with proper
portfolio of investments is vital. Capital allocation is more a strategy than an operational task. Research
done by BCG (Boston Consultants Group) on various companies found that most of the companies do
this vital activity in an haphazard way.
‘Democratic capital allocation’, wherein companies spend their investments without discriminating
performance and growth potential
“Biggest children get the most food”, wherein capital is al located according to the size of the units
“We have always done it this way” typeof monotonous allocation of capital- based on age old
practiceListoffew ineffective practices by companies for capital allocation:
Prioritization and capacity of growth among various business units.
Translating roles into actions, wherein various business units are assigned role-specific strategies in
the portfolio management of a corporate.
Differentiating among types of growth investments – eve ry growth investment will have its own
short run or long run objective; accordingly financial requirement need to be forecast with suitable
methods. Calculation of NPV (net present value) alone should not be the deciding criterion.
Actively managingthe investment portfolio – after finalizingthe portfolioofcapital allocation, the sameneedtobe managed
over time withsuitable initiatives andflexible strategies. This can be done with multidisciplinaryresearch anddevelopment
activities andconstant monitor.
BestPracticesassuggestedbyBCGbasedonclientexperiences:
Capital allocation is a major decision making problem. With a proper allocation of investments
among the portfolio, wastage of resources and associated risks can be minimized. Therefore,
prioritizing the objectives of investments, correct methods of financial calculations for capital
allocation and continuous monitoring of various business units in which capital is invested, is
inevitable.
1. What is meant by capital allocation? What happens if capital allocation is not managed through
portfolio management?
Hints: meaning of capital allocation and portfolio management – practices and problems in capital
budgeting.
2. Describe betterways to manage investments?
Hints: objectives, growth potential, dynamics of portfolio management.
Source: Sebastian Stange, Alexander Roos, Jeffrey Kotzen, and Ulrich Pidun (2014) – Taking a portfolio approach
to growth investments, bcg.perspectives, July 22, 2014.
10.6 Forecasting and Decision Making Capital Budgeting Economics for managers
32

Block III:
Macroeconomics - I
22. Macro-Economic Interventions to Usher Economic Growth –The Case of
African economy
23. Effectiveness of Well-Designed Macroeconomic Policies – A Case of Solar
Energy Policy
24. Japan’s never–ending Workforce Challenges- Impact on GDP
25. Private Financial Wealth – An Important Variant of National I ncome
26. The Glittering Power of Cities for Luxury Growth – Industry’s Aggregate
Demand
27. Role of Macro-Economic Policy in Public-Private Participation (PPP)
28. Supply Side Economics towards Sustaining Growth – The Case of ASEAN
29. Economic Crisis, Policy and Schools of Thought: A Re-visit
30. One Objective: One Policy - The case of distortion in India
31. What Controls investments? – A Case of Mining
32. Financial Inclusion in India
33. Money supply – A case of Quantitative Easing
33

22. Macro-Economic Interventions to Usher Economic Growth –
The Case of African economy
Economic growth is the outcome of ‘resource availability’. Africa, a resource-rich
continent,had depicted a poverty-stricken picture. Until recently it narrated a different
growth story. The timely macroeconomic intervention by the governments of African
countrieshas manoeuvred them to take some of its important destinations on the world
map of investment option.
After many years of perseverance governments of Africa are shaping its growth away from its
commodity-base. Abundant in natural resources, it is third highest in mineral resources, producer of
2/3rds of diamonds and 1/10th of oil production in the world. The commodity-focused growth rate turned
its course towards other fields – the financial servic es, less at the mercy of commodity markets. This
negotiation is yielding results through improved FDI inflows as favorable investment destinations in
Nigeria and Rwanda. Now, fewer African countries are expected to be in recession than before. Saving
during boom and spending the saving during recession, a reverse-motto of economists is helping them
stabilize their growth rate. Now, commodity prices are having lesser impact on the values of their
currencies.
The probable shortfalls in the growth engine that might halt the good start of Africa in the coming years
The growth is not from within and also not from all directions. It is happening from the FDI inflows
through financial services.
Attractionof certain destinations forFDI inflows cannot be generalizedtoAfricaas a whole. Similarly, stabilityin
one or fewcurrencies cannot createthe magic ofincreasingits trade.couldbemainlyattributedto-
Highly dependent on commodities market, Africa’s growth rate was far below the standard mark. It is
a paradox to many economic theories that scarcity of resources pull an economy down. Despite being
rich in resources, the growth line of Africa did not show a significant upward pointer. With the
changed perception of taking the economy through macro-economic perceptions, the various
governments of African countries shifted their priority to non-commodity markets. This shift has now
become the driver of economic growth.
1. What is macroeconomics? What is its scope?
Hints: definition – objectives of macroeconomics – role of gov ernment in macroeconomic policies.
2. What is non-commodity based growth? How is it possible?
Hints: difference between trading of goods and services – role of fo reign investments in non-
commodity market.
Source: C.W (2015): Africa’s growth is being powered by things other than commodities, Economist Explains,
Economist, LONDON, Jan 2015
11.4 Introduction to Macro economics Macroeconomic objectives Economics for managers
34

Block IV: Macroeconomics - II
23. Effectiveness ofWell-DesignedMacroeconomic Policies
– A Case ofSolar EnergyPolicy
For every macroeconomic objective to be achieved there should be a tool or an instrument facilitating
the aim of the objective. These various instruments help in revenue generation,expending the revenue
by government for variousdevelopmental activities and to attain internal and external stability.
Initial Installation of 2700 Mw solar power grid by 2014 end and trying to reach a grid capacity of
10000 Mw by 2017. Generation of 20,000 MWs solar power by the end of 2022.
Solar power bundled with thermal power resulted in the falling prices of power from an earlier price
range of Rs. 17 to 18 per unit to today’s Rs. 6.50 to 7 per unit.
In the midst of traditional power investment complications, investments in solar energy attracted the
attention of policy makers and investors as a fruitful investment option.
It was Gujarat that came up with its first Gujarat State Solar Policy in 2009 and installed a grid
capacity up to 1000 Mw, followed by Rajasthan with a capacity of 727 Mw grid capacity of solar
energy. Being a late entrant in this race and with its miniscule presence initially, Madhya Pradesh
showed a remarkable improvement in the solar power generation with a capacity of 355 Mw and
occupied third position in the list of solar power production as on February 2014.
The reasons behind this achievement by Madhya Pradesh were due to relatively superior tax
incentive package, competitive projects in national-level bids, betterterms for evacuation and free
distribution network. It set an example to other states like Maharashtra,Andhra Pradesh and Tamil
Nadu in terms of administrative capacity to achieve this feat.
Issues like acquisition of suitable land, government clearances, pathways for transmitters, assured buyers of power etc. that affect the
size of investments in this field, were promptly taken care of.
FewinsightsintotheachievementsofJNNSM:
Achievement by Madhya Pradesh (MP) – A feather on its cap: Madhya Pradesh became the 3rd
largest solar power producer because of its effective implementation of a well-crafted, innovative policy
combined with a committed state leadership and bureaucracy. The state government introduced “Right to
use” concept to set up solar power projects in government la nds by digitizing the land data. This reduced
the time and cost involved in acquiring land for solar projects. The identification of such government
lands were transferred to New and Renewable Energy Department (NRED). Thus, the ownership of the
land was also retained by the government. NRED further simplified the process of clearances, approvals
and inspection. All these contributed to cost-and-time-effective managerial policies.
MP, being the fifth state to be notified as part of solar policy implementation, learnt fromother states on
the various issues and difficulties involved in policy implementation. It came out with a refracted policy
on solar energy with better tax incentive schemes when compared to other states. It framed competitive
projects to attract investors. Finally, a better combination of generation and distribution related reforms
in power sector with a standardization process created a congenial social and economic atmosphere.
Government controls economic activity through its spending on infrastructure projects, capital and
revenue expenses and through intervention in the market forces, wherever necessary. Such influences
are made through proper macroeconomic instruments to lay the foundation of growth and
development of the economy.
35
Development of any economy is largely hypothecated in its infrastructural facilities. ‘Energy’
development is a main element of infrastructural development. It forms an important resource for the
remaining sectors to develop. Unless energy related issues are addressed and effectively implemented
by a well-designed macroeconomic policy, achievement of macro-economic objectives will remain a
daunting task. To exemplify the achievement of such a macro-economic objective of meeting ‘energy
crisis’, Madhya Pradesh government stood a part by an effective implementation of Jawaharlal Nehru
National Solar Mission – JNNSM. It came out with a feasible combination of solar power and
thermal power generation with a viable ‘pooled price’.

1. How is energy policy related to macroeconomic policy?
Hints: energy – basic infrastructure – othersectors are de pendent on it – for– energy crisis leads to
hindrance of growth and development
2. What are macroeconomic instruments? Which instrument is directly related to energy policy?
Hints: various tools – revenue generated from fiscal policy rela ted directly to energy policy –
government spending.
Source: Vinayak Chatterjee (2014): Sunshine over Madhya Pradesh: Well-crafted policies and smart
implementation haveled to a solar power surge in the state, Business Standard, October 2014.
11.5 Introduction to Macro Instruments of Macroeconomic Economics for managers
economics policy
36

24. Japan’s never–ending Workforce Challenges- Impact on GDP
Data on workforce of any country will provide an insight to the formidable and
potential growth of its national income at any given point of time.
Many mature economies of the world like Germany and Japan, around 1995, faced the problem of
shrinking workforce, an unnoticed or ignored factor in terms of its relevance to future economic growth .
A lot of literature review is available on workforce crisis across the globe. In one of the articles, the BCG
researchers have examined workforce supply-and-demand dynamics in 25 major economies (including
the G20) through 2030.
According to the research study, sixkey drivers of labour supply and demand had its impact on Japan’s
Unnoticed effect of declining birth rate coupled with insignificant / non-existent population policy
for the country led to shrunken human resource for future requirement. The fertility rate declined
from 1.7 to 1.4 between 1988 and 2008, this further declined to 1.3 by 2010.
Workforce participation sawa slight increase from 70% to 74%; the good news coming from female
labor participation that increased from 57 to 64 percent.
Loosened Immigration policy of skilled foreign workers is allowed to contribute to its growth.
The retirement age was increased formally and informally close to 70 years, thus extending the use
of available workforce and leveraging the declined workforce participation.
Reduced labor supply due to fallen working hours per year by individual workers contributed to slowing economic
growth;growth.Thesekeyobservations were:
The study also cautioned countries like Germany and South Korea witnessing a similar trend should
understand the relevance of these levers for their economy’s growth and development.
Natural resources, human resources, capital resources are the factors that affect the size of a
nation’s income. The case of “Workforce Challenges of Japan” illustrates how is sues related to
human resources such as declining birth rate, stringent immigration policies, labour productivity etc.
have impacted growth rate of Japan which was less than 1%.
1. Do highly populated countries always suffer with low GDP rates due to population? Why or why
not?
Hints: Not always – human capital – skilled workforce – source of service export – egs.India and
China.
2. Do you consider that the population policy is one of the remedial measures for falling GDP rates?
How?
Hints: For controlling and standardizing population trend – decide on immigration policy.
Source: Rainer Strack, Jens Baier, Matthew Marchingo, and Shailesh Sharda (2014) -The Global Workforce Crisis:
$10 Trillion at Risk, BCG Perspectives, July 2014.
12.4 National Income Factors affecting the size of a Nation’s Income Economics for Managers
37

25. Private Financial Wealth – An Important Variant of
National Income
National income is an indicator of economic growth. It is the aggregate of a country’s total income
generated from various sectors of the economy. Investment (I) component of National Income can
have varied forms. Accumulation of private financial wealth is a part of private investment generated
from private income earned by an individual.
Private financial wealth is wealth acquired by private individuals. It is one of the drivers of growth.
When people become well-off, they diversify their investments and take the risk on financial asset
accumulation. Investment in the latter is used in the financial market as lending to potential borrowers
who undertake production activity. Production, in turn, helps national income to grow. This article by
BCG studied the creation of private financial wealth in various parts of the globe and the factors that
contributed to this wealth.
The growth rate of global private financial wealth was 14.6% in 2013 as against 8.7% in 2012. The
cumulative of such wealth was 152 trillion USD. Increase in private wealth in 2013 was 19.3 trillion
USD as against 10.7 trillion USD in 2012.
Asia Pacific (excluding Japan) witnessed faster growth than other regions of the globe.
The conventionalrich world especially North America recorded a double digit growth of private
wealth. Other regions such as Middle East and Africa (MEA), Eastern Europe have also recorded
double digit growth rates.
Japan and Western Europe recorded a decelerated single digit private wealth growth rate.
On a comparative basis, North America, US and Europe with private wealth of 50.3 trillion USD and
37.9 trillion USD were the richest regions. Asia Pacific was third in the list with 37 trillion USD of
private wealth. It has reduced the gap with North America since 2008. It was slated to overtake
North America by 2018.AnoverviewonGlobalprivate wealth on a regional basis:
The Reason: The reason for the growth in global private wealth was due to rise in equity stock indexes.
The research study found out that the increase in the number of millionaires and billionaires were due to
investment in assets that were majorly allocated to share investments instead of the traditional way of
investment in bonds and deposits. On an average, globally, the returns on possessed assets contributed
Equities rose at a rate of 28.0%, whereas bonds with a growth rate of 4.1% and cash and deposits
with an yield growth rate of 8.8%.
S&P 500 rose by 17.9%, the Nikkei 225 recorded a growth of 56.7% and the Euro Stroxx 50 rose by
147%.
In the year 2013 equity products were the highest contributors for the rising trend in private financial
wealth of the globe irrespective of the inter-regional variations in the growth.
A comparatively betterand stable economic performance by USA and Europe contributed for
private wealth accumulation and few countries like Ireland, Portugal and Spain in Europe
experienced recovery.
A better governance of monetary policy in many economies was another contributing factor for
growth and economic stability. Economic stability led to bettergrowth and standard of living.
2013 witnessed a major polarization of wealth with the United States,China and Japan containing
most of the millionaires. The U.S. had the highest number of millionaire households (7.1 million), as
well as the highest number of new millionaires (1.1 million). There was a robust creation of wealth
in China with the number or millionaire households at 2.4 billion while Japan slid a little to 1.2
million from 1.5 million.
The highest density of millionaire households were in Qatar, Singapore and Switzerland; thehighest density of
billionaire households were in HongKong and Switzerland.
forthegrowthofprivatewealth.
38

Anotherreason for growth in private wealth was rise in currency value, especially US dollars against
many economies of emerging world and Japanese Yen.
One more significant factor was rise in GDP of rapidly developing economies, especially the BRIC
countries with a 10% growth rate in 2013.
China’s 49.2 % growth rate of private wealth was contributed mostly by financial products ofthe
shadowbanking sector such as PRC trusts (A trust company is a kind of financial institution in the
Peoples’ Republic China (PRC) which manages entrusted funds through th e issuance of trust units);
in otherwords, 81.5% in the total private wealth in the year 2013.
The growth of an economy is judged by the percentage increase/decrease of national income. Income
of an individual can be of various types: personal income, disposable income, private income.
Increased private and disposable income in the hands of an individual leads to investment in financial
assets and wealth.
1. What are variants of income?
Hints: personal income, disposable income, private income, per capital income, nominal income,
real income.
2. How is GDP related to private wealth accumulation?
Hints: accumulation of private wealth is a result of better standard of living – more per capita and
disposable income – better economic condition – good GDP growth rate in the economy.
Source: Brent Beardsley, Jorge Becerra, Federico Burgoni, Bruce Holley, Daniel Kessler, Federico Muxi, Matthias
Naumann, Tjun Tang, and Anna Zakrzewski (2014): Global Wealth 2014: Riding a Wave of Growth,
bcg.perspectives ,June,2014;
12.6 National Income Measures of aggregate Income - Private Economics for Managers
Incom e
39

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