Enemy of economy: Black money

Black money is not just a feeble enemy of the economy. This is the context when the term "arch-enemy" would seem appropriate. Black money could be defined as the  money on which one doesn't pay taxes.

The sources of income for the government at large are as following-

1. Tax receipts
2. Capital receipt
3. Non-tax revenue

Normally, taxes are second highest source of revenue generation for the government. Now, in most simplest way, tax evasion will lead to reduction in the earnings of the government. This in turn will increase the gap between the expenditures and revenue of the government, clearly, the former more the latter. This leaves just one choice for the government to finance this deficit- borrow money i.e to sink in a pool of debt. This is one of the causes of inflation, which in turn affects the common man in terms of high prices and the commoners, regular tax payers or not, are to suffer.

Let us assume a very tiny scale scenario to know how black money affects the mass. Let us assume a small region with a population of only 100. Assume that 20 people earn 1000, 20 earn 2000, 20 earn 3000, 20 earn 4000 and the last 20, maybe the government officials or businessmen earn 5000 currency per month, and the government in that region taxes 20% on the income.

Now, if to get his work done easily, a business man earning 5000 per month will bribe a poor employee 1000 rupees, that employee earning 1000 rupees per month suddenly earns 2000 a month. But, this excess 1000 is black money, so he can't pay taxes on it because if he will, there are chances that the Income Tax department will most probably catch that black money. So, the employee will hide those 1000 rupees from the government. Thus, 1000 rupees that were actually circulating in that region now are nowhere to be seen. Thus, the tax earnings on those 1000 rupees will be fictitious as those 1000 are as good as vanished for the government. Therefore, the government earning reduces by 200 rupees (20% of 1000).

Now, this government will increase the tax percent from 20 to 25% so that their earning should increase. Thus, now the people who are innocent and not involved in black money will also have to pay extra taxes because of the people who are involved in the black money dealings.

Difference between the employees earning 1000 per month who bribe and the one who do not is as follows-

Tax is 25%. One who took bribe has 2000 of which he will pay tax only on 1000 because as per official records he earns only 1000 per month and there is no explanation to how he got the extra 1000. Thus, his expense on tax will be 250 (25% of 1000). Hence, he will be having 750+1000 = 1750 to use every month. One who does not bribe used to spend 200 earlier and now has to spend 250 every month and ends up with only 750 currency every month.

Now, imagine the large impact of people having black money of over a thousand million dollars. It is unimaginable how great a consequence would elimination of black money have. Take bills and receipts. Do not bribe. Do not accept bribes. Do things straight and right, you'd never have to take or give bribes.

Thus, one who takes bribe has an adverse impact on those who do not. They reduce the government earnings as they then can evade taxes and thus make the government increase their tax limits from every citizen.

Follow @PryingThoughts

Can banks print money & get rich?

The answer is NO. If the Central Bank starts to print money, there will be an inflation in the economy and the prices will rise high. And if the Central Bank prints too much money, the economy would enter the state of hyper-inflation and make our lives worse. Sounds unlikely? Read on.

Let us start with the most simple and fundamental concepts that will lead us to this conclusion.

Demand and Price

Think of how demand and price are related to each other. Fairly easy to do. Take an example of a product that you desire the most, say an Apple iPhone. If Apple brings down the price of its iPhone by 50%, certainly it will have more demand. Surely, an iPhone at 40,000 Rs. will sell lesser than the same at 20,000 Rs.

Thus, the demand of a product increases, if its price decreases.

Supply and Price

If the price of a product rises, the number of suppliers will increase. It is natural, that the sellers will supply as much as they can, because higher prices will earn them higher revenues.

Thus, higher the price of a product, more will be the supply.

Supply and Demand

Imagine that a special edition CD is out in the stores for 500 Rs. Assume that large number of these CDs are sold at this cost. Since the demand of these CDs is high, the price of the CD will rise. Consequently, since the price of the CD rises, the supply of these CDs will rise as well, as per the supply-price relationship.

Imagine that the demand for these CDs remain the same but the supply has increased. This is result in some CDs not sold at all. The suppliers will try harder to sell these CDs and lower its price. Now with a lower price, there will more people ready to buy these CDs.

If Central Bank prints lots of money

Suppose that the Central Bank prints money, and mails a share it to each and every living citizen of the country in an envelope. For the sake of a hyperbole, assume that every individual gets a sum of 1,00,000 Rs. in that envelope. Now, you are suddenly richer than what you were. Some people will save this money, some will pay off their debts and most of them will run down to their nearest shopping place and buy what they needed to buy, say a Samsung smartphone.

This sudden rise of the demand of products will pose as a problem for the shopping place, say Croma. Now, due to this rise in the demand for a Samsung smartphone, Croma is most likely to run out of stock for the same. Most logical thing for Croma to do is to raise the price of the Samsung smartphone so as to regulate this high demand. Rise in prices is equal to inflation. Thus, if Croma does that, it will cause inflation right away and the value of money will fall. But, assume, for an argument's sake that Croma will keep its prices constant. Now, to keep the price of Samsung smartphone constant, from what we learnt above, the supply of the phones to Croma must meet its demand from Croma by the consumers

For having the supply meet this rise in demand, Samsung will now have to increase its production of the smartphones. Certainly, this is almost impossible because with phones of such high demand, Samsung must already be using its full capacity to produce as many phones as they can. Still, if there is room for Samsung to increase the production, it will require more number of parts from its suppliers. To raise the bar of this exaggeration, assume that the suppliers supply the parts on time without raising their prices, there is another factor, which Samsung will have to deal with and that is labour.

For production of more smartphones, they’re going to need more man hours of labour. Wages are essentially prices; an hourly wage is the price a person charges for an hour of labour. It will be impossible for hourly wages to stay at their current levels. Some of the added labour may come through the current workers working overtime. This clearly has added costs, and workers are not likely to be as productive (per hour) if they’re working 12 hours a day than if they’re working 8. Many companies will need to hire extra labour. Thus, the cost that is incurred upon the company will rise as the company will have to pay to more number of workers. They’ll also have to influence their current workers not to retire. Since every person has been 1,00,000 Rs. by the Central Bank, some of them will not do their job unless their wage/salary is increased. Thus, from one way or the other, the cost involved in manufacturing a product in this case is going to be reflected in the smartphone's final price, thus causing inflation.

In short prices will go up after a drastic increase in the money supply by the Central bank because:

1. If people have more money, they’ll divert some of that money to spending. Retailers will be forced to raise prices, or run out of product.
2. Retailers who run out of product will try to replenish it. Producers face the same dilemma of retailers that they will either have to raise prices, or face shortages because they do not have the capacity to create extra products and they cannot find labor at rates which are low enough to justify the extra production. 

Inflation is caused due to the following factors-

1. Supply of money increases
2. Supply of goods decreases
3. Demand for money decreases
4. Demand for goods increases

Thus, increasing in supply of money is going to result in inflation. If the supply of goods increased enough, factor 1 and 2 could balance each other out and we could avoid inflation. Suppliers would produce more goods if wage rates and the price of their inputs wouldn’t increase. However, we’ve seen they will increase. Thus, supply of additional money is one way or the other going to cause inflation.

Follow @PryingThoughts