Nowadays the buzzwords in IT are paving way to the ones in economics. Terms like inflation, CRR etc. are becoming more common. With no formal economics knowledge, I found it pretty difficult to correlate these terms and understand them. The objective of this post is to give my understanding of some buzzwords in common man terms. Pardon and correct me if I am wrong in certain cases.
Inflation: Today I go out with 100 Rupees. I first head to my favorite restaurant, have wonderful dishes, pick up a couple of magazines on the way and come back home. I find a balance of 30 Rupees in my pocket. After 3 years, when I go out with 100 Rupees and have the same dishes (of course in the same restaurant), I find that I have no money left to get the magazines (same magazines…). This is called inflation. Reason is that the dishes cost more now, because of the increased prices of raw materials for cooking, which in turn is due to lack of supply.
CRR: Popularly known as Cash Reserve Ratio!! My father gives me a pocket money of 100 Rupees every month. I can comfortably meet all my expenses with 80 Rupees. So I have a surplus of 20 Rupees every month. My friend Suresh gets a pocket money of only 50 Rupees and he needs 10 more Rupees to meet his expenses. So I used to give him 10 Rupees as a loan every month, which he promises to repay after a particular period of time. My father (a.k.a RBI) came to know about this and did not like this agreement. He does not want me to lend 10 Rupees to Suresh. So he cut my pocket money by 10 Rupees (he also promised me that he will keep it with him under my name and give it to me when I need) and now I get only 90 Rupees. So after meeting my expenses, if I give Suresh all the remaining 10 Rupees, I have no savings left. So the maximum I can lend him is only 5 Rupees. This 10 Rupees which my father is withholding on my sake is called Cash Reserve Ratio.
Fiscal Deficit: I get a salary of 10000 Rupees every month. My basic expenditures like rent, electricity, house hold articles etc. amounts to 6000 Rupees every month. I constantly find that the other expenses exceed the balance 4000 Rupees. I have to use my Credit card for about 2000 Rupees on average, every month. Now the fiscal deficit in this case is 2000 Rupees. Simply put “Fiscal Deficit = 2000 – (10000-6000-4000) or Borrowing – (Earning – Fixed expenditure – Variable expenditure)”. Whenever this formula gives a positive number, it means that there is fiscal deficit. It can be overcome only by increasing the earning or decreasing the variable expenditure.
Prime Lending Rate (PLR) – You are into credit business. You lend money to people, in small scale and nominal interest rates. You have a very well known circle of people, who borrow money from you regularly. Assume that the rate at which you lend them is 7%. A less known person comes to you asking for a loan. His financial history is not known to you and for that matter not to anybody in the lending business, in your locality. To be on safer side, you ask for guarantees and also for higher interest rate at 9%. He has no option to agree to your condition, as he has no others who can lend him at a lower rate. Here the 7% is called PLR. When PLR moves up (that is you charge more interest even for your trustworthy customers), the normal lending rate moves up too.
More buzzwords when I add them to my kitty!!