Advantages of Privatization

Advantages of Privatization

Advantages of privatization are Liberalization of economy, improved product & services, efficiency & productivity, more profitability, and more income for the Government, no political pressure on decision making, end of bailout packages.

1.    Liberalization of Economy

Liberalization of economy is one of the main advantages of privatization. Liberal economy would provide equal opportunity to all parties. Liberal economy would also promote the competition in the economy.

2.    Improved Product & Services

Privatization would improve the competition, and such competition will bring improved services & product to the society. Such competition would reduce the prices of products for the customer.

3.     Better Efficiency & Productivity

Other advantage of privatization is improved efficiency & productivity. It is important to note that organization running under government supervision & control normally has lower productivity for several reasons.

4.    More profits

Privatization of government owned organization will introduce the culture of profitability within organization. Most public organizations normally incur heavy losses, because government objective is not profit maximization.

5.    Income for Government

Privatization would also improve the government income, because the losses making companies are not paying taxes on the profits. Government can utilize this increased income on public welfare projects.

6.    No Political Influence

Privatization will introduce the culture of professionalism within organization and now decision shall be made on business logic without any political influence & pressure.

7.    Finish Bail Out Packages

Public organizations need bailout packages every now and then to finance their heavy lose. With the help of privatization, these packages can be eliminated, and government funds can be utilized more effective way.

8.    Innovations & Advanced Technology

Privatization may bring advanced technology to the public organization. Businessman or investor is more interested to use new methods of productions to improve productivity.

Disadvantages of Privatization

Disadvantages of Privatization

Disadvantages of privatization are creation of monopoly, failure to manage the organization, decline in quality of service, unemployment, misuse of disposal receipt and purchase of future sale. These disadvantages has been explained below

1.    Creation of Monopoly

Privatization may result in creation of monopoly in the economy; monopoly is created where major competitor buys the public organization. Monopoly is not in the best interest of the people for many reasons. (Monopoly earn abnormal profits)

2.    Failed to Manage

New management may not be able to run the large organization, it is noted that public organization normally are very large, because those organization are created for a larger group of people. Therefore, it is not easy to run such organization with limited skills.

3.    Decline in Quality of Service

Privatization may result in decline of quality of service, because businessman or investor is more interested in profit than quality, where government is more interested in quality than profits.

4.    Unemployment

Other disadvantage of privatization is unemployment, because new investor would be interested to run with minimum labour source, where public organization normally over staffed, therefore some staff may lose their jobs.

5.    Misuse of Disposal of Receipt

One of the main disadvantages of privatization is to use the receipt of disposal in non productive projects.

6.    Purchase for future Sale

Privatization should not be future sale, but for improvement of services and competitive environment. It means that buyer should not sell the shares in stock exchange at higher prices by manipulating profit and earn easy profit.

Types of money Standard

Types of money Standard

1.    Commodity Standard

Commodity was first standard adopted by the world; however, it could not survive for number of limitation like durability, divisibility, storage issues.

2.    Metallic Standard

Metal were used as money standard and coins of copper & iron were designed and created by different countries. Scarcity on this metal was the basic governing idea to use as standard of money, but later with the development of mining scarcity was removed and it resulted in devaluing those coins.

3.    Bimetallism

Under bimetallism both Gold & silver coins were introduced and price of silver was established in relation to gold. It means silver and gold standard value was established and in accordance of this value either golf or silver coin were developed.

4.    Gold Standard

Under Gold Standard only gold coins were used for transaction both at domestic & international level. There were number of disadvantages associated with gold coins transport ability, chance of stolen, scarcity of gold.

5.    Representative Money

The age of representative money & currency notes started. In modern world representative money is used.

Characteristics of Keynes Theory of Money

Characteristics of Keynes Theory of Money

1.    Money can Store Value

Keynes theory of money put light on another function of money i.e. money can store value. Keynes explained that due to this quality of money, there is linkage between current & future demand of money.

2.    Speculative Demand of Money

Keynes also explained that in addition to transaction demand, money also has speculative demand, which depend on the rate of interest.

3.     Supply of money & interest rate

Keynes establishes a link between supply of money and interest rate, as supply of money increases, rate of interest decrease. There is inverse relationship between supply of money and interest rate.

4.    Money supply Generate economic activity

Money has role in generating economic activity, in case money supply increase, it will boost the investment in the economy, which would create employment.

5.    Inflation & Deflation

There may be equilibrium of national income above the full employment level (inflation) and there equilibrium of nation income below full employment. (Deflation)

6.    Money Generate employment

Public expenditure by the government or increase investment level in the economy due to lower interest rate generates economic activity & employment in the country. Therefore money has role other than monetary role.

Classical Theory of Money

Classical Theory of Money Concept

Classical theory of money describes money as medium of exchanges and denies any real role of money in the economy i.e. impact or influence over income & employment.

1.    Medium of Exchange

Classical theory of money says money works as medium of exchange i.e. moneys is used to perform transaction. It means classical theory only recognize only transaction demand i.e. money is just needed to perform transactions.

2.    No Role in Economic Activity

Classical theory says that money has no role in generation of economic activity. Moreover money has no influence over the real factor of economy i.e. income, employment.

3.    Money is just facilitator

Classical theory of money says that money is just a facilitator in the market. It facilitates the transaction to be happen i.e. exchange of goods & services. Classical economist say money is like road which facilitates but does not create anything.

4.    No influence over Quality

Classical theory of money also denies money role in the quality of product. It means increase or decrease in price has no relevance with the quality, rather increase and decrease in prices relates to supply of money.

5.    Monetary Role

Classical theory recognizes monetary role of money i.e. impact on price & wage rate. It says that prices will increase with increased supply of money; similarly prices would decrease with decreased supply of money.

Types of Money Demand

 Types of Money Demand

Money demand types or motives can be classified into three classes i.e. Transaction motive, precautionary demand, speculative Demand.

1.    Transactional Demand

People need money for day to day transactions, because money is a medium of exchange. People need money both for personal consumption and for business exchanges.

2.    Precautionary Demand

Precautionary demand for money included the future accidental expenditure i.e. health etc. precautionary demand of money is both for personal and business reasons, there are number of unexpected event can happen in real life.

3.    Speculative Demand

Speculative demand is to get benefit or profit from an opportunity and for such benefit one must have liquid cash in hand

Disadvantages of Money

Disadvantages of Money

Disadvantages of money or monetary system can be expressed in terms of artificial shortage created in the market, unequal distribution of income, and trade cycles at regular intervals, fluctuation in the money value, and creation of speculative market etc.

1.    Artificial Hike in Price

Artificial price hike by creating artificial shortage is possible in Monterrey system. Producer can store value in money for future production, and thus current production level may be reduced to create artificial shortage.

2.    UN Equal Income Distribution Issues

UN equal distribution of wealth is another disadvantage of monetary system. People are able to accumulate wealth in monetary system, moreover, in monetary system investment opportunities are only available to wealthy people, and thus they can create more wealth by using money.

3.    Trade Cycles at regular interval

Economy is not in a stagnant position, and changing its position regularly. Economy takes many positions i.e. Trade cycle. The economy is moving from one trade cycle to another i.e. boom, decline, recession, recovery.

4.    Value of money Changes

Though money stores the value, however, it is not a perfect medium of storage and money value tends to fall over the period of time. This is primarily due to inflation in the economy.

5.     Speculation is created

Money has ability to create a speculative demand for the product. This is especially is case, where the interest rate is low and money can be invested in speculative markets. Speculation has many disadvantages.

6.    Black Economy

Money has encouraged the establishment of black economy in the world. Due to easy transfer ability of money, the illegal activity can be easily funded by the money.

Advantages of Money

Advantages of Money

Advantages of money include value storage, production at large scale, luxury goods or products, credit transaction, standard pricing or price mechanism, advance payment, and concept of investment & saving.

1.    Value Storage

Value storage is one of the important quality or advantage of the money. A large amount of value can be stored in a small space for future use. Value storage quality was lacking in the old systems.

2.    Production at Large Scale

Production at large scale is another important advantage of money or monetary system. In barter system only essential goods were used for immediate consumption.

3.    Luxury Products

There was no concept of luxury product in the barter system and only those product were produced, which were easy to market & sale (Essential Goods). The concept of luxury & innovative product were introduced by the money.

4.    Credit Transactions

Credit transaction or transaction on credit is facilitated by the monetary system. In barter system, it was difficult to operate credit transaction, because goods cannot store value, moreover, it is difficult to establish future price.

5.    Standard Pricing

Standard price or standard pricing concept came to existence due to money. This is one of the fundamental advantages of money, which has made possible the creation of market. In barter system, there was difficult to establish the standard price for a product.

6.    Advance Payment

Like credit transaction, advance payment is also only possible in the monetary system and there is no concept of advance payment in the barter system due to difficulty in storing the value.

7.    Investment & Savings

Concept of investment and saving was introduced by the monetary system. People can save money for the future investment; in barter system people could not store goods for future investment (producing more goods)

Advantages of Barter System

Advantages of Barter System

Following are the important advantages of barter system.

1.    Inflation is only Monetary System

Inflation is something related with the monetary system. There is not general rise in price in barter system, it is important to remember that in barter system , there is no pricing mechanism exit, accordingly there is not phenomena of inflation.

2.    Equal Opportunity for Growth

Barter system supports the equal distribution of income. In barter system, everyone has fair chance of growth; production mainly depends on personal effort & skills. Therefore a person who will put more effort will earn more.

3.    Economic Stability is ensured

There is not trade cycle exists in barter system, and this system operates in a smooth way all the time, because this system is based on essential demand.

4.    Artificial Shortages are discouraged

in barter system producer is not in a position to create shortages, because there is no price mechanism is in place, therefore shortages cannot raise the prices, which is one of the primary cause of artificial shortages.

5.    Large Production not recommended

In barter system demand is the most important factor of producing the goods. Due to limitation of storage facility, producer strictly produces the goods as per real demand in the market.

Limitations of Barter System

Limitations of Barter System

Limitation of barter system has been explained below;

1.    Only Essential Goods are Produced

In barter system only essential and limited goods are produced, only those goods are produced which have a wide and known or established demand. There is no market for luxury goods in the barter system due to low demand.

2.    Effective for Limited Population

Barter system can work only for a limited or small population. This system work in a well integrated society, where every person knows the demand of the society and thus can effectively plan its production.

3.    No Market Dynamics

In barter system market dynamics of demand and supply cannot work properly, rather barter system based on intensity of demand & negotiation between interested parties. One of the main reasons of market lacking is lack of standard goods.

4.    Storage Issues

In barter system value is stored in goods, but many goods are perishable in nature and cannot be stored for a long period, moreover, storage also requires a huge space. Therefore storage of goods is one of the main limitations of barter system.

5.    No Standard Price & Value

There is no standard price concept in the barter system , furthermore barter system does not support any pricing concept, good are being exchange for different goods, and thus  determining the standard  price of goods nearly impossible in barter system.

6.    Credit Transaction not supported

Barter system does not support the credit transaction, because it is very difficult to establish future value of good, even establishment the current value of goods is difficult task in the barter system. Thus there is no concept of future transaction in barter system.

Characteristics of Barter System

Characteristics of Barter System

Barter system goods can be exchanged against good and there is no involvement of money in such system. Barter system is old & out dated system and currently there is no effective existence of this system.

1.    No Role of Money

In barter system, money does not play any role and such system works without money. In old days, when there was no concept of money, barter system was the only option for trade. This system became obsolete on introduction of money.

2.    Goods Exchanged for Goods

In barter system goods were exchanged against good, keeping in view modern money in mind, we can say that goods were used as money.

3.    Intensity of Want & Negotiation

Barter system is based on the intensity of want for a good and negotiation between two parties for exchange of goods. Barter system does not support the proper market concept of free economy.

4.    Limited & Essential Goods Concept

Barter system only supports the production of limited and essential goods, which can easily be exchanged with other goods. There is no effective market for non essential or luxury goods.

5.    Effective for Limited Population

Barter system is only effective for limited population, where people know the need of other and producing the required goods according demand. Barter system does not support large production, and people would produce the goods which can be exchanged.

6.    Stability in Economy

Stability in the economy is one of the important characteristics of barter system. There is no artificial shortage and inflation in the barter system. In barter system demand & supply does not depends on the prices and therefore it function in stable and smooth way.