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by Manish Harodia - Tuesday, 18 January 2011, 06:55 PM
 

Ø What Does Purchasing Power Parity - PPP Mean?

An economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power.

The relative version of PPP is calculated as: S = P1/ P2

Where:

"S" represents exchange rate of currency 1 to currency 2

"P1" represents the cost of good "x" in currency 1

"P2" represents the cost of good "x" in currency 2

In other words, the exchange rate adjusts so that an identical good in two different countries has the same price when expressed in the same currency. For example, a chocolate bar that sells for C$1.50 in a Canadian city should cost US$1.00 in a U.S. city when the exchange rate between Canada and the U.S. is 1.50 USD/CDN. (Both chocolate bars cost US$1.00.)

Ø What Does Public private partnership mean?

Public–private partnership (PPP) describes a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. These schemes are sometimes referred to as PPP, P3 or P3. PPP involves a contract between a public-sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. In some types of PPP, the cost of using the service is borne exclusively by the users of the service and not by the taxpayer. In other types (notably the private finance initiative), capital investment is made by the private sector on the strength of a contract with government to provide agreed services and the cost of providing the service is borne wholly or in part by the government. Government contributions to a PPP may also be in kind (notably the transfer of existing assets). In projects that are aimed at creating public goods like in the infrastructure sector, the government may provide a capital subsidy in the form of a one-time grant, so as to make it more attractive to the private investors. In some other cases, the government may support the project by providing revenue subsidies, including tax breaks or by providing guaranteed annual revenues for a fixed period.

Ø What Does Economic Order Quantity - EOQ Mean?

An inventory-related equation that determines the optimum order quantity that a company should hold in its inventory given a set cost of production, demand rate and other variables. This is done to minimize variable inventory costs. The full equation is as follows:  EOQ = sqrt (2SD/PI)

where :

S = Setup costs

D = Demand rate

P = Production cost

I = Interest rate (considered an opportunity cost, so the risk-free rate can be used)

The EOQ formula can be modified to determine production levels or order interval lengths, and is used by large corporations around the world, especially those with large supply chains and high variable costs per unit of production. Despite the equation's relative simplicity by today's standards, it is still a core algorithm in the software packages that are sold to the largest companies in the world.

Ø What Does Demand Elasticity Mean?

Responsiveness of the demand for a good or service to the increase or decrease in its price. Normally, sales increase with drop in prices and decrease with rise in prices. As a general rule, appliances, cars, confectionary and other non-essentials show elasticity of demand whereas most necessities (food, medicine, basic clothing) show inelasticity of demand (do not sell significantly more or less with changes in price). In economics, the demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables. Demand elasticity is important because it helps firms model the potential change in demand due to changes in price of the good, the effect of changes in prices of other goods and many other important market factors. A firm grasp of demand elasticity helps to guide firms toward more optimal competitive behavior. Elasticities greater than one are called "elastic," elasticities less than one are "inelastic," and elasticities equal to one are "unit elastic."

Demand elasticity is a measure of how much the quantity demanded will change if another factor changes. One example is the price elasticity of demand; this measures how the quantity demanded changes with price. This is important for setting prices so as to maximize profit.

When price elasticity of demand is elastic, the firm should lower prices, since it will result in a big uptick in demand, increasing your total revenue. When price elasticity of demand is inelastic, you should increase prices because there will be only a small decrease in demand, and again, total revenue will increase. When price elasticity of demand is unit elastic, changing the price will not change total revenue, since price and quantity will generally change in lock step with each other.

Ø What Does Cross Elasticity Of Demand Mean?

An economic concept that measures the responsiveness in the quantity demand of one good when a change in price takes place in another good. The measure is calculated by taking the percentage change in the quantity demanded of one good, divided by the percentage change in price of the substitute good:

Cross elasticity of demand is synonymous to "cross price elasticity of demand".

The cross elasticity of demand for substitute goods will always be positive, because the demand for one good will increase if the price for the other good increases. For example, if the price of coffee increases (but everything else stays the same), the quantity demanded for tea (a substitute beverage) will increase as consumers switch to an alternative. On the other hand, the coefficient for compliments will be negative. For example, if the price of coffee increases (but everything else stays the same), the quantity demanded for coffee stir sticks will drop as consumers will purchase fewer sticks. If the coefficient is 0, then the two goods are not related.

Ø What Does Cross Elasticity Of Supply mean

Supply elasticity is defined as the percentage change in quantity supplied divided by the percentage change in price. It is calculated as per the following formula:

Supply elasticity = % change in quantity supplied / %age change in price

The calculation of elasticity of supply is comparable to the calculation of elasticity of demand, except that the quantities used refer to quantities supplied instead of quantities demanded. Factors that influence the elasticity of supply include the ability to switch to production of other goods, the ability to go out of business, the ability to use other resource inputs and the amount of time available to respond to a price change.

Over a short time period, firms may be able to increase output only slightly in response to an increase in prices. Over a longer period of time, the level of production can be adjusted greatly as production processes can be altered, additional workers can be hired, more plants can be built, etc. Therefore, elasticity of supply is expected to be greater with longer periods of time.We would expect the supply elasticity of wheat to be very high as farmers can easily switch land that is used for wheat over to other crops such as corn or soybeans. On the other hand, an oil refinery cannot easily switch its production capacity over to another product, so low oil-refining margins do not reduce the quantity supplied by very much. Due to high capital costs, higher refining margins do not necessarily induce much greater supply. So the supply elasticity for oil refining is fairly low.

Ø What Does Breakeven Point - BEP Mean?

1. In general, the point at which gains equal losses.

2. In options, the market price that a stock must reach for option buyers to avoid a loss if they exercise. For a call, it is the strike price plus the premium paid. For a put, it is the strike price minus the premium paid. Also referred to as a "breakeven".

For businesses, reaching the break-even point is the first major step towards profitability.

Ø What Does Foreign Institutional Investor - FII Mean?

An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds.

The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. One of the major market regulations pertaining to FIIs involves placing limits on FII ownership in Indian companies.

Ø What Does Foreign Direct Investment - FDI Mean?

An investment abroad, usually where the company being invested in is controlled by the foreign corporation.

An example of FDI is an American company taking a majority stake in a company in China.

Ø What Does Brown Field Investment Mean?

When a company or government entity purchases or leases existing production facilities to launch a new production activity. This is one strategy used in foreign-direct investment.

The alternative to this is a green field investment, where a new plant is constructed.

Ø What Does Green Field Investment Mean?

A form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. In addition to building new facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees. This is opposite to a brown field investment.

Green field investments occur when multinational corporations enter into developing countries to build new factories and/or stores. Developing countries often offer prospective companies tax-breaks, subsidies and other types of incentives to set up green field investments. Governments often see that losing corporate tax revenue is a small price to pay if jobs are created and knowledge and technology is gained to boost the country's human capital.

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