Keynesian philosophy

KEYNESIAN PHILOSOPHY

• The one issue consistently pushed by Keynes was the need for increased government spending to enable and amplify economic growth during periods of economic contraction. This was balanced by the call for increased government savings when the economy returned to normal.• His calls for increased government spending focused on health, education, and other subsidizations, common areas for a strong social safety net for those most affected most by the struggling economy.• His rationale was simple: as the economy begins to falter, businesses reduce their spending and consumers (either fearful or losing their job, or currently unemployed) refrain from spending as well. • The only way to break the stalemate between producers (businesses) and consumers (everyday people) was for the government to step in to create the demand the economy needed by spending on programs and initiatives that gave people jobs and channeled money (demand) back into the economy.• As producers received more demand, they would begin hiring again, which would make consumers less fearful of losing their jobs, so they’d begin spending again.

KEYNES: INCOME EXPENDITURE MODEL

• The model basically states that we produce as many goods as will sell on the market and fluctuations in production and expenditure are tied to keep an economy stable. The theory makes a couple of assumptions that aren't always true: wages, prices and interest rates are fixed, and output is determined by demand.• Consumption:- Consumption is how much people will buy. In the Keynesian theory, consumption is largely determined by income. The more money people make, the more money they will use to purchase goods and services. • The amount of additional disposable income that goes to additional consumption is called "the marginal propensity to consume." This theory doesn't deal thoroughly with the fact that people respond differently to short term increases in income from the way they do to long term increases or a variety of other factors.


• Investment Expenditure:- Investment Expenditure is how much a company will spend to bring its products to market. It is based on how much a company believes demand will increase or decrease for its products in the future.• It is not based on historical demand, according to Keynes, so much as on "animal spirits," which Keynes defined as "a spontaneous urge to action rather than inaction." In other words, investment expenditure is based on the producer's desire to do something proactive to build his company.• Output:- Output is what companies are producing. If their "animal spirits" spur companies to invest in producing large numbers of product, their output will increase. • Output can also increase as a result of actual demand. If demand exceeds what it has been previously, companies will increase investment to meet the output demand. In Keynes' theory, output is not driven by how much a company can produce but how much the market can absorb.


• Equilibrium:- Equilibrium is when the demand, income and consumption all match the output exactly. The willingness and ability of consumers to purchase a million $100 pairs of shoes exactly matches the number of $100 pairs of shoes available. •Equilibrium never happens precisely. Instead, demand will outstrip supply, meaning there aren't enough $100 pairs of shoes to go around and manufacturers can increase production or raise prices. •Or there may be more shoes made than consumers purchase, in which case there are leftover shoes and shoemakers may pull back on investment and sell their shoes at a discount.

GROSS DOMESTIC PRODUCT

• The gross domestic product (GDP) is one the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period - you can think of it as the size of the economy. • Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the year-to-year GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.• Measuring GDP is complicated (which is why we leave it to the economists), but at its most basic, the calculation can be done in one of two ways: either by adding up what everyone earned in a year (income approach), or by adding up what everyone spent (expenditure method). Logically, both measures should arrive at roughly the same total. • The income approach, which is sometimes referred to as GDP(I), is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports.

GROSS DOMESTIC PRODUCT

• The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. GDP = C + G + I + NX• "C" is equal to all private consumption, or consumer spending, in a nation's economy"G" is the sum of government spending"I" is the sum of all the country's businesses spending on capital"NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports)• GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country's standard of living. Critics of using GDP as an economic measure say the statistic does not take into account the underground economy - transactions that, for whatever reason, are not reported to the government. Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation's productivity, which is unrelated.

GROSS NATIONAL PRODUCT• Gross national product (GNP) is the market value of all the products and services produced in one year by labor and property supplied by the residents of a country. Unlike Gross Domestic Product (GDP), which defines production based on the geographical location of production, GNP allocates production based on ownership.• GNP does not distinguish between qualitative improvements in the state of the technical arts (e.g., increasing computer processing speeds), and quantitative increases in goods (e.g., number of computers produced), and considers both to be forms of "economic growth".• Basically, GNP is the total value of all final goods and services produced within a nation in a particular year, plus income earned by its citizens (including income of those located abroad), minus income of non-residents located in that country. •GNP measures the value of goods and services that the country's citizens produced regardless of their location. GNP is one measure of the economic condition of a country, under the assumption that a higher GNP leads to a higher quality of living, all other things being equal.

GROSS NATIONAL PRODUCT• An estimate of the total money value of all the final goods and services produced in a given one-year period by the factors of production owned by a particular country's residents. • "Final" goods and services means goods and services sold or otherwise provided to their final consumers -- that is, to avoid double counting, the value of steel sold to GM to make a car is not added separately into the GNP or GDP totals because its value is already included when we add in the final sales price of the car to the customer.• GNP and GDP are very closely related concepts in theory, and in actual practice the numbers tend to be pretty close to each other for most large industrialized countries. • The differences between the two measures arise from the facts that there may be foreign-owned companies engaged in production within the country's borders and there may be companies owned by the country's residents that are engaged in production in some other country but provide income to residents.• So, for example, when Americans receive more income from their overseas investments than foreigners receive from their investments in the United States, American GNP will be somewhat larger than GDP in that year. If Americans receive less income from their overseas investments than foreigners receive from their US investments, on the other hand, American GNP will be somewhat smaller than GDP.

ACCOUNTING FOR DECISION MAKERS

• Small business owners are faced with countless decisions every business day. Managerial accounting information provides data-driven input to these decisions, which can improve decision-making over the long term. • Relevant Cost Analysisa) Managerial accounting information is used by company management to determine what should be sold and how to sell it.b) For example, a small business owner may be unsure where he should focus his marketing efforts. To evaluate this decision, an accounting manager could examine the costs that differ between advertising alternatives for each product, ignoring common costs. • Activity-based Costing Techniquesa) Once the company has determined what products to sell, the business needs to determine to whom they should sell the products. b) By using activity-based costing techniques, small business management can determine the activities required to produce and service a product line.


• Make or Buy Analysisa) A primary use of managerial accounting information is to provide information used in manufacturing. For example, a small business owner may be considering whether to make or buy a component needed to manufacture the company's primary product. b) By completing a make or buy analysis, she can determine which choice is more profitable. While this technique is certainly useful, small business owners should only use these analyses as a factor in the decision. • Utilizing the Dataa) Managerial accounting information provides a data-driven look at how to grow a small business. Budgeting, financial statement projections and balanced scorecards are just a few examples of how managerial accounting information is used to provide information to help management guide the future of a company. b) By focusing on this data, managers can make decisions that aim for continuous improvement and are justifiable based on intelligent analysis of the company data, as opposed to gut feelings.


• Management accountants look ahead - they focus on forecasting and decision-making. They use information to advise on how the business can move forward, for example, should a company buy another, should it invest in new equipment.• Management accounting involves using the internal financial information available to managers, as well as that information which companies must publish by law. This contributes to forward planning, reviewing and analyzing the performance of the business.• The main ratios used in management accounting are:• efficiency or activity ratios, including liquidity - these show whether the business is able to pay its debts. They look at whether the assets of the company (its buildings, land equipment) could repay any debts.• gearing- shows the long-term financial position of the business. It can show balance of funding in a business i.e. how much money is from loans (on which it needs to pay interest) and how much is from shareholder funds (on which it needs to pay a dividend to shareholders). More money from loans carries more cost and therefore more risk.• profitability or performance ratios - show how well a business is doing. They relate to the business objectives, which might be to make profit or obtain a return on investment, or collects its debts quickly.


• Cash flow forecasts which look at likely future flows of costs and revenues. The business uses these to plan expenditure and to see where it might need to borrow. • Budgets, which are financial plans for the future. They help the business to see where it will incur costs and where revenues will come from. They are particularly important in helping to co-ordinate the different parts or activities of a business. • Variances which show the difference between what was forecast to happen (in a budget) and what actually happened. The reasons for these differences can then be analyzed to show why the variance occurred. Management accountants can then see how the business can build on positive variances or avoid negative ones in future. • Investment appraisal helps to decide whether a particular investment is worthwhile or not. It looks at the costs of investing, for example, in a new factory or processes and at the likely financial returns.

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Keynesian philosophy