PIECES Framework

A checklist for identifying problems with an existing information system.

• Performance
• Throughput
• Response Time
• Information (and Data)
• Outputs
• Lack of any information
• Lack of necessary information
• Lack of relevant information
• Too much information – information overload
• Information that is not in a useful format
• Information that is not accurate
• Information that is difficult to produce
• Information that is not timely to its subsequent use
• Inputs
• Data is not captured
• Data is not captured in time to be useful
• Data is not accurately captured – contains errors
• Data is difficult to capture
• Data us captured redundantly – same data is captured more than once
• Too much data is captured
• Illegal data is captured
• Stored Data
• Data is stored redundantly in multiple files and/or databases
• Stored data is not accurate
• Data is not secure from accident or vandalism
• Data is not well organized
• Data is not flexible – not easy to meet new information needs from stored data
• Data is not accessible
• Economics
• Costs
• Costs are unknown
• Costs are untraceable
• Costs are too high
• Profits
• New markets can be explored
• Current marketing can be improved
• Control (and Security)
• Too little security or control
• Input data is not adequately edited
• Crimes (e.g. fraud, embezzlement) are (or can be) committed against the data
• Ethics are breached on data or information – refers to data or information getting to unauthorized people
• Redundantly stored data is inconsistent in different files or databases
• Data privacy regulations or guidelines are being (or can be) violated
• Processing errors are occurring (either by people, machines, or software)
• Decision- making errors are occurring
• Too much control or security
• Bureaucratic red tape slows the system
• Controls inconvenience customers or employees
• Excessive controls cause processing delays
• Efficiency
• People, machines, or computers waste time
• Data is redundantly input or copied
• Data is redundantly processed
• Information is redundantly generated
• People, machines, or computers waste materials and suppliers
• Effort required for tasks is excessive
• Materials required for tasks is excessive
• Service
• The system produces inaccurate results
• The system produces inconsistent results
• The system produces unreliable results
• The system is not easy to learn
• The system is not easy to use
• The system is awkward to use
• The system is inflexible to new or exceptional situations
• The system is inflexible to change
• The system is incompatible with other systems
• The system is not coordinated with other systems

Investment

Investment

In general sense, investment is that part of capital which is spent on productive use. In other words, investment refers the expenditure on capital goods. The word investment is applied to the spending money on capital goods. Investment can be classified into three types:

1. Autonomous and induced investment
2. Planned, unplanned and actual investment
3. Gross investment and net investment

1. Autonomous and induced investment:

Autonomous investment is the regular of compulsory investment and it is not guided by profit motive. It is income inelastic. In the words of Peterson, “The autonomous investment is generally associated with such factors as the introduction of new technology or product, the development of new resource on the growth of population or labour force”.

When an increase in investment is due to the increase is the current level of income. It is done with the profit motive. It varies positively with the level of income.

2. Planned, unplanned and actual investment:

If investment is made intentionally to achieve pre-defined goal, then it is planned investment. If investment if made due to sudden changes or unexpected changes in economic and other factor then it is called unplanned investment.

Actual investment is the sum of planned and unplanned investment.

3. Gross and net investment:

Gross investment is the sum total of net investment and depreciation. It refers to the total expenditure on capital goods in a period of time.

Net investment is difference of depreciation from gross investment. It occurs due to increase in capital stock.

Investment function:

Investment function refers to inducement to invest or investment demand. Classical economist considered investment demand simply as a decreasing function of interest rate. Hence,

, where I = induced investment, r = rate of interest

Keynes state that the volume of investment undertaken by private entrepreneurs in the economy depends on two factors i.e. marginal efficiency of capital and rate if interest. Hence,

Marginal efficiency of capital (MEC)

The concept of MEC was introduced by Iriving Fisher. This concept was fully developed or re-defined by J. M. Keynes. It is one of the important contributions made by Keynes. The MEC refers to the expected profitability of capital assets. It is related to real investment not financial investment. It may be defined as the higher rate of return over cost expected from the marginal or additional unit of capital assets. Hence, MEC = ………………….. (i)

Where, Q = expected yields of capital assets

            r = rate of interest

            C = supply price of the assets

The value of r is equal to MEC. It can be obtained by re-arranging the term in equation (i)

= 1.5 – 1

r = 0.5

This shows that MEC = 5%.

MEC is measured with the help of two elements:

1. Prospective Yield:

It means aggregate net return from asset during its life time. Net return refers to the net yearly proceeds obtained from the sales of output produced by the capital assets.

2. Supply Price:

The cost of capital goods is called the supply price. The investor while purchasing a new plant or establishing a new factory he does not only see the expected return from it but also supply price of it. Hence, we can obtain the MEC in the following way.

, where Qn = expected rate of return, r = rate of discount / MEC

Sp = supply price

Investment demand curve:

The MEC falls as investment increases. There are two reasons for this. They are:

1. The installation of large number of similar machine leads to a reduction in their perspective yields just as consumption of more units leads to a decrease in marginal utilities.
2. The price of such machine will go up as their demand increases. This will add to the cost. Thus cost will go up on one hand and the market price of their product goes down as production increases. Hence MEC goes down as investment increases. This is because with more investment the productive capacity of the economy will increase and this will decrease expected rate of profit.

This can be shown with the help of following diagram:

Investment (in million)	MEC
$10,000	12%
$12,000	10%
$14,000	8%
$16,000	6%
$18,000	4%
$20,000	2%

Determinants of MEC (induced invest)

1. Level of income
2. Liquid assets
3. Taxation
4. Business optimism and pessimism
5. Economic policies
6. Political climate

1. Level of income:

If the level of income raises in the economy through rise in wage rates and other factor prices, the demand for goods will rise this will give rise to MEC and on the contrary, the inducement to invest or MEC will fall with the lowering of income level.

2. Liquid assets:

The amount of liquid assts with the investor also influences the inducements to investment. If they posses large liquid assets, the inducement to invest is high and vice-versa.

3. Taxation:

MEC is also affected by the rates if taxation. Heavy doses of direct and indirect tax adversely affect the MEC. On the other hand low rates of taxation tend to raise MEC and encourage investment.

4. Business optimism and pessimism:

Business psychology plays on important past in determining the MEC. If the business person is optimistic then the majority of entrepreneur would estimate a high MEC and pessimism a low MEC is estimated.

5. Government policy:

If the government levis heavy progressive tax the MEC is low and vice-versa. If the government sector regarding private sector is liberal (in terms of credit facilities and other necessary legal environment, the private sector participation will be enhanced and MEC will increase.

6. Political climate:

If there is political instability in the country, the inducement to investment is adversely affected.

Paradox of Thrift

The concept of paradox of thrift is a paradoxical because it contradicts with popular saying “A peni-saved is peni-earned”. This may be true for individual but not for the society. According to classical economist saving is a private virtue because every individual should save something for his difficult days. Saving is positive function of rate of interest and investment is negative function of rate of interest. Rate of interest is determined by the interaction between saving and investment. Therefore, according to classical economist saving is both private as well as social virtue.

                       

But Keynes rejected the idea of classical economist and he claimed that ‘saving is a vice not a virtue’. Saving is increasing function of current income. In other words, saving varies positively with current income. Since one man’s expenditure is other’s income. Increased saving means less consumption and hence less of effective demand which leads the reduction in income, output and employment in the economy. Hence, according to Keynes, “saving is a big social vice not a virtue”.

The paradox of thrift can be shown with the help of following diagram:

In the above figure E is the initial equilibrium where investment (II₁) intersects saving curve (SS₁). This equilibrium shows that income equilibrium is OY₁. At this level of income equilibrium saving and investment is Y₁E₁, when saving is the society increases. The saving curve shifts upward from S₁S₁ to S₂S_2. It leads to decrease in consumption, investment and income. As a result new equilibrium is formed i.e. E, which S₂S₂ intersects with investment curve II_1. This equilibrium level of income and equilibrium saving and investment are OY₂. It implies that saving in current period leads to decrease in both saving and income in future.

Theory of Multiplier

The concept of multiplier is one of the important components of Keynesian theory of employment. This theory was propounded by a popular economist F.A. Khan in 1931. Later on J.M Keynes developed and redefined this theory. Hence, where K = multiplier.

= Change in income

= Change in investment

Multiplier is the ratio between change in income with change in investment at particular period of time. In other words, it tells us how many times income increases as a result of increase in investment.

Relationship between multiplier and MPC (Marginal Propensity to Consume)

Let a two sector economy, economy is in equilibrium as follows:                                                                                                               Y = C + I ------------------- (i)

When investment increases them,

Y + = C +   + I +    --------------------- (ii)

Subtract the eqⁿ (i) from (ii)

= + ------------------------ (iii)

Or, =

Or, - =

Or, =

Or,

Substituting the value,

Or, K = ------------------------- (iv)

K =                                                      

This equation shows that the multiplier and marginal propensity to consume have direct relationship. When MPC increases, multiplier also increases and vice versa. This positive relationship can be shown by the help of following table.

MPC	Multiplier K =
0	1
0.25	1.33
0.50	2
0.75	4
-1

Assumption of multiplier effect

1. The original propensity to consume remains constant during the period of multiplier process.
2. There is closed economy.
3. There are no changes in prices.
4. Consumption is function of current income
5. There are no time lags in multiplier process.
6. Consumer goods are available in response to effective demand for them.

Forward working multiplier can be shown with the help of following figure:

Figure:

In the given figure, x-axis represent income and y-axis represent saving / investment. Initial equilibrium is E₁, at point E₁ the equilibrium income is OY. Now there is an increase in the investment () which leads to an increase in the aggregate expenditure. Thus, this cause income to increase ().

Reverse working multiplier

Figure:

In the given figure x-axis and y-axis represents income and saving / investment respectively. Initial equilibrium is E1. At this point income level is OY1. Now there is decrease in investment () which leads to decrease in the aggregate expenditure. Thus, this cause income also decrease by ().

Leakage of multiplier

1. Saving
2. Undistributed profit
3. Taxation
4. Inflation
5. Hoarding of cash balance

1. Saving:

It is the most important cause for the leakage of multiplier process. Since the marginal propensity to consume is less than one, the whole increment in income is not spent on consumption. A part of it is saved which prefer out of the income stream and the increase in income in the next round decline. Thus, the higher the marginal propensity to save, the smaller the size of the income stream and vice versa.

2. Undistributed profit:

If profits acquiring to Joint Stock Company are not distributed to the shareholders in the form of dividend but are kept in the reserve fund, it is a leakage from the income stream. If companies tend to reduce the income and hence, further expenditure on consumption goods thereby weakening the multiplier process.

3. Taxation:

It is also important factor in weakening the multiplier process. Progressive taxes have the effect of lowering the disposable income of tax payers and reducing their consumption expenditure. Thus, increased taxation reduces the income stream and lowers the size of multiplier.

4. Inflation:

When there is a raise in the price of consumption goods, a good part of the increased money expenditure out of the increased income will be dissipated on higher prices instead of promoting consumption, income and employment.

5. Hoarding of cash balance:

This type of leakage will be greater if business prospectuses are bad and smaller. When business prospectus are good. Whenever new created money income is hoarded, it cannot reappear as income in the next round and the multiplier effect will be arrested.

Unemployment

Unemployment in reality is taken in sense of involuntary unemployment. Involuntary unemployment refers to a situation when people are willing to work at the prevailing wage rate. But they are unable to find the work.

Types of unemployment

1. Cyclical unemployment
2. Frictional unemployment
3. Structural unemployment
4. Open unemployment
5. Disguish unemployment
6. Educated unemployment

a.       Cyclical unemployment:

It is associated with the downsizing and depression phases of business cycle. During the downsizing and depression phase of business cycle income fall then aggregate demand also falls and output fall giving rise to widespread unemployment. It is caused by deficiency in aggregate demand.

b.      Fictional unemployment:

Frictional unemployment exists when there is lack of adjustment between demand and supply of labour force. People leave job for many reason and they take time to find new jobs because of lack of knowledge and mobility on part of the labour. This gives rise to temporary unemployment of those workers who are moving between jobs. Unemployment caused by movements of people from one job to another.

c.       Structural unemployment:

Unemployment in Nepal is basically structural in nature, which refers to a situation when a large number of persons do not get work because of limited job opportunities available. This is known as structural unemployment.

d.      Open unemployment:

Open unemployment refers to a situation when there are some workers who have absolutely no work to de. They are willing to work at the present wage rate but they are forced to remain unemployment in the absence of work.

e.       Disguish unemployment:

It refers to a situation when a person is apparently employment, but in fact is unemployed. It is not open for everyone to see. It remains canceled or hidden. This type of unemployment prevails mostly in villages.

f.       Educated unemployment:

It refers to the unemployment among the educated. Some of these people may be unemployed in the sense of open unemployment i.e. they are not doing any work whatever.

Keynesian theory of employment (Principle of effective demand)

 British economist J. M Keynes in 1930s developed macro economics as a field of economic analysis, different from micro-economics. Keynes propounded the theory of employment, which is also known as principle of effective demands. According to this theory unemployment arises due to the deficiency of effective demand and method to control unemployment is to raise effective demand. According to Keynes the level of employment in short run will depend on aggregate effective demand for goods and services in the country. Greater the aggregate demand greater will be the volume of employment and vice-versa. Total employment depends on total demand and unemployment is the result of a deficiency of total demand. Effective demand represents total money spends on consumption and investment.

 Assumptions:

1. There is the existence of closed economy.
2. There is operation of law of diminishing returns.
3. Perfect competition market exists in the society.
4. Less than full employment equilibrium is possible in short run time period.
5. Labour supply in the economy is positively related to money wages.

Aggregate Demand Price / Function (ADP)

When the entrepreneur provides employment to the labour, they produce goods and services. The entrepreneur receives certain fixed amount of money from the sale of that product. Hence, the aggregate demand price refers to the receipt which all the entrepreneurs taken together expect from of the sale of the output. In brief, ADP means the expected price or income when certain volume of employment is given. The expected receipts are different to different level of employment. A schedule of receipts expected from the sale of output from various amount of employment is called aggregate demand function.

Aggregate Supply Price (ASP)

The entrepreneur should bear certain production cost when he gives employment to a fixed number of labour. Hence, he should get at least a minimum amount from the sale of output while giving employment. Therefore, ASP refers to the amount of money that the entrepreneur taken together must receive from the sale of output as given level of employment. In brief, ASP is the production cost of total output at a given level of employment.

The aggregate supply price is different at different level of employment. A schedule of minimum amount of receipts required to induce various quantity of employment is called aggregate supply 

Theory of Employment

Say’s Law of Market

Say’s law is the foundation of classical theory of employment. Say’s law, named after the French Economist J.B. Say, is a classical economic proposition that the production of aggregated output creates sufficient aggregate demand to purchase all of the output produced. In other words, Say’s law states that supply creates its own demand and over production is impossible. In Say’s words, “It is production which creates market for goods for selling each at the same time buying and more of production, more of creating demand for other goods”. Every producer finds a buyer. Every supply of output creates equivalent demand for output so that there can never be a problem of general over production. Thus, Say’s law denies the possibility of deficiency of aggregate demand.

Assumptions of Say’s Law

a)      Free Market Economy

b)      No government intervention

c)      Flexibility in internal prices

d)     Long run phenomenon

Classical theory of Employment

The classical theory of employment was developed by the combined contribution of classical economist like Adam Smith, J. B Say, J. S. Mill, David Ricardo etc.

The theory is based on the assumption of full employment of labour and other resources of the economy. Full employment refers the situation when all the people who are willing to work at the existing wage rate will get work. Thus, full employment doesn’t mean achieving zero unemployment. Zero unemployment is impossible in any real economy.

Assumption of classical theory of employment

a)      This theory assumed that closed capitalist economy.

b)      Full employment level

c)      Money acts as medium of exchange

d)     There is the existence of perfect competition in the market

e)      There is existence of wage price flexibility

1. Say’s law of market:

Same as before (not assumption)

2. Money market:

Irving Fisher states that total value of output is equal to total expenditure on final goods and services. According to Fisher the long run rate of goods and services remains constant at full employment level. Similarly, (V and V) velocity of money and velocity of bank money also remains constant. Thus, price level (p) is determined by the supply of money (M and M). There is direct relationship between money supply and price level. Hence, PT = MV + MV

3. Labour market:

Flexibility in wage rate assures labour equilibrium with full employment. Real wage rate is determined by market forces i.e. demand and supply of labour market. Demand for labour is negative function of real wage   rate whereas supply of labour is positive function of real wage rate. Real wage rate is determined and the level where demand and supply of labour are equal. This level also represents level of full employment.

4. Product market (Production function):

According to classical economist total output is decreasing function of the number of workers employed. It is due to the operation of law of diminishing returns but at the full employment level of output remains stable.

The classical theory of employment can be shown with the help of following figures:     

In figure A, DD represents demand for labour curve and SS represents supply. It intersect at point E i.e. equilibrium.

In figure B, y = fcurve indicates total production function. It slopes upward to the right and bends to the x-axis and after a point it becomes horizontal.

In figure C, two horizontal curve representing MV and M¹V¹ at corresponding level of price. It slopes downward to the x-axis.

Thus, it indicates that total output increases at a decreasing rate initially and reaches at its maximum and constant at full employment ON. At full employment level, corresponding output is OY.

Measures to raise induced investment

Measures to raise induced investment

1. Low rate of interest
2. Tax reduction
3. Public expenditure (government expense)
4. Price policy
5. Promotion of research
6. Economic planning

1. Low rate of income:

Since inducement to invest depends on MEC and rat of interest, it is obvious that under the given state of MEC, lowering of the rate of interest would enhance the probability of investment. Thus, it is suggested that the rate of interest should be lowered down by the monetary authorities to encourage private investors.

2. Tax reduction:

Direct and corporate should be lowered so that the disposable income of the community increases. Again a reduction in profit tax would increase corporate saving which may induce more investment.

3. Public expenditure:

Public expenditure may be of two types:

a.       Pump-priming and ii)   Compulsory spending

Deliberate public expenditure undertaken by the government with a view of initiating recovery by injecting the circulation of new money into depressed economy is called pump-priming.

Public expenditure designed to compensate the deficiency in private investment is referred to as compulsory expenditure.

A little expenditure by the government in the form of pump-priming encourages private investment.

4. Price policy:

Instability in private sector investment is caused by price fluctuations which cause variations in the expected rate of profitability. Price stability is an essential condition. A host of Keynesian and post Keynesian economist believes that a rising price policy has favourable impact on investment and growth.