MICROECONOMICS
What Is Microeconomics? How I Would Define It:
Roughly speaking, microeconomics deals with economics decisions made at a low, or micro, level. More precisely, I would define microeconomics as "the analysis of the decisions made by individuals and groups, the factors that affect those decisions and how those decisions affect others".
Microeconomics decisions by both firms and individuals are motivated by cost and benefit considerations. Costs can be either in terms of financial costs such as average fixed costs and total variable costs or they can be in terms of opportunity costs, which consider alternatives foregone.
Macro economists consider questions such as "What determines how much a consumer will save?", "How much should a firm produce, given the strategies their competitors are using" and "Why do people buy both insurance and lottery tickets?"
What is Microeconomics? - How Others Define Microeconomics
Like most definitions in economics, there are various competing definitions of the term Microeconomics. Browsing the web, we will find various answers to the question:
Perhaps the simplest answer to the question "What is Microeconomics?" can be found at West Valley College. They state that "Microeconomics deals with the decision making and market results of consumers and firms".
The Economist's Dictionary of Economics defines Microeconomics as "The study of economics at the level of individual consumers, groups of consumers, or firms... The general concern of microeconomics is the efficient allocation of scarce resources between alternative uses but more specifically it involves the determination of price through the optimizing behavior of economic agents, with consumers maximizing utility and firms maximizing profit."
Example of a Microeconomics Question
How does the change of a price of good influence a family's purchasing decisions? If my wages rise, will I be inclined to work more hours or less hours? Contrast this with Macroeconomics, which deals with questions of a large scope, such as how does a change in interest rates influence national savings?
More on Microeconomics
Economics at About.com has a number of useful resources on Microeconomics:
The Microeconomics Resource Center has articles on a great deal of microeconomics topics, such as elasticity and opportunity costs.
Microeconomics Tips and Tricks has a number of useful links for students who are looking to ace their next microeconomics test or assignment. The page Resources for Microeconomics also contains a great deal of valuable microeconomics information.
What is Microeconomics - Where to Go from Here?
Now you know what microeconomics is, it is time to expand your knowledge of economics. Here are 6 more entry-level FAQs to get you started:
What is Money?
What is the Business Cycle?
What are Opportunity Costs?
What does Economic Efficiency mean?
What is the Current Account?
What are Interest Rates?
Microeconomics:
One of the two main studies of economics, Microeconomics focuses on the behavior of individual consumers or households. Microeconomics is the opposite of Macroeconomics. These economics articles, working papers, and problems will help you develop a better understanding of the field.
Investopedia - Microeconomics Definition
A definition of microeconomics by Investopedia. Includes several links for more information.
Lectures - Microeconomic Resources and PowerPoint Slides
A collection of PowerPoint slides about microeconomics and macroeconomics. A lot of detailed information in an easy to digest, PowerPoint format.
Problems in Microeconomics
A set of practice problems for student and faculty involved in microeconomics courses written by Byron W. Brown, Professor of Economics at Michigan State University. An excellent site for learning and teaching microeconomics.
What's the difference between macro and microeconomics?
A detailed answer from Yahoo finance about the difference between microeconomics and macroeconomics.
The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). The graph depicts a right-shift in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new market-clearing equilibrium point on the supply curve (S).
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Health • Education • Welfare
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Microeconomics (from Greek prefix micro- meaning "small" + "economics") is a branch of economics that studies how the individual parts of the economy, the household and the firms, make decisions to allocate limited resources,typically in markets where goods or services are being bought and sold. Microeconomics examines how these decisions and behaviors affect the supply and demand for goods and services, which determines prices; and how prices, in turn, determine the supply and demand of goods and services.
This is a contrast to macroeconomics, which involves the "sum total of economic activity, dealing with the issues of growth, inflation and unemployment. Macroeconomics also deals with the effects of national economic policies (such as changing taxation levels) on the aforementioned aspects of the economy. Particularly in the wake of the Lucas critique, much of modern macroeconomic theory has been built upon 'micro foundations' — i.e. based upon basic assumptions about micro-level behavior.
One of the goals of microeconomics is to analyze market mechanisms that establish relative prices amongst goods and services and allocation of limited resources amongst many alternative uses. Microeconomics analyzes market failure, where markets fail to produce efficient results, and describes the theoretical conditions needed for perfect competition. Significant fields of study in microeconomics include general equilibrium, markets under asymmetric information, choice under uncertainty and economic applications of game theory. Also considered is the elasticity of products within the market system.
Contents
1 Assumptions and definitions
2 Modes of operation
3 Market failure
4 Opportunity cost
5 Applied microeconomics
6 References
7 Further reading
8 External links
Assumptions and definitions
The theory of supply and demand usually assumes that markets are perfectly competitive. This implies that there are many buyers and sellers in the market and none of them has the capacity to significantly influence prices of goods and services. In many real-life transactions, the assumption fails because some individual buyers or sellers have the ability to influence prices. Quite often a sophisticated analysis is required to understand the demand-supply equation of a good model. However, the theory works well in simple situations.
Mainstream economics does not assume a priori that markets are preferable to other forms of social organization. In fact, much analysis is devoted to cases where so-called market failures lead to resource allocation that is suboptimal by some standard (highways are the classic example, profitable to all for use but not directly profitable for anyone to finance). In such cases, economists may attempt to find policies that will avoid waste directly by government control, indirectly by regulation that induces market participants to act in a manner consistent with optimal welfare, or by creating "missing markets" to enable efficient trading where none had previously existed. This is studied in the field of collective action. It also must be noted that "optimal welfare" usually takes on a Paretian norm, which in its mathematical application of Kaldor-Hicks Method, does not stay consistent with the Utilitarian norm within the normative side of economics which studies collective action, namely public choice. Market failure in positive economics (microeconomics) is limited in implications without mixing the belief of the economist and his or her theory.
The demand for various commodities by individuals is generally thought of as the outcome of a utility-maximizing process. The interpretation of this relationship between price and quantity demanded of a given good is that, given all the other goods and constraints, this set of choices is that one which makes the consumer happiest.
Modes of operation
It is assumed that all firms are following rational decision-making, and will produce at the profit-maximizing output. Given this assumption, there are four categories in which a firm's profit may be considered.
A firm is said to be making an economic profit when its average total cost is less than the price of each additional product at the profit-maximizing output. The economic profit is equal to the quantity output multiplied by the difference between the average total cost and the price.
A firm is said to be making a normal profit when its economic profit equals zero. This occurs where average total cost equals price at the profit-maximizing output.
If the price is between average total cost and average variable cost at the profit-maximizing output, then the firm is said to be in a loss-minimizing condition. The firm should still continue to produce, however, since its loss would be larger if it were to stop producing. By continuing production, the firm can offset its variable cost and at least part of its fixed cost, but by stopping completely it would lose the entirety of its fixed cost.
If the price is below average variable cost at the profit-maximizing output, the firm should go into shutdown. Losses are minimized by not producing at all, since any production would not generate returns significant enough to offset any fixed cost and part of the variable cost. By not producing, the firm loses only its fixed cost. By losing this fixed cost the company faces a challenge. It must either exit the market or remain in the market and risk a complete loss.
Market failure
Main article: Market failure
In microeconomics, the term "market failure" does not mean that a given market has ceased functioning. Instead, a market failure is a situation in which a given market does not efficiently organize production or allocate goods and services to consumers. Economists normally apply the term to situations where the assumptions of the First Welfare Theorem fail leading to the market outcome no longer being on the Pareto frontier. On the other hand, in a political context, stakeholders may use the term market failure to refer to situations where market forces do not serve the public interest.
The four main types or causes of market failure are:
Monopolies or other cases of abuse of market power where a "single buyer or seller can exert significant influence over prices or output". Abuse of market power can be reduced by using antitrust regulations.
Externalities, which occur in cases where the "market does not take into account the impact of an economic activity on outsiders." There are positive externalities and negative externalities. Positive externalities occur in cases such as when a television program on family health improves the public's health. Negative externalities occur in cases such as when a company’s processes pollutes air or waterways. Negative externalities can be reduced by using government regulations, taxes, or subsidies, or by using property rights to force companies and individuals to take the impacts of their economic activity into account.
Public goods are goods that have the characteristics that they are non-excludable and non-rivalrous and include national defense, public transportation, federal highways, and public health initiatives such as draining mosquito-breeding marshes. For example, if draining mosquito-breeding marshes was left to the private market, far fewer marshes would probably be drained. To provide a good supply of public goods, nations typically use taxes that compel all residents to pay for these public goods (due to scarce knowledge of the positive externalities to third parties/social welfare); and Cases where there is asymmetric information or uncertainty (information inefficiency).Information asymmetry occurs when one party to a transaction has more or better information than the other party. For example, used-car salespeople may know whether a used car has been used as a delivery vehicle or taxi, information that may not be available to buyers. Typically it is the seller that knows more about the product than the buyer, but this is not always the case. An example of a situation where the buyer may have better information than the seller would be an estate sale of a house, as required by a last will and testament. A real estate broker buying this house may have more knowledge about the house than the family members of the deceased.
This situation was first described by Kenneth J. Arrow in a seminal article on health care in 1963 entitled "Uncertainty and the Welfare Economics of Medical Care," in the American Economic Review. George Akerlof later used the term asymmetric information in his 1970 work The Market for Lemons. Akerlof noticed that, in such a market, the average value of the commodity tends to go down, even for those of perfectly good quality, because the buyer has no way of knowing whether the product they are buying will turn out to be a "lemon" (a defective product).
Opportunity cost
Main article: Opportunity cost
Opportunity cost of an activity (or goods) is equal to the best next alternative foregone. Although opportunity cost can be hard to quantify, the effect of opportunity cost is universal and very real on the individual level. In fact, this principle applies to all decisions, not just economic ones. Since the work of the Austrian economist Friedrich von Wieser, opportunity cost has been seen as the foundation of the marginal theory of value.
Opportunity cost is one way to measure the cost of something. Rather than merely identifying and adding the costs of a project, one may also identify the next best alternative way to spend the same amount of money. The forgone profit of this next best alternative is the opportunity cost of the original choice. A common example is a farmer that chooses to farm her or his land rather than rent it to neighbors, wherein the opportunity cost is the forgone profit from renting. In this case, the farmer may expect to generate more profit alone. Similarly, the opportunity cost of attending university is the lost wages a student could have earned in the workforce, rather than the cost of tuition, books, and other requisite items (whose sum makes up the total cost of attendance). The opportunity cost of a vacation in the Bahamas might be the down payment money for a house.
Note that opportunity cost is not the sum of the available alternatives, but rather the benefit of the single, best alternative. Possible opportunity costs of the city's decision to build the hospital on its vacant land are the loss of the land for a sporting center, or the inability to use the land for a parking lot, or the money that could have been made from selling the land, or the loss of any of the various other possible uses—but not all of these in aggregate. The true opportunity cost would be the forgone profit of the most lucrative of those listed.
One question that arises here is how to assess the benefit of disse must determine a dollar value associated with each alternative to facilitate comparison and assess opportunity cost, which may be more or less difficult depending on the things we are trying to compare. For example, many decisions involve environmental impacts whose dollar value is difficult to assess because of scientific uncertainty. Valuing a human life or the economic impact of an Arctic oil spill involves making subjective choices with ethical implications.
It is imperative to understand that nothing is free. No matter what one chooses to do, he or she is always giving something up in return. An example of opportunity cost is deciding between going to a concert and doing homework. If one decides to go the concert, then he or she is giving up valuable time to study, but if he or she chooses to do homework then the cost is giving up the concert. Opportunity Cost is vital in understanding microeconomics and decisions that are made.
Applied microeconomics
Applied microeconomics includes a range of specialized areas of study, many of which draw on methods from other fields. Applied work often uses little more than the basics of price theory, supply and demand. Industrial organization and regulation examines topics such as the entry and exit of firms, innovation, role of trademarks. Law and economics applies microeconomic principles to the selection and enforcement of competing legal regimes and their relative efficiencies. Labor economics examines wages, employment, and labor market dynamics. Public finance (also called public economics) examines the design of government tax and expenditure policies and economic effects of these policies (e.g., social insurance programs). Political economy examines the role of political institutions in determining policy outcomes. Health economics examines the organization of health care systems, including the role of the health care workforce and health insurance programs. Urban economics, which examines the challenges faced by cities, such as sprawl, air and water pollution, traffic congestion, and poverty, draws on the fields of urban geography and sociology. The field of financial economics examines topics such as the structure of optimal portfolios, the rate of return to capital, econometric analysis of security returns, and corporate financial behavior. The field of economic history examines the evolution of the economy and economic institutions, using methods and techniques from the fields of economics, history, geography, sociology, psychology, and political science.
Macroeconomic/microeconomic
economics is a broad subject that can be divided into two areas: macroeconomics and microeconomics. To differentiate between the two, the analogy of the forest and the individual trees can be helpful. Macroeconomics is the study of the behaviors and activities of the economy as a whole; hence, the forest. Microeconomics looks at the behaviors and activities of individual households and firms, the individual components that make up the whole economy; hence, the individual trees. Several examples are given below.
Macroeconomics
Macroeconomics, being the study of the behaviors and activities of the economy as a whole, looks at such areas as the Federal Reserve System, unemployment, gross domestic product, and business cycles.
The Federal Reserve System was created by the Federal Reserve Act of 1913, which divided the United States into twelve districts with a Federal Reserve Bank located in each. Each of these banks is owned by the member banks located within that district. The Federal Reserve System's most important function is to control the supply of money in circulation. Monetary policies made by the Federal Reserve System's Board of Governors have a tremendous impact on the total economy. These policies influence such factors as the amount of money member banks have available to loan, interest rates, and the overall price level of the economy. Three ways in which the Federal Reserve Board regulates the economy are by changing reserve requirements, changing the discount rate, and buying and selling government securities.
Macro economists also study unemployment, which simply defined is a very large work force and a small job market, to determine methods to control this serious economic problem. The U.S. Department of Labor estimates the level of unemployment in the economy by using results from monthly surveys conducted by the Bureau of the Census.
Unemployment means lost production for the economy and loss of income for the individual. One type of unemployment is frictional unemployment, which includes those people who are not employed because they have been fired or have quit their job. Cyclical unemployment follows the cycles of the economy. For example, during a recession, spending is low and workers are laid off because production needs are reduced. Structural unemployment occurs when a job is left vacant because a worker does not have the necessary skills needed or a worker does not live where there are available jobs. Some unemployment is due to seasonal factors; that is, employees are hired only during certain times of the year. To help lessen the problem of unemployment, the government can use its powers to increase levels of spending by consumers, businesses, and the government itself and by lowering taxes or giving tax incentives, which makes available more money with which to purchase goods and services. This in turn puts more laid-off workers back to work. The Federal Reserve System can also increase spending by lowering interest rates.
Total economic spending, which includes consumer, business, and government spending, determines the level of the gross domestic product (GDP), which is the market value of all final products produced in a year's time. GDP is one of the most commonly used measures of economic performance. An increasing GDP from year to year shows that the economy is growing. The nation's policy makers look at past and present G DPs to formulate policies that will contribute to economic growth, which would result in a steady increase in the production of goods and services. If GDP is too high or growing too rapidly, inflation occurs. If GDP is too low or decreasing, an increase in unemployment occurs.
Fluctuations in total economic activity are known as business cycles, and macro economists are concerned with understanding why these cycles occur. Most unemployment and inflation are caused by these fluctuations. There are four phases of the business cycle: prosperity (peak), recession, trough, and recovery. The length and duration of each cycle varies. From its highest point, prosperity, to its lowest point, trough, these phases are marked by increases and decreases in GDP, unemployment, demand for goods and services, and spending.
Microeconomics
Microeconomics looks at the individual components of the economy, such as costs of production, maximizing profits, and the different market structures.
Business firms are the suppliers of goods and services, and most firms want to make a profit; in fact, they want to maximize their profits. Firms must determine the level of output that will result in the greatest profits. Costs of production play a major role in determining this level of output. Costs of production include fixed costs and variable costs. Fixed costs are costs that do not vary with the level of output, such as rent and insurance premiums. Variable costs are costs that change with the level of output, such as wages and raw materials. Therefore, total cost equals total fixed costs plus total variable costs (TC TFC TVC). Marginal cost, which is the cost of producing one more unit of output, helps determine the level at which profits will be maximized. Marginal cost (MC) measures the change (Δ)in total cost when there is a change in quantity (Q) produced (MC =ΔTC/ΔQ). Firms must then decide whether they should produce additional quantities.
Revenue, the money a firm receives for the product it sells, is also a part of the profit equation because total revenue minus total costs equal profit (TR TC profit). Marginal revenue, which is the additional revenue that results from producing and selling one more unit of output, is also very important. As long as marginal revenue exceeds marginal cost, a firm can continue to maximize profits.
There are four basic categories of market structures in which firms sell their products. Pure competition includes many sellers, a homogeneous product, easy entry and exit, and no artificial restrictions such as price controls. A monopoly is the opposite of pure competition and is characterized by a single firm with a unique product and barriers to entry. An oligopoly has few sellers, a homogeneous or a differentiated product, and barriers to entry such as high startup costs. Where products are differentiated, non price competition occurs; that is, consumers are persuaded to buy products without consideration of price. The fourth market structure is monopolistic competition. It includes many sellers, differentiated products, easy entry and exit, and non prime competition.
MACROECONOMICS
Study of the entire economy in terms of the total amount of goods and services produced, total income earned, level of employment of productive resources, and general behavior of prices. Until the 1930s, most economic analysis focused on specific firms and industries. The aftermath of the Great Depression and the development of national income and production statistics brought new interest to the field of macroeconomics. The goals of macroeconomic policy include economic growth, price stability, and full employment. See also microeconomics; national income accounting.
Circulation in macroeconomics
Economics
Economies by region
General categories
Microeconomics • Macroeconomics
History of economic thought
Methodology • Heterodox approaches
Fields and subfields
Behavioral • Cultural • Evolutionary
Growth • Development • History
International • Economic systems
Monetary and Financial economics
Public and Welfare economics
Health • Education • Welfare
Population • labor • Managerial
Business • Information • Game theory
Industrial organization • Law
Agricultural • Natural resource
Environmental • Ecological • Conservation
Urban • Rural • Regional
Economic geography
Techniques
Mathematical • Econometrics
Experimental • National accounting
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Categories • Topics • Economists
Economic ideologies
The economy: concept and history
Business and Economics Portal
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Macroeconomics (from prefix "macr(o)-" meaning "large" + "economics") is a branch of economics that deals with the performance, structure, behavior and decision-making of the entire economy, be that a national, regional, or the global economy.Along with microeconomics, macroeconomics is one of the two most general fields in economics.
Macro economists study aggregated indicators such as GDP, unemployment rates, and price induces to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. In contrast, microeconomics is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets.
While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income).
Macroeconomic models and their forecasts are used by both governments and large corporations to assist in the development and evaluation of economic policy and business strategy.
Development of macroeconomic theory
Main article: History of modern macroeconomic thought
The term "macroeconomics" stems from a similar usage of the term "macro system" by the Norwegian economist Ragnar Frisch in 1933.[3] and there was a long existing effort to understand many of the broad elements of the field. It fused and extended the earlier study of business fluctuations and monetary economics.
Mark Blaug, a notable historian of economic thought, proclaimed in his "Great Economists before Keynes: 1986" that Swedish economist Knut Wick sell “more or less founded modern macroeconomics”.
Macroeconomic schools of thought
The traditional distinction is between three different approaches to economics: Keynesian economics, focusing on demand; neoclassical economics based on rational expectations and efficient markets, and innovation economics focused on long-run growth through innovation. Keynesian thinkers challenge the ability of markets to be completely efficient generally arguing that prices and wages do not adjust well to economic shocks. None of the views are typically endorsed to the complete exclusion of the others, but most schools do emphasize one or the other approach as a theoretical foundation.
Keynesian tradition
Keynesian economics was an academic theory heavily influenced by the economist John Maynard Keynes. This period focused on aggregate demand to explain levels of unemployment and the business cycle. That is, business cycle fluctuations should be reduced through fiscal policy (the government spends more or less depending on the situation) and monetary policy. Early Keynesian macroeconomics was "activist," calling for regular use of policy to stabilize the capitalist economy, while some Keynesian's called for the use of incomes policies.
Neo-Keynesians combined Keynes thought with some neoclassical elements in the neoclassical synthesis. Neo-Keynesianism waned and was replaced by a new generation of models that made up New Keynesian economics, which developed partly in response to new classical economics. New Keynesianism strives to provide microeconomic foundations to Keynesian economics by showing how imperfect markets can justify demand management.
Post-Keynesian economics represents a dissent from mainstream Keynesian economics, emphasizing the importance of demand in the long run as well as the short, and the role of uncertainty, liquidity preference and the historical process in macroeconomics.
Neoclassical tradition
For decades Keynesian's and classical economists split in to autonomous areas, the former studying macroeconomics and the latter studying microeconomics. In the 1970s New Classical Macroeconomics challenged Keynesian's to ground their macroeconomic theory in microeconomics. The main policy difference in this second stage of macroeconomics is an increased focus on monetary policy, such as interest rates and money supply. This school emerged during the 1970s with the Lucas critique. New Classical Macroeconomics based on rational expectations, which means that choices are made optimally considering time and uncertainty, and all markets are clearing. New Classical Macroeconomics is generally based on real business cycle models.
Monetarism, led by Milton Friedman, holds that inflation is always and everywhere a monetary phenomenon. It rejects fiscal policy because it leads to "crowding out" of the private sector. Further, it does not wish to combat inflation or deflation by means of active demand management as in Keynesian economics, but by means of monetary policy rules, such as keeping the rate of growth of the money supply constant over time.
Macroeconomic policies
To try to avoid major economic shocks, such as The Great Depression, governments make adjustments through policy changes they hope will stabilize the economy. Governments believe the success of these adjustments is necessary to maintain stability and continue growth. This economic management is achieved through two types of strategies:
Fiscal policy
Monetary policy
See also
Microeconomics
Monetary policy
Keynesian economics
Economic development
Fiscal Policy
Dynamic stochastic general equilibrium
Model (macroeconomics)
AP Macroeconomics
Innovation Economics
Macroeconomic Data and Resources:
1. Magazines and News:
WEB sites of some leading economics and business newspapers and magazines are listed below. Each one of these sites offers selected articles form current and past issues that provide a wealth of macroeconomic information on industrial countries and emerging markets.
The Economist
The WEB site of the Economist offers only a few articles of each issue and an archive of selected articles in past issues of them magazine. Still, the site is a partial free alternative to subscribing to the paper edition.
You need to pay a fee to subscribe on a regular basis. The on-line edition of the WSJ contains all current articles and an search able archive of the last two weeks of the WSJ and Dow Jones services.
The Financial Times:
The on-line web site of the Financial Times offers you a view of the current articles and links to parts of archived articles. Business source premier (one of the databases accessible through WSU library databases) will give you full-text access to any Financial Times article you would want to read in its entirety.
You can also use the WSU library databases to find articles in those publications. Use of these databases is free of additional charges.
2. Macroeconomic Data:
The Dismal Scientist covers over 65 economic releases from over 15 countries. This site gives a good overview of the latest economic data releases and comments on the significance of the data for macroeconomic performance in the U.S. (mostly) and some other countries. This site is very user friendly since it helps to make sense of the data releases.
Free Lunch is the web's most accessible FREE database of economic, industry, financial, and demographic data with over 1,000,000 time series available
for download (at least that is what this site claims).
Economical:
This site has historical time series for an enormous number of U.S. economic indicators. An added advantage of this page is that all the tables are already put together for you on-line and in many cases graphs are available in various formats. The site is compiled at the University Of Alabama School Of Business. The material is well put together and lists full sources for each table. The entire page is so rich with information that recommending one area over another is somewhat of a disservice. You can browse the data by source, or run searches. Searching draws on more sources than you will find presented in the browse
Feature.
The Conference Board - Business Cycle Indicators
The Conference Board is a private research organization that won the bid to publish the leading economic indicators (LEI) a widely watched index that is used to forecast economic activity in the U.S. The website contains information about this index and a good discussion of the recent trend in U.S. macroeconomic performance.
FRED - Federal Reserve Bank of St. Louis
One of the largest data collections of the U.S. macro economy.
Federal Reserve Banks:
Each one of the 12 Federal Reserve Banks and the Board of Governors of the Fed has a WEB site offering a wealth of information, analysis and data on US monetary policy. Particularly useful and rich in content are the New York Fed site, and the Board of Governors site.
Board of Governors of the Federal Reserve
Federal Reserve Bank of New York
Federal Reserve Bank of Cleveland
For a more complete listing of U.S. data sources, including consensus forecasts, see Resources for Economists on the Internet.
3. MACROECONOMIC FORECASTING SERVICES:
Morgan Stanley Global Economic Forum
This service offers a daily view on macroeconomic affairs and events around the world. This is a good daily source of information and commentary on current macroeconomic conditions in US, Europe, Japan, Canada and selected developing countries. On each business day, a number of issues are discussed. Back issues are available as well. A good source of analysis and information on macroeconomic conditions and policies in industrial and emerging markets.
4. WORLD AND INTERNATIONAL DATA:
The World Bank site offers a wide variety of material on their operations. It includes information on current events, country and project information. There is also substantial information on the research projects of the bank. An excellent site for information on emerging markets and their macroeconomic conditions.
International Monetary Fund
The IMF gopher site provide information on the role and functions of the IMF, the leading
international organization dealing with macroeconomic reform and lending to developing countries facing macroeconomic difficulties. You can find information on IMF Staff Country Reports, IMF Working Papers and Papers on Policy Analysis and Assessment, Press
Releases/Briefings/Conferences, News Briefs, Speeches by the Managing Director, the IMF Survey and some selected macro data.
Inter-American Development Bank
This sites describes many aspects of the bank's work, a international lending institution for Latin America. It also has extensive information on their projects, press releases, information on their press releases, some information on business opportunities, information on their private sector projects, and information on the Inter-American Investment Corporation. They also have fairly extensive summary statistical data on their member countries. A good source of information on Latin American countries.
Organization for Economic Cooperation and Development
This OECD is based in Paris and is the "club" of industrialized countries. Among other functions, the OECD collects a large set of macroeconomic data for the member countries and prepares regular reports and studies of their macroeconomic conditions and policies. The sites provide information on the activities of the OECD. You can find on this site some data on the latest economic indicators of the member countries and a catalogers of the publications of the OECD.
Asian Development Bank:
This site describes all aspects of this bank's work. This not only includes information about the bank, but also includes news releases, extensive information on its projects, and its work with law and development. There is also extensive material on the bank's publications. Again, Resources for Economists links you to a vast number of international data sources. You can now find data from most industrialized countries statistical offices - often in English.
5. FINANCE AND FINANCIAL MARKETS :
Bloomberg is one of the leading suppliers of financial market information. In this offering, you can read about a number of current financial market events. While this site offers less than their fee-based service (Bloomberg Terminal), it does supply a substantial amount of information: news, summary information on markets around the world, etc.
Allows you to track domestic and international financial information over time, create a personalized portfolio and follow the news (with back issues) on a particular company, country or stock/bond index.
This site provides up-to-date information on financial markets - it is a good tool to follow interest rates over the course of a day.
Introduces itself as "The currency site", the #1 source of foreign exchange services and online tools. OANDA provides currency conversion information and services to travelers, investors and businesses worldwide.
Forexnews.com was created in January 1999 as a service mark of MG Media Ltd., part of the MG Group. Forexnews.com reflects Mug’s commitment to enhancing public knowledge about the foreign exchange markets. The site offers the latest insights and analysis in currency markets, freely available to traders and researchers alike.
Pacific Exchange Rate Service:
This service provides access to current and historic daily exchange rates through an on-line database retrieval and plotting system. Also provided is a list of all the currencies of the world with information on each country's exchange rate regime and ISO-4217 currency code. Analysis and trend projections of the Canadian Dollar, the U.S. Dollar, and the Euro are available as well. This site is dedicated to the support of academic research and teaching in the area of exchange rate economics.
Monetary Information and Macroeconomic Fluctuations:
This paper introduces contemporaneously available monetary data into an "equilibrium" model that combines rational expectations, market clearing, and incomplete information about monetary disturbances. Data on the current money stock involve a preliminary estimate that is subject to a subsequent process of gradual revision. The model implies the testable hypothesis that aggregate output and employment are uncorrelated with the contemporaneous measure of money growth implied by the difference between the currently available estimates of current and past money shocks. Rejection of this hypothesis provides strong evidence again at the equilibriums approach to modeling the relation between monetary disturbances and macro-economic fluctuations.
Macroeconomic Policy Tools:
Monetary Policy:
Monetary policy instruments consists in managing short-term rates (Fed Funds and Discount rates in the U.S.), and changing reserve requirements for commercial banks. Monetary policy can be either expansive for the economy (short-term rates low relative to inflation rate) or restrictive for the economy (short-term rates high relative to inflation rate). Historically, the major objective of monetary policy had been to manage or curb domestic inflation. More recently, central bankers have often focused on a second objective: managing economic growth as both inflation and economic growth are highly interrelated.
Fiscal Policy:
Fiscal policy consists in managing the national Budget and its financing so as to influence economic activity. This entails the expansion or contraction of government expenditures related to specific government programs. It also includes the raising of taxes to finance government expenditures and the raising of debt (Treasuries in the U.S.) to bridge the gap (Budget deficit) between revenues (tax receipt) and expenditures related to the implementation of government programs. Raising taxes and reducing the Budget Deficit is deemed to be a restrictive fiscal policy as it would reduce aggregate demand and slow down GDP growth. Lowering taxes and increasing the Budget Deficit is considered an expansive fiscal policy that would increase aggregate demand and stimulate the economy.
International Economics:
The world has a long, rich history of international trade among nations that can be traced back to early Assyrian, Babylonian, Egyptian, and Phoenician civilizations. These and other early civilizations recognized that trade can be tied directly to an improved quality of life for the citizens of all the partners. Today, the practice of trade among nations is growing by leaps and bounds. There is hardly a person on earth who has not been influenced in some way by the growing trade
among nations.
Environmental Economics:
Environmental economics is a subfield of economics concerned with environmental issues (other usages of the term are not uncommon). In using standard methods of neo-classical economics, it is distinguished from green economics or ecological economics which include the nonstandard approaches to environmental problems, environmental science/environmental studies, or ecology. Quoting from the National Bureau of Economic Research Environmental Economics program.
"Environmental Economics undertakes theoretical or empirical studies of the economic effects of national or local environmental policies around the world Particular issues include the costs and benefits of alternative environmental policies to deal with air pollution, water quality, toxic substances, solid waste, and global warming."
A related field (or possibly alternative approach to the same field) is ecological economics, which takes as its premise that economics is itself a strict subfield of ecology.
Development Economics:
Development economics is a branch of economics that deals with the study of macroeconomic causes of long term economic growth, and microeconomics; the incentive issues of individual households and firms, especially in developing countries. This may involve using mathematical methods from dynamical systems like differential equations and inter-temporal optimization, or it may involve a mixture of quantitative and qualitative methods. Unlike classical economics, development economics incorporates social and political strategies to devise particular plans for development in third world countries. In this way, development economics does not rely simply on classical
Economic theory.
ISLAMIC ECONOMICS
Introduction:
Islamic Economics differs fundamentally from man-made laws and systems in defining economic problem. It represents the only wholly independent, alternative economic paradigm in the world today. It is based on principles revealed from Islamic sources as norms for human welfare that offer a strikingly alternative set of parameters for economic activity. According to its proponents its offers a comprehensive, coherent and better alternative to those currently in use in Western economics.
Definition:
Islamic economics is economics in accordance with Islamic law. Because the Qur'an spoke against usury in the context of early Muslim society, it generally entails trying to remove or redefine interest rates from financial institutions. In doing so, Islamic economists hope to produce a more 'Islamic society'. However, liberal movements within Islam may deny the need for this field, since they generally see Islam as compatible with modern secular institutions and law.
History Reforms under Islam:
Michael Bonner, Professor of Medieval Islamic History at the University of Michigan, writes on poverty and economics in the Qur'an that the Qur'an provided a blueprint for a new order in society, in which the poor would be treated more fairly than before. This "economy of poverty" prevailed in Islamic theory and practice until 13th and 14th century. At its heart was a notion of property circulated and purified, in part, through charity, which illustrates a distinctively Islamic way of conceptualizing charity, generosity, and poverty markedly different from "the Christian notion of perennial reciprocity between rich and poor and the ideal of charity as an expression of community love." The Qur'an prohibits bad kind of circulation (often understood interest or usury) and asks for good circulation (zakat [legal alms giving]). Some of the recipients of charity appear only once in the Qur'an, and others—such as orphans, parents, and beggars—reappear constantly. Most common is the triad of kinsfolk, poor, and travelers. Unlike pre-Islamic Arabian society, the Qur'anic idea of economic circulation as a return of goods and obligations was for everyone, whether donors and recipients know each other or not, in which goods move, and society does what it is supposed to do. The Qur'an's distinctive set of economic and social arrangements, in which poverty and the poor have important roles, show signs of newness. The Qur'an told that the guidance comes to a community that regulates its flow of money and goods in the right direction (from top down) and practices generosity as reciprocation for God's bounty. In a broad sense, the narrative underlying the Qur'an is that of a tribal society becoming urbanized. Many scholars have characterized both the Qur'an and Islam as highly favorable to commerce and to the highly mobile type of society that emerged in the medieval Near East. Muslim tradition (both hadith and historiography) maintains that Muhammad did not permit the construction of any buildings in the market of Medina other than mere tents; nor did he permit any tax or rent to be taken there. This expression of a "free market"—involving the circulation of goods within a single space without payment of fees, taxes, or rent, without the construction of permanent buildings, and without any profiting on the part of the caliphal authority (indeed, of the Caliph himself )—was rooted in the term sadaqa, "voluntary alms." This coherent and highly appealing view of the economic universe had much to do with Islam's early and lasting success. Since the poor were at the heart of this economic universe, the teachings of the Qur'an on poverty had a considerable, even a transforming effect in Arabia, the Near East, and beyond.
shariah rules:
The Shariah defines certain rules that regulate company structure, effectively preventing abuse and corruption. For instance, Islam forbids monopolies by outlawing the hoarding of wealth (Al-Ihtikar), and eliminates copyright or potency laws that would open the avenue for potential monopolies to develop. Also, Islam protects the ownership of businesses and companies by restricting ownership of companies only to those who contribute both capital and effort to the company or business, thus effectively putting the seal on such concepts as "corporate takeover" from ever becoming a reality. Yet, generally we will exhibit the root of Shariah rules to solve those problems in this section.
contracts:
The Exchange Contract is the most basic of all contracts and the most important building block for a financial and economic system. Most of the financial products, services and instruments are based on this contract. Therefore a thorough understanding of the Shariah-acceptable way of exchange is called for to appreciate how the basic contract in its multifarious and varied forms could be used to design and develop financial products and to provide financial solutions.
monetary & fiscal:
The role and realm of reign of each will be specified to the set of assumptions that is derived from the Islamic economic system, which include Zakah, prohibition of interest, moderation in consumption, the Islamic inheritance system, Hisbah, Qirad, and the co-existence of private and social ownership of the means of production. Zakah provides a major means of fiscal policy because it affects the allocation of resources, the level of aggregate demand and the distribution of income as well since the variations in the volume and the timing of collection and disbursement of Zakah creates variations in disposable income and fixed and circulating capital. The economic policy has to do with the role of the government Such a government role is made available through its ownership of the major natural resources and al-Hisbah.
trade & business:
During the height of the great Islamic civilization, trade was among the most important activity in wealth creation. Today in a world that is being rapidly globalized, trade has become even more important, facilitated by the advancements in information and communication technology and the greater capacity and speed of transportation. Whereas in the past trade could be carried out through the barter of goods, the Muslim world would still have to trade with the rest of the world as individual countries or as a regional group or as an Islamic Financial Community.
Other Economic Concepts in Islam:
Debt arrangements:
Most Islamic economic institutions advise participatory arrangements between capital and labor. The latter rule reflects the Islamic norm that the borrower must not bear all the cost of a failure, as "it is God who determines that failure, and intends that it fall on all those involved."
Conventional debt arrangements are thus usually unacceptable - but conventional venture investment structures are applied even on very small scales. However, not every debt arrangement can be seen in terms of venture investment structures. For example, when a family buys a home it is not investing in a business venture - a person's shelter is not a business venture. Similarly, purchasing other commodities for personal use, such as cars, furniture, and so on, cannot realistically be considered as a venture investment in which the Islamic bank shares risks and profits for the profits of the venture.
Natural capital:
Perhaps due to resource scarcity in most Islamic nations, this form of economics also emphasizes limited (and some claim also sustainable) use of natural capital, i.e. producing land. These latter revive traditions of haram and hima that were prevalent in early Muslim civilization.
Welfare:
Social welfare, unemployment, public debt and globalization have been re-examined from the perspective of Islamic norms and values. Islamic banks have grown recently in the Muslim world but are a very small share of the global economy compared to the Western debt banking paradigm. It remains to be seen if they will find niches - although hybrid approaches, e.g. Grameen Bank which applies classical Islamic values but uses conventional lending practices, are much lauded by some proponents of modern human development theory.
What is the Islamic Ruling on the Issue of Waqfs?:
Waqf means putting aside the original property and donating its benefits for the sake of Allaah. What is meant by the original property is something from which benefit may be derived whilst its essence remains, such as houses, shops, gardens, etc. What is meant by benefits is beneficial produce that comes from the original property, such as crops, rents, provision of shelter, etc.
The ruling concerning waqfs is that the waqf is an act of worship which is recommended in Islam (mustahabb). The evidence for that is the saheeh Sunnah. In al-Saheehayn it is narrated that ‘Umar (may Allaah be pleased with him) said: "O Messenger of Allaah, I have got wealth from Khaybar and I have nothing that is more precious to me than that. What do you command me to do with it?" He said, "If you wish, you can put it aside and give in charity from it (from what it produces), but the original property should not be sold, given away or inherited." So ‘Umar gave it in charity to the poor and to relatives, used it to set slaves free, gave it for the sake of Allaah, helped wayfarers and honoured his guests. Muslim narrated in his Saheeh that the Prophet (peace and blessings of Allaah be upon him) said: "When the son of Adam dies, all his good deeds come to an end except three: ongoing charity, knowledge from which others may benefit after he is gone, and a righteous son who will pray for him." Jaabir said: "There was no one among the Companions of the Messenger of Allaah (peace and blessings of Allaah be upon him) who had the means, but he set up a waqf."
Qurtubah (may Allaah have mercy on him) said: "There is no dispute among the scholars concerning waqfs of aqueducts and mosques in particular, but they differed concerning other types of waqfs."
There is the condition that the one who established the waqf should be one who has the authority to dispose of this wealth, i.e., he should be an adult, free and mature, because a waqf made by a minor, a fool or a slave is not valid.
The contract of the waqf is done in either of two ways:
a) By saying something that indicates that a waqf is being established, such as saying, "I make this place a waqf" or "I make it a mosque."
b) By doing something that customarily indicates a waqf, such as making a house into a mosque, or giving general permission to the people to pray there, or making one’s land into a graveyard and giving people permission to bury their dead there.
Words which indicate a waqf are of two types:
1) Clear words, such I saying "I make this a waqf," or "I make this for the sake of Allaah," and so on… these words are clear, because they cannot be interpreted as meaning anything other than a waqf. When he utters these words it becomes a waqf with no need to add anything further.
2) Words which are indirect, such as "I give this in charity," or "I deny myself its benefits" or "This is for the sake of Allaah in perpetuity". These are called indirect because they may be interpreted as meaning a waqf or something else. If he says an expression such as this, it has to be accompanied by the intention to set up a waqf, or one of the clear phrases, or one of the other indirect phrases. The clear phrases include "I give such and such in charity as a waqf, or for the sake of Allaah, or denying myself its benefits, or in perpetuity." Or the indirect words may be accompanied by the ruling on waqfs, such as saying, "I give such and such in charity and it is not to be sold or inherited."
Certain conditions apply in order for the waqf to be valid. These include:
(1) That the person who is setting up the waqf is one who has the authority to dispose of this wealth, as stated above.
(2) That the property given as a waqf should be something from which ongoing benefit may be derived whilst its original essence remains. Things which do not remain after they have been used cannot be given as a waqf, such as food.
(3) That the property given as a waqf should be something specific. A waqf consisting of something unspecified is invalid, such as saying, "I give one of my slaves or one of my houses as a waqf."
(4) The waqf should be for a good purpose, because the purpose behind it is to draw closer to Allaah – such as mosques, aqueducts, waqfs for the poor, books of knowledge and waqfs to benefit relatives. It is not permissible to set up a waqf for purposes that are not good, such as waqfs for places of worship of the kuffaar, or the books of the heretics, or for installing lights on tombs or perfuming them with incense, or to support those who look after tombs, because that is helping people to commit sin, shirk and kufr.
(5) In order for the waqf to be valid if it refers to a specific thing, that thing should be in the firm possession of the one who is setting up the waqf. So one who cannot possess anything, such as the dead and animals, cannot set up a waqf.
(6) In order for the waqf to be valid it must be executable with immediate effect. A waqf which is temporary or suspended is not valid, except when a person connects it to his death, such as saying, "When I die, my house will be a waqf for the poor," because of what Abu Dawood narrated: "‘Umar made a will that if anything were to happen to him, then Samagh – some land which he owned – would be given in charity." This became well known and no one denied this action, which amounted to unanimous agreement on this point. The waqf which is connected to a person’s death should be (no more than) one-third of the wealth, because it comes under the rulings of wills (wasiyyah).
Among the rulings on waqfs is that it is obligatory to act in accordance with the wishes of the one who set up the waqf, so long as it does not go against sharee’ah, because the Prophet (peace and blessings of Allaah be upon him) said: "The Muslims are bound by their conditions, except for conditions which make haraam things permissible or halaal things forbidden." And because ‘Umar (may Allaah be pleased with him) set up a waqf and stipulated certain conditions, and if it had not been obligatory to adhere to the conditions there would have been no point in stipulating them. So if (the person setting up the waqf) stipulates a certain amount, or that some deserving people should be given precedence over others, or that those who are to benefit should have certain qualities or be free of certain qualities, etc., then it should be done in accordance with his conditions, so long as that does not go against the Qur’aan or Sunnah.
If he does not stipulate any conditions, then rich and poor, male and female, should be treated equally when given the benefits of the waqf.
If he does not designate a specific person to be in charge of the waqf, or if he designates a specific person then that person dies, then the one to look after the waqf should be the one for whom it was set up. If the waqf was not set up to benefit a particular person, such as a waqf set up for a mosque a mosque, or for people who cannot be counted, such as the poor and needy, then the ruler should take care of the waqf, either in person or by delegating someone else to do it.
The person who takes care of the waqf has to fear Allaah and do a good job in taking care of the waqf, because that is something that has been entrusted to him (amaanah).
If a person sets up a waqf for his children, he must treat males and females equally, because he has included all of them in that, which implies that they all have an equal share. Just as if he were to give something to them, it should be shared equally among them, so too if he sets up a waqf for them, they should have equal shares. After his own children, the waqf should pass to the children of his sons, and not the children of his daughters, because they belong to another man and should be attributed to their father, because they are not included in the aayah (interpretation of the meaning): "Allaah commands you as regards your children’s (inheritance):" [al-Nisaa’ 4:11]. Some of the scholars think that they (daughter’s children) are included in the word "children", because the daughters are also his children, so their (daughter’s) children are also his children in a real sense. And Allaah knows best.
If he says "I set up a waqf for my sons, or for the sons of So and so," then the waqf is for the males only, because the word sons is used in the specific sense, as Allaah says (interpretation of the meaning):
"Or has He (Allaah) only daughters and you have sons?" [al-Toor 52:39].
Unless those for whom the waqf is set up are a tribe, such as Bani Haashim or Bani Tameem, in which case the women are also included, because the name of the tribe includes both the males and the females.
But if the waqf is set up for a group who can be counted, they must all be included and treated equally. If they cannot all benefit from it because they are so many, such as Bani Haashim and Bani Tameem, then they do not all have to be included, because it is impossible, and it is permitted to limit it to some of them and give precedence to some of them over others.
Waqfs are among the contracts which become binding just by speaking them, and it is not permissible to annul them, because the Prophet (peace and blessings of Allaah be upon him) said: "The original property should not be sold, given as a gift or inherited." Al-Tirmidhi said: "According to the scholars, it is not permissible to annul a waqf, based on this hadeeth and because it is established in perpetuity and is not to be sold or moved somewhere else unless its benefits cease altogether, such as a house which gets destroyed and cannot be rebuilt using the money of the waqf, or agricultural land which gets ruined and becomes dead and cannot be restored, and there are no funds from the waqf to restore it. In this case the waqf should be sold and the money spent on a similar thing, because this is closer to the aims of the waqf. If it is not possible to spend the money on something that is exactly the same, then it is to be spent on something smaller that is of the same nature, and the replacement becomes a waqf as soon as it is bought.
If the waqf is a mosque and can no longer be used where it is, such as if the neighbourhood in which it is located is destroyed, then it should be sold and the money spent on another mosque. If a waqf is set up to benefit a mosque and produces more than is needed, it is permissible to spend the extra money on another mosque, because in this way the benefit is given to something similar to the purpose for which the waqf was set up. It is permissible to give in charity to the poor the extra benefits produced by a waqf that was set up to benefit a mosque.
If a waqf is set up for a specific person, such as saying, "This is for Zayd; his is to be given one hundred of it every year," and it produces more than that, then the extra amount should be given (in charity). Shaykh Taqiy al-Deen (may Allaah have mercy on him) said: "If he knows that the produce will always be more, then he has to dispose of it; withholding it is a waste of this extra amount."
If a waqf is set up to benefit a mosque, and that mosque is destroyed, and it is not possible to rebuild it from the waqf funds, then they should be given to other mosques.
Source: al-Mulakhkhas al-Fiqhi by Shaykh Saalih ibn Fawzan Aal Fawzaan, p. 158
slamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. Sharia prohibits the payment or acceptance of interest fees for the lending and accepting of money respectively, (Riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden). While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community,Islamic banking is nothing but funding of partnership.
Classical Islamic banking:
Main article: Islamic economics in the world
Further information: Early reforms under Islam
During the Islamic Golden Age, early forms of proto-capitalism and free markets were present in the Caliphate,where an early market economy and an early form of mercantilism were developed between the 8th-12th centuries, which some refer to as "Islamic capitalism".A vigorous monetary economy was created on the basis of the expanding levels of circulation of a stable high-value currency (the dinar) and the integration of monetary areas that were previously independent.
A number of innovative concepts and techniques were introduced in early Islamic banking, including bills of exchange, the first forms of partnership (mufawada) such as limited partnerships (mudaraba), and the earliest forms of capital (al-mal), capital accumulation (nama al-mal), cheques, promissory notes, trusts (see Waqf), startup companies, transactional accounts, loaning, ledgers and assignments.Organizational enterprises similar to corporations independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced during that time. Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.
Riba:
The word "Riba" means excess, increase or addition, which correctly interpreted according to Shariah terminology, implies any excess compensation without due consideration (consideration does not include time value of money). The definition of riba in classical Islamic jurisprudence was "surplus value without counterpart." or "to ensure equivalency in real value" and that "numerical value was immaterial." During this period, gold and silver currencies were the benchmark metals that defined the value of all other materials being traded. Applying interest to the benchmark itself (ex natura sua) made no logical sense as its value remained constant relative to all other materials: these metals could be added to but not created (from nothing).
Applying interest was acceptable under some circumstances. Currencies that were based on guarantees by a government to honor the stated value (i.e. fiat currency) or based on other materials such as paper or base metals were allowed to have interest applied to them.[9] When base metal currencies were first introduced in the Islamic world, no jurist ever thought that "paying a debt in a higher number of units of this fiat money was riba" as they were concerned with the real value of money (determined by weight only) rather than the numerical value. For example, it was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars of equal aggregate weight (i.e., the value in terms of weight had to be same because all makes of coins did not carry exactly similar weight).
Modern Islamic banking:
The first modern experiment with Islamic banking was undertaken in Egypt under cover without projecting an Islamic image—for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime. The pioneering effort, led by Ahmad Elnaggar, took the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963. This experiment lasted until 1967 (Ready 1981), by which time there were nine such banks in the country.
This section requires expansion.In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank which, till date, is still in business in Egypt. In 1975, the Islamic Development Bank was set-up with the mission to provide funding to projects in the member countries. The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early years, the products offered were basic and strongly founded on conventional banking products, but in the last few years the industry is starting to see strong development in new products and services.Islamic Banking is growing at a rate of 10-15% per year and with signs of consistent future growth.[11] Islamic banks have more than 300 institutions spread over 51 countries, including the United States through companies such as the Michigan-based University Bank, as well as an additional 250 mutual funds that comply with Islamic principles. It is estimated that over US$822 billion worldwide sharia-compliant assets are managed according to The Economist.This represents approximately 0.5% of total world estimated assets as of 2005.The World Islamic Banking Conference, held annually in Bahrain since 1994, is internationally recognized as the largest and most significant gathering of Islamic banking and finance leaders in the world.The Vatican has put forward the idea that "the principles of Islamic finance may represent a possible cure for ailing markets."[14]
[edit]Largest Islamic Banks
Islamic Development Bank:
Shariah-compliant assets reached about $400 billion throughout the world in 2009, according to Standard & Poor’s Ratings Services, and the potential market is $4 trillion.[15][16] Iran, Saudi Arabia and Malaysia have the biggest sharia-compliant assets.[17]
In 2009 Iranian banks accounted for about 40 percent of total assets of the world's top 100 Islamic banks. Bank Melli Iran, with assets of $45.5 billion came first, followed by Saudi Arabia's Al Rajhi Bank, Bank Mellat with $39.7 billion and Bank Saderat Iran with $39.3 billion.
Principles:
Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). Common terms used in Islamic banking include profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah).
In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank's profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha. Another approach is EIjara wa EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).
An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership. At the same time, the borrower in the partnership entity also buys the bank's share of the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party's current equity. This method allows for floating rates according to the current market rate such as the BLR (base lending rate), especially in a dual-banking system like in Malaysia.
There are several other approaches used in business transactions. Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company's individual rate of return. Thus the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing lender to monopolize the economy.
Islamic banking is restricted to Islamically acceptable transactions, which exclude those involving alcohol, pork, gambling, etc. The aim of this is to engage in only ethical investing, and moral purchasing.
In theory, Islamic banking is an example of full-reserve banking, with banks achieving a 100% reserve ratio.[20] However, in practice, this is not the case, and no examples of 100 per cent reserve banking are observed.[21]
Islamic banks have grown recently in the Muslim world but are a very small share of the global banking system. Micro-lending institutions founded by Muslims, notably Grameen Bank, use conventional lending practices and are popular in some Muslim nations, especially Bangladesh, but some do not consider them true Islamic banking. However, Muhammad Yunus, the founder of Grameen Bank and microfinance banking, and other supporters of microfinance, argue that the lack of collateral and lack of excessive interest in micro-lending is consistent with the Islamic prohibition of usury (riba).
Shariah Advisory Council/Consultant:
Islamic banks and banking institutions that offer Islamic banking products and services (IBS banks) are required to establish a Shariah Supervisory Board (SSB) to advise them and to ensure that the operations and activities of the bank comply with Shariah principles. On the other hand, there are also those who believe that no form of banking can ever comply with the Shariah.[24]
In Malaysia, the National Shariah Advisory Council, which additionally set up at Bank Negara Malaysia (BNM), advises BNM on the Shariah aspects of the operations of these institutions and on their products and services. (See: Islamic banking in Malaysia). In Indonesia the Ulama Council serves a similar purpose.
A number of Shariah advisory firms (either standalone or subsidiaries of larger financial groups) have now emerged to offer Shariah advisory services to the institutions offering Islamic financial services. Issue of independence, impartiality and conflicts of interest have also been recently voiced. WDIBF World Database for Islamic Banking and Finance has been Developed to provide complete knowledge about all the websites related to this type of banking.
Islamic financial transaction terminology:
This section may require cleanup to meet Wikipedia's quality standards. Please improve this section if you can. (February 2010)
Bai' al-inah (sale and buy-back agreement):
The financier sells an asset to the customer on a deferred-payment basis, and then the asset is immediately repurchased by the financier for cash at a discount. The buying back agreement allows the bank to assume ownership over the asset in order to protect against default without explicitly charging interest in the event of late payments or insolvency. Some scholars believe that this is not compliant with Shariah principles.
Bai' bithaman ajil (deferred payment sale):
This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed to by both parties. This is similar to Murabahah, except that the debtor makes only a single installment on the maturity date of the loan. By the application of a discount rate, an Islamic bank can collect the market rate of interest
Bai muajjal (credit sale):
Literally bai muajjal means a credit sale. Technically, it is a financing technique adopted by Islamic banks that takes the form of murabaha muajjal. It is a contract in which the bank earns a profit margin on the purchase price and allows the buyer to pay the price of the commodity at a future date in a lump sum or in installments. It has to expressly mention cost of the commodity and the margin of profit is mutually agreed. The price fixed for the commodity in such a transaction can be the same as the spot price or higher or lower than the spot price. (Deferred-payment sale)
Musharakah:
Musharakah (joint venture with capital)is an arrangement or agreement between two or more partners,whereby each partner provides funds to be used in a venture. Profits made are shared between the partners according to the invested capital. In case of loss, each partner loses the capital in the same ratio.If the Bank is providing capital, same conditions apply. It is this financial risk, according to the Shariah, that justifies the bank's claim to part of the profit. All the parnters may or may not participate in carrying out the business. The parnter/s who is also working, gets greater profit ratio as compared to the sleeping partner. The Difference b/w Musharaka and Madharaba is that, in Musharaka, each partner participates with some capital, whereas in Madharaba, there is a capital provider, ie. a financial institution and an enterpreneur, who has zero financial participation. Note that Musharaka and Madharaba are commonly overlapping.[27]
Mudarabah:
Main article: Mudarabah
"Mudarabah" is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called "rabb-ul-mal", while the management and work is an exclusive responsibility of the other, who is called "mudarib".
The Mudarabah (Profit Sharing) is a contract, with one party providing 100 percent of the capital and the other party providing its specialist knowledge to invest the capital and manage the investment project. Profits generated are shared between the parties according to a pre-agreed ratio. Compared to Musharaka, in a Mudaraba only the lender of the money has to take losses.
Murabaha:
Main article: Murabaha
This concept refers to the sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated at the time of the sale agreement. The bank is compensated for the time value of its money in the form of the profit margin. This is a fixed-income loan for the purchase of a real asset (such as real estate or a vehicle), with a fixed rate of profit determined by the profit margin. The bank is not compensated for the time value of money outside of the contracted term (i.e., the bank cannot charge additional profit on late payments); however, the asset remains as a mortgage with the bank until the default is settled.
This type of transaction is similar to rent-to-own arrangements for furniture or appliances that are very common in North American stores.
Musawamah:
Musawamah is the negotiation of a selling price between two parties without reference by the seller to either costs or asking price. While the seller may or may not have full knowledge of the cost of the item being negotiated, they are under no obligation to reveal these costs as part of the negotiation process. This difference in obligation by the seller is the key distinction between Murabaha and Musawamah with all other rules as described in Murabaha remaining the same. Musawamah is the most common type of trading negotiation seen in Islamic commerce.shoaib
Bai salam:
Bai salam means a contract in which advance payment is made for goods to be delivered later on. The seller undertakes to supply some specific goods to the buyer at a future date in exchange of an advance price fully paid at the time of contract. It is necessary that the quality of the commodity intended to be purchased is fully specified leaving no ambiguity leading to dispute. The objects of this sale are goods and cannot be gold, silver, or currencies based on these metals. Barring this, Bai Salam covers almost everything that is capable of being definitely described as to quantity, quality, and workmanship.
Basic features and conditions of Salam:
The transaction is considered Salam if the buyer has paid the purchase price to the seller in full at the time of sale. This is necessary so that the buyer can show that they are not entering into debt with a second party in order to eliminate the debt with the first party, an act prohibited under Sharia. The idea of Salam is to provide a mechanism that ensures that the seller has the liquidity they expected from entering into the transaction in the first place. If the price were not paid in full, the basic purpose of the transaction would have been defeated. Muslim jurists are unanimous in their opinion that full payment of the purchase price is key for Salam to exist. Imam Malik is also of the opinion that the seller may defer accepting the funds from the buyer for two or three days, but this delay should not form part of the agreement.
Salam can be effected in those commodities only the quality and quantity of which can be specified exactly. The things whose quality or quantity is not determined by specification cannot be sold through the contract of salam. For example, precious stones cannot be sold on the basis of salam, because every piece of precious stones is normally different from the other either in its quality or in its size or weight and their exact specification is not generally possible.
Salam cannot be effected on a particular commodity or on a product of a particular field or farm. For example, if the seller undertakes to supply the wheat of a particular field, or the fruit of a particular tree, the salam will not be valid, because there is a possibility that the crop of that particular field or the fruit of that tree is destroyed before delivery, and, given such possibility, the delivery remains uncertain. The same rule is applicable to every commodity the supply of which is not certain.
It is necessary that the quality of the commodity (intended to be purchased through salam) is fully specified leaving no ambiguity which may lead to a dispute. All the possible details in this respect must be expressly mentioned.
It is also necessary that the quantity of the commodity is agreed upon in unequivocal terms. If the commodity is quantified in weights according to the usage of its traders, its weight must be determined, and if it is quantified through measures, its exact measure should be known. What is normally weighed cannot be quantified in measures and vice versa.
The exact date and place of delivery must be specified in the contract.
Salam cannot be effected in respect of things which must be delivered at spot. For example, if gold is purchased in exchange of silver, it is necessary, according to Shari'ah, that the delivery of both be simultaneous. Here, salam cannot work. Similarly, if wheat is bartered for barley, the simultaneous delivery of both is necessary for the validity of sale. Therefore the contract of salam in this case is not allowed.
Hibah (gift):
This is a token given voluntarily by a debtor to a creditor in return for a loan. Hibah usually arises in practice when Islamic banks voluntarily pay their customers a 'gift' on savings account balances, representing a portion of the profit made by using those savings account balances in other activities.
It is important to note that while it appears similar to interest, and may, in effect, have the same outcome, Hibah is a voluntary payment made (or not made) at the bank's discretion, and cannot be 'guaranteed.' However, the opportunity of receiving high Hibah will draw in customers' savings, providing the bank with capital necessary to create its profits; if the ventures are profitable, then some of those profits may be gifted back to its customers as Hibah.
Ijarah:
Ijarah means lease, rent or wage. Generally, Ijarah concept means selling the benefit of use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price.
Advantages of Ijarah:
Ijarah provides the following advantages to the Lessee:
Ijarah conserves the Lessee' capital since it allows up to 100% financing.
Ijarah gives the Lessee the right to access the equipment on payment of the first installment. This is important as it is the access and use (and not ownership) of equipment that generates income.
Ijarah arrangements aid corporate planning and budgeting by allowing the negotiation of flexible terms
Ijarah is not considered Debt Financing so it does not appear on the Lessee' Balance Sheet as a Liability. This method of "off-balance-sheet" financing means that it is not included in the Debt Ratios used by bankers to determine financing limits. This allows the Lessee to enter into other lease financing arrangements without impacting his overall debt rating.
All payments towards Ijarah contracts are treated as operating expenses and are therefore fully tax-deductible. Leasing thus offers tax-advantages to for-profit operations.
Many types of equipment (i.e computers) become obsolete before the end of their actual economic life. Ijarah contracts allow the transfer of risk from the Lesse to the Lessor in exchange for a higher lease rate. This higher rate can be viewed as insurance against obsolescence.
If the equipment is used for a relatively short period of time, it may be more profitable to lease than to buy.
If the equipment is used for a short period but has a very poor resale value, leasing avoids having to account for and depreciate the equipment under normal accounting principles.
Ijarah thumma al bai' (hire purchase):
Parties enter into contracts that come into effect serially, to form a complete lease/ buyback transaction. The first contract is an Ijarah that outlines the terms for leasing or renting over a fixed period, and the second contract is a Bai that triggers a sale or purchase once the term of the Ijarah is complete. For example, in a car financing facility, a customer enters into the first contract and leases the car from the owner (bank) at an agreed amount over a specific period. When the lease period expires, the second contract comes into effect, which enables the customer to purchase the car at an agreed to price.
The bank generates a profit by determining in advance the cost of the item, its residual value at the end of the term and the time value or profit margin for the money being invested in purchasing the product to be leased for the intended term. The combining of these three figures becomes the basis for the contract between the Bank and the client for the initial lease contract.
This type of transaction is similar to the contractum trinius, a legal maneuver used by European bankers and merchants during the Middle Ages to sidestep the Church's prohibition on interest bearing loans. In a contractum, two parties would enter into three concurrent and interrelated legal contracts, the net effect being the paying of a fee for the use of money for the term of the loan. The use of concurrent interrelated contracts is also prohibited under Shariah Law.
Ijarah-wal-iqtina:
A contract under which an Islamic bank provides equipment, building, or other assets to the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rentals as well as the purchase price are fixed in such manner that the bank gets back its principal sum along with profit over the period of lease.
Musharakah (joint venture)
Musharakah is a relationship between two parties or more, of whom contribute capital to a business, and divide the net profit and loss pro rata. This is often used in investment projects, letters of credit, and the purchase or real estate or property. In the case of real estate or property, the bank assess an imputed rent and will share it as agreed in advance.[27] All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. This concept is distinct from fixed-income investing (i.e. issuance of loans).[citation needed]
Qard hassan/ Qardul hassan (good loan/benevolent loan)
This is a loan extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. However, the debtor may, at his or her discretion, pay an extra amount beyond the principal amount of the loan (without promising it) as a token of appreciation to the creditor. In the case that the debtor does not pay an extra amount to the creditor, this transaction is a true interest-free loan. Some Muslims consider this to be the only type of loan that does not violate the prohibition on riba, since it is the one type of loan that truly does not compensate the creditor for the time value of money.[29]
Sukuk (Islamic bonds):
Main article: Sukuk
Sukuk is the Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed-income, interest-bearing bonds are not permissible in Islam. Hence, Sukuk are securities that comply with the Islamic law (Shariah) and its investment principles, which prohibit the charging or paying of interest. Financial assets that comply with the Islamic law can be classified in accordance with their tradability and non-tradability in the secondary markets.
Takaful (Islamic insurance):
Main article: Takaful
Takaful is an alternative form of cover that a Muslim can avail himself against the risk of loss due to misfortunes. Takaful is based on the idea that what is uncertain with respect to an individual may cease to be uncertain with respect to a very large number of similar individuals. Insurance by combining the risks of many people enables each individual to enjoy the advantage provided by the law of large numbers. See Takaful for details.
Wadiah (safekeeping)
In Wadiah, a bank is deemed as a keeper and trustee of funds. A person deposits funds in the bank and the bank guarantees refund of the entire amount of the deposit, or any part of the outstanding amount, when the depositor demands it. The depositor, at the bank's discretion, may be rewarded with Hibah (see above) as a form of appreciation for the use of funds by the bank.
[edit]Wakalah (power of attorney)
This occurs when a person appoints a representative to undertake transactions on his/her behalf, similar to a power of attorney.
Islamic equity funds:
Islamic investment equity funds market is one of the fastest-growing sectors within the Islamic financial system. Currently, there are approximately 100 Islamic equity funds worldwide. The total assets managed through these funds currently exceed US$5 billion and is growing by 12–15% per annum. With the continuous interest in the Islamic financial system, there are positive signs that more funds will be launched. Some Western majors have just joined the fray or are thinking of launching similar Islamic equity products.
Despite these successes, this market has seen a record of poor marketing as emphasis is on products and not on addressing the needs of investors. Over the last few years, quite a number of funds have closed down. Most of the funds tend to target high net worth individuals and corporate institutions, with minimum investments ranging from US$50,000 to as high as US$1 million. Target markets for Islamic funds vary; some cater for their local markets, e.g., Malaysia and Gulf-based investment funds. Others clearly target the Middle East and Gulf regions, neglecting local markets and have been accused of failing to serve Muslim communities.
Since the launch of Islamic equity funds in the early 1990s, there has been the establishment of credible equity benchmarks by Dow Jones Islamic market index (Dow Jones Indexes pioneered Islamic investment indexing in 1999) and the FTSE Global Islamic Index Series. The Web site failaka.com monitors the performance of Islamic equity funds and provides a comprehensive list of the Islamic funds worldwide.
[edit]Islamic laws on trading
The Qur'an prohibits gambling (games of chance involving money) and insuring ones' health or property (also considered a game of chance). The hadith, in addition to prohibiting gambling (games of chance), also prohibits bayu al-gharar (trading in risk, where the Arabic word gharar is taken to mean "risk" or excessive uncertainty).
The Hanafi madhab (legal school) in Islam defines gharar as "that whose consequences are hidden." The Shafi legal school defined gharar as "that whose nature and consequences are hidden" or "that which admits two possibilities, with the less desirable one being more likely." The Hanbali school defined it as "that whose consequences are unknown" or "that which is undeliverable, whether it exists or not." Ibn Hazm of the Zahiri school wrote "Gharar is where the buyer does not know what he bought, or the seller does not know what he sold." The modern scholar of Islam, Professor Mustafa Al-Zarqa, wrote that "Gharar is the sale of probable items whose existence or characteristics are not certain, due to the risky nature that makes the trade similar to gambling." There are a number of hadith that forbid trading in gharar, often giving specific examples of gharhar transactions (e.g., selling the birds in the sky or the fish in the water, the catch of the diver, an unborn calf in its mother's womb etc.). Jurists have sought many complete definitions of the term. They also came up with the concept of yasir (minor risk); a financial transaction with a minor risk is deemed to be halal (permissible) while trading in non-minor risk (bayu al-ghasar) is deemed to be haram.[30]
What gharar is, exactly, was never fully decided upon by the Muslim jurists. This was mainly due to the complication of having to decide what is and is not a minor risk. Derivatives instruments (such as stock options) have only become common relatively recently. Some Islamic banks do provide brokerage services for stock trading.
[edit]Microfinance
Microfinance is a key concern for Muslims states and recently Islamic banks also. Islamic microfinance tools can enhance security of tenure and contribute to transformation of lives of the poor.[31] Already, several microfinance institutions (MFIs) such as FINCA Afghanistan have introduced Islamic-compliant financial instruments that accommodate sharia criteria.
Controversy:
In Islamabad, Pakistan, on June 16, 2004: Members of leading Islamist political party in Pakistan, the Muttahida Majlis-e-Amal (MMA) party, staged a protest walkout from the National Assembly of Pakistan against what they termed derogatory remarks by a minority member on interest banking:
Taking part in the budget debate, M.P. Bhindara, a minority MNA [Member of the National Assembly]...referred to a decree by an Al-Azhar University's scholar that bank interest was not un-Islamic. He said without interest the country could not get foreign loans and could not achieve the desired progress. A pandemonium broke out in the house over his remarks as a number of MMA members...rose from their seats in protest and tried to respond to Mr Bhindara's observations. However, they were not allowed to speak on a point of order that led to their walkout.... Later, the opposition members were persuaded by a team of ministers...to return to the house...the government team accepted the right of the MMA to respond to the minority member's remarks.... Sahibzada Fazal Karim said the Council of Islamic ideology had decreed that interest in all its forms was haram in an Islamic society. Hence, he said, no member had the right to negate this settled issue.[32]
Some Islamic banks charge for the time value of money, the common economic definition of Interest (Riba). These institutions are criticized in some quarters of the Muslim community for their lack of strict adherence to Sharia.
The concept of Ijarah is used by some Islamic Banks (the Islami Bank in Bangladesh, for example) to apply to the use of money instead of the more accepted application of supplying goods or services using money as a vehicle. A fixed fee is added to the amount of the loan that must be paid to the bank regardless if the loan generates a return on investment or not. The reasoning is that if the amount owed does not change over time, it is profit and not interest and therefore acceptable under Sharia.
Islamic banks are also criticized by some for not applying the principle of Mudarabah in an acceptable manner. Where Mudarabah stresses the sharing of risk, critics point out that these banks are eager to take part in profit-sharing but they have little tolerance for risk. To some in the Muslim community, these banks may be conforming to the strict legal interpretations of Sharia but avoid recognizing the intent that made the law necessary in the first place.[citation needed]
The majority of Islamic banking clients are found in the Gulf states and in developed countries. With 60% of Muslims living in poverty, Islamic banking is of little benefit to the general population. The majority of financial institutions that offer Islamic banking services are majority owned by Non-Muslims. With Muslims working within these organizations being employed in the marketing of these services and having little input into the actual day to day management, the veracity of these institutions and their services are viewed with suspicion. One Malaysian Bank offering Islamic based investment funds was found to have the majority of these funds invested in the gaming industry; the managers administering these funds were non Muslim.[32] These types of stories contribute to the general impression within the Muslim populance that islamic banking is simply another means for banks to increase profits through growth of deposits and that only the rich derive benefits from inplementation of Islamic Banking
