Glossary of Economic Terms and Concepts: http://www.economicswisconsin.org/guide/glossary.htm

Glossary of Economic Terms and Concepts

A B C D E F G H I J K L M N O P Q R S T U V WX Y Z       

  Absolute advantage - The ability to produce something with fewer resources than other producers would use to produce the same thing 
Alternatives - Options among which to make choices.  

Balance of trade - The part of a nation's balance of payments that deals with merchandise (or visible) imports or exports. 
Bank, commercial - A financial institution accepts checking deposits, holds savings, sells traveler's checks and performs other financial services. 
Barter - The direct trading of goods and services without the use of money. 
Benefit - The gain received from voluntary exchange. 
Bond - A certificate reflecting a firm's promise to pay the holder a periodic interest payment until the date of maturity and a fixed sum of money on the designated maturity date. 
Business (firm) - Private profit-seeking organizations that use resources to produce goods and services. 

   

Capital - All buildings, equipment and human skills used to produce goods and services. 
Capital resources - Goods made by people and used to produce other goods and services. Examples include buildings, equipment, and machinery. 
Change in demand - see Demand decrease and Demand increase.  
Change in supply - see Supply decrease and Supply increase.
Choice - What someone must make when faced with two or more alternative uses of a resource (also called economic choice). 
Circular flow of goods and services (or Circular flow of economic activity) - A model of an economy showing the interactions between households and business firms as they exchange goods and services and resources in markets. 
Collateral - Anything of value that is acceptable to a lender to guarantee repayment of a loan. 
Command economy - A mode of economic organization in which the key economic functions--what, how, and for whom--are principally determined by government directive.  Sometimes called a "centrally planned economy." 
Comparative advantage - The principle of comparative advantage states that a country will specialize in the production of goods in which it has a lower opportunity cost than other countries. 
Competition - The effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms. 
Complements - Products that are used with one another such as hamburger and hamburger buns 
Consumers - People whose wants are satisfied by consuming a good or a service. 
Consumption - In macroeconomics, the total spending, by individuals or a nation, on consumer goods during a given period.  Strictly speaking, consumption should apply only to those goods totally used, enjoyed, or "eaten up" within that period.  In practice, consumption expenditures include all consumer goods bought, many of which last well beyond the period in question --e.g., furniture, clothing, and automobiles. 
Consumer spending - The purchase of consumer goods and services. 
Corporation - A legal entity owned by stockholders whose liability is limited to the value of their stock. 
Costs - See Opportunity Cost 
Costs of production - All resources used in producing goods and services, for which owners receive payments. 
Craftsperson - A worker who completes all steps in the production of a good or service. 
Credit - (1) In monetary theory, the use of someone else's funds in exchange for a promise to pay (usually with interest) at a later date.  The major examples are short-term loans from a bank, credit extended by suppliers, and commercial paper.  (2) In balance-of-payments accounting, an item such as exports that earns a country foreign currency. 
Criteria - Standards or measures of value that people use to evaluate what is most important. 

Decision making - Choosing from alternatives the one with the greatest benefit net of costs. 
Deflation - A sustained and continuous decrease in the general price level. 
Demand - A schedule of how much consumers are willing and able to buy at all possible prices during some time period. 
Demand decrease - A decrease in the quantity demanded at every price; a shift to the left of the demand curve. 
Demand increase -  An increase in the quantity demanded at every price; a shift to the right of the demand curve. 
Determinants of demand - Factors that influence consumer purchases of goods, services, or resources. 
Determinants of supply - Factors that influence producer decisions about goods, services, or resources. 
Distribution - The manner in which total output and income is distributed among individuals or factors (e.g., the distribution of income between labor and capital). 
Division of labor -  The process whereby workers perform only a single or a very few steps of a major production task (as when working on an assembly line.) 
Durables - Consumer goods expected to last longer than three years. 

 

Earn - Receive payment (income) for productive efforts. 
Economic growth - An increase in the total output of a nation over time.  Economic growth is usually measured as the annual rate of increase in a nation's real GDP. 
Economic system - The collection of institutions, laws, activities, controlling values, and human motivations that collectively provide a framework for economic decision making. 
Economic wants - Desires that can be satisfied by consuming a good or a service.  Some economic wants range from things needed for survival to things that are nice to have. 
Employment - See Full employment 
Entrepreneur - One who organizes, manages, and assumes the risks of a business or enterprise. 
Entrepreneurship - The human resource that assumes the risk of organizing other productive resources to produce goods and services. 
Equilibrium price - The market clearing price at which the quantity demanded by buyers equals the quantity supplied by sellers. 
Exchange - Trading goods and services with others  for other goods and services or for money (also called trade).  When people exchange voluntarily, they expect to be better off as a result. 
Exchange rates - The rate, or price, at which one country's currency is exchanged for the currency of another country. 
Excise Tax - Taxes imposed on specific goods and services, such as cigarettes and gasoline. 
Exports - Goods or services produced in one nation but sold to buyers in another nation. 

 

Factors of production -  Resources used by businesses to produce goods and services. 
Federal Reserve System - The central bank and monetary authority of the United States. 
Final goods - Products that end up in the hands of consumers. 
Fiscal policy - A government's program with respect to (1) the purchase of goods and services and spending on transfer payments, and (2) the amount and type of taxes. 
Functions of money - The roles played by money in an economy.  These roles include medium of exchange, standard of value, and store of value. 
Full employment - A  term that is used in many senses.  Historically, it was taken to be that level of employment at which no (or minimal) involuntary unemployment exists.  Today economists rely upon the concept of the natural rate of unemployment to indicate the highest sustainable level of employment over the long run. 

 

Goods - Objects that can satisfy people's wants. 
Government - National, state and local agencies that use tax revenues to provide goods and services for their citizens. 
Gross domestic product (GDP) - The value, expressed in dollars, of all final goods and services produced in a year. 
Gross domestic product (GDP), real - GDP corrected for inflation.

   

Households - Individuals and family units which, as consumers, buy goods and services from firms and, as resource owners, sell or rent productive resources to business firms. 
Human capital - The health, strength, education, training, and skills which people bring to their jobs. 
Human resources - The quantity and quality of human effort directed toward producing goods and services (also called labor). 

 

Incentives - Factors that motivate and influence the behavior of households and businesses.  Prices, profits, and losses act as incentives for participants to take action in a market economy. 
Imports - Goods or services bought from sellers in another nation. 
Income - The payments made for the use of borrowed or loaned money. 
Increase in productivity - When the same amount of an output can be produced with fewer inputs; more output can be produced with the same amount of inputs; or a combination of the two. 
Inflation - A sustained and continuous increase in the general price level. 
Interdependence - Dependence on others for goods and services; occurs as a result of specialization. 
Interest rates - The price paid for borrowing money for a period of time, usually expressed as a percentage of the principal per year. 
Investment in capital goods - Occurs when savings are used to increase the economy's productive capacity by financing the construction of new factories, machines, means of communication, and the like. 
Investment - The purchase of a security, such as a stock or bond. 
Investment in capital resources - Business purchases of new plant and equipment. 
Investment in human capital - An action taken to increase the productivity of workers.  These actions can include improving skills and abilities, education, health, or mobility of workers. 

  

Labor force - That group of people 16 years of age and older who are either employed or unemployed.
Labor market - A setting in which workers sell their human resources and employers buy human resources. 
Labor union - A group of employees who join together to improve their terms of employment. 
Land - Natural resources or gifts of nature that are used to produce goods and services. 
Law of demand - The principle that price and quantity demanded are inversely related. 
Law of supply - The principle that price and quantity supplied are directly related. 
Loss - Business situation in which total cost of production exceeds total revenue; negative profit. 

  

Market - A setting where buyers and sellers establish prices for identical or very similar products, and exchange goods and/or services. 
Market economy - An economic system where most goods and services are exchanged through transactions by private households and businesses.  Prices are determined by buyers and sellers making exchanges in private markets. 
Medium of exchange - One of the functions of money whereby people exchange goods and services for money and in turn use money to obtain other goods and services. 
Mixed economy - The dominant form of economic organization in noncommunist countries.  Mixed economies rely primarily on the price system for their economic organization but use a variety of government interventions (such as taxes, spending, and regulation) to handle macroeconomic instability and market failures. 
Monetary policy - The objectives of the central bank in exercising its control over money, interest rates, and credit conditions.  The instruments of monetary policy are primarily open-market operations, reserve requirements, and the discount rate. 
Money - Anything that is generally accepted as a medium of exchange with which to buy goods and services, a good that can be used to buy all other goods and services, that serves as a standard of value, and has a store of value. 
Money market - A term denoting the set of institutions that handle the purchase or sale of short-term credit instruments like Treasury bills and commercial paper. 

 

National debt - The net accumulation of federal budget deficits. 
National income - The amount of aggregate income earned by suppliers of resources employed to produce GNP; net national product plus government subsidies minus indirect business taxes. 
Natural resources - "Gifts of nature" that are used to produce goods and services.  They include land, trees, fish, petroleum and mineral deposits, the fertility of soil, climatic conditions for growing crops, and so on. 
Non-durables - Consumer goods expected to last less than three years. 
Non-price determinants of supply - The factors that influence the amount a producer will supply of a product at each possible price.  The non-price determinants of supply are the factors that can change the entire supply schedule and curve. 
Normal profit - The minimum payment an entrepreneur expects to receive to induce the entrepreneur to perform entrepreneurial functions. 
Normative economics - Normative economics considers "what ought to be"--value judgments, or goals, of public policy.  Positive economics, by contrast, is the analysis of facts and behavior in an economy, or "the way things are." 

  

Opportunity cost - The next best alternative that must be given up when a choice is made. 

  

Physical capital - Manufactured items used to produce goods and services. 
Price - The money value of a unit of a good, service, or resource 
Prices - The amounts that people pay for units of particular goods or services. 
Private goods - A commodity that benefits the individual.  An example is bread, which, if consumed by one person, cannot be consumed by another person. (See public goods.) 
Producers - People who use resources to make goods and services (also called workers). 
Production - The making of goods available for use; total output especially of a commodity or industry. 
Productive resources - All natural resources (land), human resources (labor), and human-made resources (capital) used in the production of goods and services. 
Productivity - The ratio of output (goods and services) produced per unit of input (productive resources) over some period of time. 
Profit - The difference between total revenues and the full costs involved in producing or selling a good or service; it is a return for risk taking. 
Property tax - Taxes paid by households and businesses on land and buildings. 
Public goods - A commodity whose benefits are indivisibly spread among the entire community, whether or not particular individuals desire to consume the public good.  For example, a public-health measure that eradicates smallpox protects all, not just those paying for the vaccinations.  These goods are often provided by the government.  To be contrasted with private goods. 

  

Quantity demanded - The amount of a product consumers will purchase at a specific price. 
Quota - A legal limit on the quantity of a particular product that can be imported or exported. 
Quantity supplied - The amount of a product producers will produce and sell at a specific price. 

  

Resources - All natural, human, and human-made aids to production of goods and services (also called productive resources). 
Revenue - Payments received by businesses from selling goods and services. 

  

Sales tax - Taxes paid on the goods and services people buy. 
Save - Set aside earnings (income) for a future use. 
Saving - Occurs when individuals, businesses, and the economy as a whole do not consume all of current income (or output). 
Scarcity - The condition that results from the imbalance between relatively unlimited wants and the relatively limited resources available for satisfying those wants. 
Services - Activities that can satisfy people's wants. 
Shortage - The situation resulting when the quantity demanded exceeds the quantity supplied of a good or service, usually because the price is for some reason below the equilibrium price in the market. 
Specialists - People who produce a narrower range of goods and services than they consume (also called specialized workers). 
Specialization - The situation in which people produce a narrower range of goods and services than they consume. 
Spend - Use earnings (income) to buy goods and services. 
Standard of living - A minimum of necessities, comforts, or luxuries held essential to maintaining a person or group in customary or proper status or circumstances. 
Standard of value - One of the functions of money whereby the value of goods and services is expressed in money terms (prices). 
Stock - A certificate reflecting ownership of a corporation. 
Store of value - One of the functions of money allowing people to save current purchasing power to buy goods and services in a future time period. 
Substitutes - Products that can replace one another such as butter and margarine. 
Supply - A schedule of how much producers are willing and able to sell at all possible prices during some time period. 
Supply decrease - A decrease in the quantity supplied at every price; a shift to the left of the supply curve. 
Supply increase - An increase in the quantity supplied at every price; a shift to the right of the supply curve. 
Surplus - The situation resulting when the quantity supplied exceeds the quantity demanded of a good or service, usually because the price is for some reason below the equilibrium price in the market. 

 

Tariff - A tax on an imported good. 
Taxes - Required payments of money made to governments by households and business firms. 
Total cost - Cost of resources used in producing a product multiplied by the quantity produced. 
Total revenue - Selling price of a product multiplied by the quantity demanded. 
Trade - See Exchange.
Trade agreement - An international agreement on conditions of trade in goods and services. 
Trade-off - Giving up some of one thing to get some of another thing. 
Traditional economy - A mode of economic organization which borrows economic decisions made at an earlier time or by an earlier generation 

  

Unemployment - The situation in which people are willing and able to work at current wage rates, but do not have jobs. 

  

Wages - The payment resource earners receive for their labor. 
Work - Employment of people in jobs to make goods or services. 
Workers - See Producers.

 

Terms and definitions from the following sources: 

• Coulson, E., McCorkle, S.  (1994). Master curriculum guide in economics: Teaching strategies 5-6. New York: Economics America.
• McEachern, W. A.  (1994).  Economics: A contemporary introduction, 3rd ed.  Cincinnati, Ohio: South Western Publishing Co. 
• Phipps, B. J., Hopkins, M. C., Littrell, R. L. (1993). Master curriculum guide in economics: Teaching strategies K-2. New York: Economics America.
• Samuel, C., Stout, R. L.  (1994). Master curriculum guide in economics: Teaching strategies 3-4. New York: Economics America.
• Samuelson, P.A., Nordhaus, W. D. (1995).  Economics, 15th ed.  New York: McGraw-Hill, Inc.
• Saunders, P., Gilliard, J., (editors).  (1995). A framework for teaching basic economic concepts: With scope and sequence guidelines.  New York: Economics America.
• Suitor, M. C., et al.  (1996).  Focus: Middle school economics.  New York: Economics America.
• Webster's ninth new collegiate dictionary.  (1991).  Springfield, Mass.: Merriam-Webster, Inc.

 

Developed by  Lynn Kirby, Ph.D. Larry Weiser, Ph.D.

Teaching Wisconsin's K-12 Economics Standards Topic Index Grade Level Index

 

Riba: The Main Cause of All Recessions and Depressions

Riba: The Main Cause of All Recessions and Depressions

General monetary economics (rate of interest is the reward for saving) Vs Islamic monetary economics (interest less banking)

According to classical and Neo-classical economists rate of interest is the reward for savings. Where in Islam interest is prohibited. The reasons are Interest rate made people manipulate poor people and interest made the rich richer and the poor poorer. On expectation of guaranteed return at the maturity period interest rate made people work less.

          As the world economy made the transition to a market economy after the industrial revolution, it is not hard to see when Riba¹ applies and when it does not?

What is Riba?

In other words riba is seen as an unjustified earning where a person could receive a monetary advantage in a business transaction without giving just a counter value. Technically it’s a premium that must be paid by borrower to the lender along with the principle amount as a condition for the loan or for an extension of maturity.

Riba (Rate of Interest) is a sin under Islamic law even those hired to write the contract or who witness (and then confirm) contract are a party to the sin. Here prohibition of Riba means that money can be lent lawfully only for either charitable purposes (without any expectation of return above the amount of the principle), or for the purpose of doing lawful business i.e.; investment on the basis of profit and risk sharing. i.e. an investment of the kind that seeks profit while sharing the risk is encouraged in Islam, indeed it is commended.

          Islam doesn’t consider money as a commodity such that there should be price for its use. Money is medium of exchange in asset oriented economy and a store of value. It has made clear distinction between trade and Riba; where trading is welcomed and riba is prohibited. Trade is that the business risk in trading is allocated more evenly among all the parties involved, where as in Riba operations the business risk lies heavily, if not solely on the borrower.

Flaws in the Theory of Interest-The root cause of the crisis

The present global economic crisis as a result of interest rates; from the American recession in 2008-09 to the crisis in south East Asia and Euro debt crisis at present.

Huge budgetary imbalances, excessive monetary expansion, large balance of payment deficits, insufficient foreign aid and in adequate international cooperation can all be related to the flaws in the mechanism of theories of rate of interest and its working, which also the root cause of the crisis.

          The demand for Economic growth as parallel to inflated interest rates and global economic crisis. Most countries which make the transition to a market economy had developed some kind of crisis in the early stages .Inflation often occurs as  a result of a fast growing economy, hence contracting monetary policy is must to offset inflation. Increase in interest rates would only add to the unemployment level. Keynesian school has emphasized the problem of high interest as contribution to unemployment. Therefore, stressing the need of reducing interest rates to the lowest possible. But now the question is what the optimal rate of interest is? Or should exit?

Forbidden  things in  trade and commerce in Islam:-

Muslims are not allowed to pay or receive interest. The Holy Quran Says, “God-has permitted for you trade and Prohibited interest” (2:275).Where depositors in an Islamic Bank would be treated as like share holders, would receive dividends when the bank makes a profit, and would lose capital when it suffers a loss.

Prohibition of fixed interest flows from Islam’s concern for social justice. If a person goes to Islamic bank for a loan to purchase a house then the Islamic financing company or bank buys the house. The house is leased back to you for a fixed period of time; you pay the finance group the rent value plus an additional amount for the house purchase. The value or the lease home will be reassessed every year, and the rent will be adjusted accordingly. Since Islamic banking is asset based financing.

Interest is neither a trade nor a profit. It is a means of exploitation and concentration of wealth. The Quran says: “O you, who believe, do not take interest, doubling and multiplying, and keep your duty to Allah, so that you may prosper”. (3:130)

Interest (riba) is an integral part of modern free market economics. Unlike Zakah³ which distributes wealth from the rich to the poor, interest takes wealth from the poor to the rich. Modern economics depends upon interest, it is assumed to be impossible to leave without it, this falls assumption is challenged by the successful interest free facilities offered by Islamic banks and Investment companies throughout the world, including the UK.

Islamic economics an alternative to the current system:- Its Mechanism

            Islam suggests an interest free system that heavily relays on profit sharing i.e. Mudarabah².  Here profits are the substitutes for the interest. But one might ask, how banks would have the capital i.e. necessary to lend, when banks do not pay interest for savings A/c’s or capital providers.

          There is a triangle or three way systems where all participants are mutually beneficial.

Those are 1. Bank

               2. The supplier of savings or funds

              3. The actual user of capital of the Entrepreneur

Now it is clear that not only banks and entrepreneurs are exposed to risk but also the supplier of funds.

          The lender would be a venture capitalist who is interested in profit sharing, where as banks can study applications of borrowers and hence extend credit, offer portfolio investment for lenders and undertake forgone services.

Conclusion:- 

a)Finally a interest free system would  work and provide unlimited prosperity but certainly does not work under the current system, the whole economic system should be altered  and changed in order for the Islamic frame work to success. This system can survive only in Christian, Jewish or Islamic economy that abolishes interest.

b) A fully-fledged interest free economy is not yet a reality it is a complex situation nevertheless we should work towards an interest free economy to ensure social justice and equal access to opportunities for everyone in the world and interest free economy is only possible when an Islamic government carefully and systematically plans and implements the economic system of Islam, political or state authority is essential to implement an Islamic economic system. 

c) Can incorporate Islamic Banking in the present Indian banking system as a single window.

A solution to the debt crisis can avoid the farmer’s suicide and other consequences in failure to repay the debt with interest.

References:-

1. Riba¹ (Arabic: ربا, [rɪbæː]) means one of the senses of "usury. Riba is forbidden in Islamic economic jurisprudence and considered as a major sin. Simply, unjust gains in trade or business, generally through exploitation.

http://en.wikipedia.org/wiki/Riba

2. Mudarabah²

"Mudarabah" is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The capital investment comes from the first partner, who is called the "rabb-ul-mal", while the management and work is the exclusive responsibility of the other party, who is called the "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 ("rabb-ul-mal") may incur a loss.

http://en.wikipedia.org/wiki/Mudarabah

3. Zakah³  

“ Zakah” it is one of the basic duties of islam every muslim who have sufficient wealth must pay the fixed rate of zakah to the Islamic state.

            

Comparative Study on Sources Of Public Finance in Islamic Economy and Capitalist Economy

Comparative Study on Sources Of Public Finance in Islamic Economy and Capitalist Economy

Applicability Of Islamic Public Finance To Preset Trend

Introduction

ž           Since interest is prohibited in Islam, the Govt in an Islamic economy cannot issue interest based credit instruments like Trade bills/bonds or obtain interest based sovereign debt. Where in general economics interest rate is reward for saving, the govt issues various debt instruments to raise funds from  general public, foreign nationals , banks to fund projects and for deficit financing on the basis of interest rates. Apart from different sources of Non-tax revenues viz fines, fees, revenue generated from Public sector enterprises, revenue including interest or profit from the investments, user fee etc., Based on the literature review, of Islamic economy no taxes levied other than Zakah. Accordingly; this study explores the sources of revenue for a government in Islamic economy. In discussing sources of tax revenue it is maintained that zakah is the only tax the government in an Islamic economy can levy. Where e in general economics taxation is the central part of modern public finance, its objective is to raise revenue necessary in a welfare state to fulfill its obligations. There are various sources of taxes mainly personal income tax, corporate income tax, wealth tax, Value added tax, service tax etc.,

ž           One thing is found common in both the institutes as govt can charge service/performance based fees, duties, surcharge etc in providing public goods. Furthermore, the profitable operations of state owned enterprises form of important part of non-tax revenues.

ž           This study discuss that how the  government can finance its deficit keeping in view that low taxation and  low interest in general economics  as like that of interest rate is prohibited in islam & zakah rate are very low.

BACKGROUND OF THE STUDY:-

ž            The role of government in a economy has always been important issue , economist and policy makers since from the evolution of political economics by Adam smith  in wealth of nation to Keynesian frame work has been accepted government as a not only a regulator of a economy but also as an active economic player.

ž           In the midst of great recession, the role and importance of government has once again reappeared as an important issue. Like bailout package of US govt to financial sector in Dec 2008, providing huge subsidies to its agricultural sector. So one cannot ignore the role of a state as a regulator and as a active economic player.

ž           In this backdrop, this study takes an important issue in public finance in a Islamic economy and general economics, more specifically, it put a glance at sources of tax revenue, how it is raised and utilized for public finance in Islamic point of view. Also to see does this applicable to present trend.

PROBLEM OF STATEMENT:-

ž           This study analyses public finance literature in general economics and Islamic economy on the other hand source of revenues to the governments for funding ever increasing public expenditure , reduction in budgetary deficits and applicability of Islamic ideology of public finance to present trends

OBJECTIVES OF THE STUDY:-

ž The study sets the following important objectives.

ž To suggest the different sources of  revenue for the state in Islamic point of view

ž To explore the ground rules for zakatable assets and zakatable income fund in the study of Islamic faith.

To estimate the potential of tax revenues that can be collected in zakah

IMPORTANCE OF STUDY:-

ž           The study has significance in academics as well as in public policy making in respect to Islamic faith could be a alternative to policy making and adds to the literature of contemporary developments in both literatures and public finance practice of general economics. To discuss the means of revenue and sources of public finance through and beyond zakah in an Islamic economy.

RESEARCH METHODOLOGY:-

ž          This study is conceptive and theoretic in nature. It clarifies various charges in the institution of zakah as like taxation in general economics

SCOPE OF THE STUDY:-

ž           Comparative study of sources of revenues in Islamic economics (Zakah) and General economics (Direct & Indirect taxation). This study sets to contribute in public policy making as well as add to the academic literature of general economics as a alternative system.

LIMITATIONS OF THE STUDY:-

ž          The study is purely theoretic and comparative in analyses the sources of public finance (taxation and zakah only)

LITERATURE REVIEW:-

 ž In conventional economics, the government has following sources of revenue: general sales tax, excise duty, customs duty, Import& export duty, Property tax , development surcharge, personal income tax, corporate income tax. Apart from that non-tax revenue by way of earning through profitable operations of state owned enterprises, fines and activity based charges & duties are also important sources of revenue to state. In general economics, if government needs to finance deficit it can issue treasury bills/bonds or obtain loans from domestic as well as international sources.

 ž In islamic economy, the problem comes in the issuance of debt( due to prohibition of interest) and imposition of taxes beyond zakah is not recommendable. Zakah is a combination of a net worth tax and production tax.

 ž In islamic thought zakah is a religious obligation to pay a part of wealth and production to the government. However, in most countries, zakah is not collected by the government and is not considered a compulsory payment. Eminent Muslim scholar Ab-ul-ala Maududi (1970) reasoned that zakah is a religious obligation and not a substitute for tax. Taxes other than zakah can be imposed in an Islamic economy if these taxes are levied by the legislative council and used for public welfare. He reasoned that the taxes discouraged in a hadith are those which were imposed by autocratic kings for their own lavish consumption and this kind of usurpation of public property was discouraged.

ž         Disucssing the issue of distributing zakah, islahi(185) and Qardawi (2000) explained that it is not necessary to make some living  person the owner of the zakah. Zakah can be given to any person or cause or an organizaiton working for a cause, not necessary to make some living person the owner of the zakah. Zakah could be distributed on the welfare of the people as well as given to people themselves. If a policy of full employment requires high MPC; then, a progressive taxation like zakah could help in boosting aggregate demand and increasing employment.

ž           As modern day problems in estimation of zakah, Usmani(2003) asserted that zakah on shares would be paid on the net liquid assets/share i.e. by excluding from the total assets, the value of assests used as means of production. And the liabilities owed to the business are deductable. Then, the zakah can be paid on the value of net liquid assets/share multiplied by number of shares held by the investor.

ESTIMATION OF ZAKAH ACCORDING TO THE EXPENDITURES:-

ž           Haque & Mirakhor (1998) classified government expenditure into i) asset creating and ii) non-asset creating. Non asset creating activities can be financed through tax revenues. But, in asset creating activities, equity modes of financing can be used whereby financing would be generated by way of an instrument. As per their recommendation, this instrument would be priced using the formula.

ž           I=w1 WI+W2PPI+W3LSI+W4 ROG

ž          Where

ž WI = worked index

ž LSI=Stock index, a measure of market performance index based on ROE.

ž PPI=index representing average returns on commercial participation papers

ž ROG=return on government investments and project

W1 W2 W3 and w4 are weights assigned to each variable.

INSTITUTION OF ZAKAH: AN IMPORTANT SOURCE OF PUBLIC FINANCE IN ISLAMIC ECONOMY

ž          Zakah is a religious obligation to pay a part of wealth and income to the government.

ž   For calculation of zakah, people used the cross rate between gold and silver and determined their nisaab in gold as well. This cross rate has changed historically; that is why, we will have to resort to the original base i.e. 612 grams of silver when there is no bimetallic monetary standard in operation. One important implication of this principle is that tax exception amount in silver is much lower than gold using current cross rate and hence taxable assets will increase in magnitude. Zakah would be as per the ceiling rates defined for each category of wealth or production.

ž          The classification is as follows:

ž a) 2-½% on cash, wholesale value of held for trade inventory and capital in excess of need payable once a year at a particular set date.

ž b) 5% on production using both labor and capital. It is charged at the completion of the production process.

ž  

ž c) 10% on production using either labor or capital. It is charged at the completion of the production process.

ž d) 20% on production using neither labor nor capital. This is applicable on treasure or any other natural Gift obtained without using neither labor nor capital.

Issues in Estimation of Zakah

ž          Wealth/Assets subject to Zakah include Cash in hand, Cash in Bank, gold and silver not in daily usage (for women), gold and silver owned by men, held-for trade inventory, property/plot purchased for the purpose of resale. Production is not limited to agriculture nowadays, but the major part of it is coming from industries as well as services sector. Therefore, industrial production could also be taxed just like agriculture. Services income could also be taxed on the same principle.

ž           Khan (2005) stated that investment in stocks should be interpreted as any other investment with some means of earning income. Stock is a means of earning dividend or capital gains. Just like means of production/income are exempt from Zakah, investment in stocks should be exempted from Wealth Zakah as investment in stocks means that the money is not kept idle rather it is invested and even its value could reduce to zero or increase by a long way theoretically. Therefore, any income arising from investment in stocks i.e. capital gains or dividend must be subject to Income Zakah. Similarly, this argument could be extended to introducing Income Zakah on mutual funds, investment in NSS, debentures, bonds etc. Furthermore, if land/building/house is leased, the land/building/house becomes the means of earning rent. Hence, income Zakah could also be introduced on rental income on houses, assets, buildings etc.

Non-Tax Revenues

ž           Non-Tax Revenue can come from profitable operations of State Owned Enterprises (SOEs). State Owned Enterprises (SOEs) in postal services, railways, airline industry, steel industry, communication industry, public utilities, transportation industry, aviation industry etc can be run effectively and generate profits as they operate in industries which have significant potential for economies of scale, economies of scope and face relatively inelastic demand. With deficit financing not an option available, there will be an automatic check on government to run these State Owned Enterprises (SOEs) effectively and efficiently.

ž           Fines and Penalties is another source through which government will generate funds. Ideally, this is not a source of revenue as the objective of fines and penalties is to enforce law, improve competition and put right market imperfections. But, this will materialize only when the good practices are rewarded and bad practices penalized.

Funding Non-Revenue Generating Activities

ž          The real problem arises in funding operations of non-revenue generating activities like the operations of courts and police etc. It is to be noted here that in Muslim societies under the rule of Caliphates, there was no concept of jail which is a later invention. The Islamic punishments like Capital punishment on Murder, Forced Rape etc, monetary fines and physical punishment in extreme cases of stealing, fraud, robbery etc do not require people to be imprisoned. As a matter of fact, these prisons become the usuries for bringing societies even more seasoned criminals rather than a place for rehabilitation. Besides the convicted person, the family of the convicted also gets heavily affected by such imprisonment. Therefore, reforming the penal law based on Islamic principles will significantly reduce expenditure on making, developing and maintaining such prison cells. If we study the judicial system in Caliphates time, the judicial system did not have high cost of advocacy. Infact, there was no concept of 3rd party advocacy

ž           As the law of the land was simple and its implementation enforced strictly. The society put huge emphasis on honest testimony. The judicial system was highly centralized and that too in Umar (rta) and Usman (rta) period when the Islamic state was spread all over Arabia and touching North Africa as well as Eastern Europe.

Alternative for Public Finance Other Than Zakah

ž            Next, we discuss how the budget deficit could be financed in an Islamic economy. First of all, it is to be noted that sources of revenue (tax and no-tax) will be substantial enough to meet necessary development and non-development expenditure. Furthermore, if true Islamic values are adopted, non-development expenditure in providing perks to the government officials will also reduce. Looking beyond imposing more taxes, Usmani (2003) proposed issuance of GDP growth linked Instruments to finance public debt. In public finance, a Nominal GDP linked bond could be issued. In public projects valuation, this benchmark rate would be used to find PV of Cash Flows.

ž This would be appropriate due to following:

ž i. It will not lead us into falling in time value of money as we are using an enterprise or output related

ž Benchmark rather than interest based benchmark.

ž ii. The Cash Flows are obtained using equity contractual modes like Mudarabah and Musharakah.

ž iii. In this case, we are calculating valuation models for the investor and not for the borrower. Borrower

ž or financee will be obliged to provide the returns based on these valuations. But, the investor can

ž Use this “indicative valuation” to rank investment alternatives.

Conclusion

ž   This study brings the sources of revenue for a government in an Islamic economy. Though Zakah rates are low, but Zakah base is very broad and can include all productive activities.

ž                  The government in an Islamic economy can manage its operations without resorting to interest based deficit financing.