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Lessons for Life

What happens when RBI prints more money to pay off bank loans? You should be able to guess it. More the money printed, lesser the value of currency. Money flowing in the country is nothing but standardized promissory notes issued by RBI. They are equivalent to the total economic activity of the country. If the economic activity does not increase in proportion to the money printed by RBI, the value of Indian Rupee will go down.

Let’s first talk about how big the Indian economy is. Big ? How can I use words like big or small for something that doesn’t physically exist? How do we measure the size of an economy? Here comes the measure called ‘Gross Domestic Product’ or ‘GDP’ to our rescue. GDP is the MONETARY VALUE of ALL the finished goods and services PRODUCED within a country's borders in a specific time period, usually a year. You can think of it as the sum of all the income generated within the country during a particular year.

Modern corporations require a lot of capital, which is beyond the reaches of a few individuals. Markets help companies raise money from a large number of people and together these investors value their company. The theory is that when a large number of people do their independent valuation, the company's price comes more closer to its ideal worth.
"In the short term, the market is a voting machine. But, in the long term, the market is a weighing machine" -- Buffett

When I talk to students and corporates about behavioural economics for the first time, they find it both cool and disturbing. Cool because the behavioural economics phenomena are interesting; and disturbing because they break a myth. What’s the myth that they break? The dominant theory that we have had about how people make decisions is that people are rational. When we say that people are rational,it kind of assumes that we know exactly what we are doing. But we have always known that in the real world, it is natural that human beings make mistakes.