Category: Economic

Figure 1

The Federal fund rate has demonstrated a declining trend and since 2008 has stabilized close to zero. The 30-year AAA bond rate shows a cyclical movement with the rates moving upward in the beginning and end of each year.

Figure 2

Figure 2 demonstrates the prices from 2008 through 2012. This shows that the annual movement of the PPI (producer price index) and CPI (consumer price index) are moving almost at the same direction. From 2008 through 2009, both CPI and PPI showed slight downward movement which could be observed by a huge fall in Inflation (i.e. percentage change in CPI).

However, since 2009, both CPI and PPI have increased gradually, and so has inflation. From the figure it can clearly be concluded that since 2008 to 2009, there was a fall in inflation due to the marginal fall in CPI however, since 2009, the CPI index has gradually climbed up, increasing inflation rate.

Figure 3

Figure 3 demonstrates the real values of GDP and the different components of GDP viz. consumption, investment, government expenditure, and net export in real terms. This demonstrates that the real GDP marginally increased in 2009 due to the marginal increase in real consumption. Real investment fell in 2009 but again rose through 2010 and 2011.

Government expenditure increased from 2008 through 2011. The real net export showing the difference between net export and net import has decreased showing a rise in export and fall in import. The overall real GDP or output is calculated as a sum of the four components shown in the graph. Evidently, it can be observed that with no definite increase or decrease in the value of the components real output remained stable from 2008 through 2011.

Figure 4

Figure 4 provides monthly unemployment rate from 2008 through 2012. Unemployment rate in the USA has been increasing since 2008 through 2009. Since 2010, it has shown marginal decline.

AS-AD Model

This section uses aggregate demand (AD) and aggregate supply (AS) model to demonstrate the effect the above data AD and AS. Figure 5 shows that AD-AS model graphically. AS and AD are determined by the interaction of the average price rates that may be determined my CPI and the real income level in our case it would be Real GDP.

Figure 5

As CPI fell there was an increase in real GDP as demonstrated in figure 2 and 3. With fall in price index, the real output increases thereby providing a negatively sloping AD curve. AS demonstrates that with increase price the supply of goods and services to the economy will raise and therefore a positively sloping AS curve.

The point of interaction of AD and AS demonstrates the equilibrium position. If there were increase in prices, with Real output remaining same, there would be a decline in demand in the economy, creating excess demand, as supply would increase. In order to fill the gap of demand and supply, the real output would fall, thereby shifting the AD curve to the left thereby bring the economy back to the equilibrium position.

With the reduction of interest rates, as demonstrated in figure 1, there was greater supply of money in the economy, therefore, people having greater disposable income. An increase in disposable income increased consumption, thereby, increasing real GDP, which in turn would shift the AD curve rightwards.

However due to an increase in demand, the supply too has to be increase, thereby, increasing production and shifting the AS curve to the right. Inversely, with higher unemployment rate the demand in the economy would decline, and so would reduce Real GDP and average prices.

Introduction

In several developing countries, policymakers usually put up several efforts to attract foreign investment. These include providing regulatory exemptions, setting up infrastructure, and provision of tax holidays. The policies are implemented with the hope that when foreign investors come, they will bring along managerial expertise, capital, and advanced technology that would spill over and help in the development of domestic industries.

However, evidence from various studies shows that spillovers are likely to happen between industries that are linked vertically and rarely within the same industry. The assertion is founded on the fact that most multinational firms put efforts in place to protect against the leakage of knowledge to competitors or potential competitors. Some of the factors include the structure of ownership of the foreign companies, the geographical distances, and the capabilities of the firms (Liang 28). The paper analyzes whether the presence of foreign firms helps or hurts domestic competition. The paper offers an example to show whether the firms collaborate or compete for market share.

The main body firms and domestic competition

Foreign firms and domestic competition have been subjects for debate worldwide. Most studies report that foreign firms hurt domestic competition while others claim that the collaboration of domestic firms with foreign firms increases their market shares. The truth is that foreign firms tend to hurt infant industries, given their entrenched nature, financial abilities, and brand loyalties. However, various factors contribute to the dominance of a firm in a certain market. Some of these factors are the ones possessed by multinationals that make them be threats to domestic firms. One factor is the lower costs of production.

The factor is usually brought about by favorable statutory policies like subsidies, tax holidays, and other benefits from the government. Economies of scale and advanced levels of technology and management are also contributors to the cutting down of costs. With low costs of productions, a firm can sell its products at lower prices than that of its competitors but still attain a higher profit margin. The provision of a product superior to all the others in the existing market is also a factor that can lead to dominance. Market dominance may be contributed by a firms technical superiority or reputation that it has built during the provision of quality products (Peng 33).

It is usually believed that multinational industries usually have a competitive advantage against domestic firms. The assertion is founded on the foreign-based firms advanced reputations, management skills, and advanced technologies. These advantages, commonly referred to as intangible productive assets, are gained through relevant tactic knowledge or experience in the industry, meaning that it may not be easy for the domestic industries to replicate them. However, they can be transferred, leading to the productivity of the local investors through various channels.

The first channel that can be used is the acquisition of knowledge directly transferred by foreign customers to the local suppliers. Foreign customers may be having demands for better qualities and higher management skills for supply chains pushing the local industries to advance their skills in management and technology. The observation of the management skills and technology of foreign investors by the domestic firms may also help them to come up with similar methods. Interactions with the personnel from foreign companies and the employment of those trained by multinationals would also help the domestic firms to acquire the skills from foreign corporations (Konings 36).

However, there are cases where the multinationals try to put in place measures, which ensure that there are no leakages of information or technology to the local firms. One of the measures that they might take is paying high wages to their staff so that they can ensure that they retain them and do not lose any staff to the domestic firms. Local firms may also not have sufficient capacity for the recognition and absorption of the technologies and management skills from foreign firms. These factors make it hard for the domestic industries to reap from technology spillovers that may result from imitation and personnel turnover (Galina and Long 61).

Cases also exist where foreign and local firms supply products and services to different markets. There are cases where multinationals supply the foreign market where there are high demands for quality, while local firms supply the domestic market with relatively lower demands for quality. In such a case, the competition among the foreign and local firms will be almost non-existent due to the diverse markets that they operate.

On the positive side, while foreign investors are usually very cautious of sharing their knowledge with local competitors, they normally provide incentives to their suppliers in the form of management and technology training to ensure they maintain high-quality supplies at a reduced cost. Foreign investors may also encourage the sharing of knowledge in the supply sector so that they do not over-rely on a single supplier. These suppliers will, therefore, advance in their products that may provide better inputs even to the local industries. In the process, the strategy boosts their productivity and competitive advantage (Liang 25).

The local industries may also gain from foreign suppliers. Foreign-owned suppliers in the domestic market may provide the local industries with high-quality equipment and components. Domestic customers may also be provided with technical support when they purchase the equipment from foreign firms. This will ensure that there is an increase in the productivity of domestic firms hence a rise in the competitive advantage.

The advantages also arise from the recruitment of local experts by foreign firms. The higher the number of people employed by foreign companies, the higher the chances of communication on the operations and organizations of the multinationals. In the end, this helps in the leakages of technology. This will help in raising the absorptive capacity of the local firms, eventually raising their competitive advantage (Kosova 39).

Case Illustration

McDonalds has been an excellent example of a firm internalizing its business. The company has managed to successfully franchise in more than 120 countries with more than 34,000 outlets. The nature of McDonalds business requires the company to enter the international market in one phase as opposed to manufacturing companies that can enter the international market by first exporting the products. The company has to open foreign subsidiaries to amplify the number of customers. The actuality opens the avenue for examining the strategies used by the company to enter into the international market.

The company may set up a master franchising dealer where the main franchisee owns and manages all other outlets in the region. Alternatively, the company may pursue the acquisition of similar companies in the target markets. The company, in the past, attempted all these entry modes, with each different presenting results. However, all the ventures have been successful. When operating in the domestic markets where there are entrenched local corporations, the company hardly competes with a franchisee for the market share. In fact, the company may also sign a partnership deal with local partners.

Conclusion

As shown in the paper, the infiltration by multinationals into the domestic markets of developing countries has a little impact on overshadowing the local firms in the short run. In the long run, however, it has been demonstrated that it can help in uplifting the domestic firms, thereby ensuring their competitive advantage.

Works Cited

Galina, Hale and Long, Cheryl. What Determines Technological Spillovers of Foreign Direct Investment: Evidence from China. New Haven, CT: Yale University, 2006. Print.

Konings, Jozef. The Effects of Direct Investment on Domestic Firms: Evidence from Firm Level Panel Data in Emerging Economies. London, UK: William Davidson Institute, 2000. Print.

Kosova, Renata. Do Foreign Firms Crowd out Domestic Firms? The Evidence from the Czech Republic. Michigan, USA: University of Michigan Business School, 2003. Print.

Liang, Helen. Does Foreign Direct Investment Improve the Productivity of Domestic Firms? Berkeley, CA: Haas School of Business, 2008. Print.

Peng, Mike. Global Strategy. New York, NY: South-Western Publishing Co., 2013. Print.

Every country has its own order of economic priorities. The ranking may appear similar to some extent especially in the top most priority. There are many objectives of an economic policy, but price stability is considered an essential part of the basic framework within which the social and economic policy is conducted (Horst U., Jouko J.H., Augusto L. & Thomas M.1990:46).

The economic priorities can be ranked in the order of importance from the most important to the least important as follows:

1. Price stability
2. Full employment
3. Quality of life or environment
4. Fair income distribution
5. Rapid economic growth
6. Exchange rate stability/ Balance of payment Stability

The first priority of Price stability is very essential for any given economy. Price stability controls the inflation levels of any country. It eliminates both deflation and inflation.

If prices fluctuate from time to time, the level of investments within the economy reduces. Most investors are not willing to take any risks if they find the prices fluctuating. The producers may not supply many products to the market due to price fluctuations. The suppliers may hoard goods and this reduces the number of products available in the market.

The business activity decreases in the economy and therefore reduces the Gross Domestic Product (GDP) of the economy. If prices of raw materials increase, the producers and manufacturers have to reduce the amount of raw material purchased or increase the prices charged to the consumers.

This means that the low income families may not afford to buy such products and therefore becomes an issue. Only the rich can afford to buy such products at exorbitant prices.

The government should stabilize the prices by use of the monetary policy or price controls. In case of high demand for products in the market, the prices usually increase. The government should therefore reduce the money supply in the economy. Through the Central Bank, it can increase the interest rate charged to the banks which in turn makes the banks to charge very high interest rates to the borrowers.

This discourages many borrowers and therefore reduces the money supply in the economy. In the long run the demand level of goods and services decreases and then the prices begin to reduce towards the equilibrium level.

Open market operation can be used by the government through the Central Bank.It may sell securities or bonds to the public so as to collect money from the economy which can be held by the Central Bank until the prices have stabilized.

This monetary policy tool is useful if the prices are very high to reduce the aggregate demand of products in the economy. The government should issue bonds with higher coupon rates to attract the public to invest in them.

The cash reserves should be increased to discourage banks from issuing too much cash to the borrowers. Any bank that does not maintain the requirements should be subjected to heavy penalties. The amount issued by the Central Bank to the banks should also be reduced. As a result, the money supply in the economy is reduced.

Non monetary policies can also be applied to stabilize prices. Price control refers to the government setting of the highest price or the lowest price that a given product can be sold in the market. A price ceiling is the highest price set by the government beyond which no product can be sold. The maximum price ensures that consumers are not overcharged in terms of the prices for various products.

Luxury goods have no price controls. Prices for consumable products should be controlled to ensure that every person affords to buy them. On the other hand, if prices are very low, the government should protect the producers by setting the minimum price that the product should be sold in the market. This ensures that the producers are encouraged to continue production to boost the GDP of the economy.

If production is reduced, the GDP also decreases. However, price control may also have devastating effects once it is withdrawn from the market by the government. If previously there was a maximum price limit, the prices are likely to shoot upwards. The control should be reasonable and not exaggerated.

Some countries have not ranked price stability as the top priority in their economic policies. The ranking may therefore vary from one country to another. Horst et al (1990:46) observes in his book that in some countries, full employment as an economic objective has been given priority from time to time other than price stability. Price stability is essential for any economic policy to be successful.

Full employment is the second in the ranking. It refers to the situation in which the economic resources of a given country are fully utilized. There are many resources that are not put to use yet they are likely to facilitate growth of the economy. The country should have this as a priority so as to create many jobs for its citizens.

This enables the citizens to have sufficient income necessary for buying the basic goods and services for their families. The country should invest more funds in the projects that promise very high returns. For example, if there are some minerals that need to be exploited in a given region within the economy, it creates employment for the communities nearby.

The miners can be employed from the adjacent community and therefore create employment fairly across all the regions. The investment may require huge funds but in the long run the benefits are very good. Minerals and other products can be exported to earn foreign exchange for the economy thus boosting its income.

Education and training should be geared towards providing the students with the immediate requirements in the jobs. The curriculum and the syllabus have to focus on the nature of jobs that the students are to join after the studies. The government should encourage full exploitation of the resources by giving grants and other assistance like subsidies and tax exemption for those who produce goods for export purposes.

Any potential investors in the industries at the rural areas should be subsidized so that industries are developed throughout the economy. If the resources are fully utilized for production in the industries, the products made contribute so much to the GDP of the economy. The country may no longer require importing any products that it can produce locally.

For any economy to increase its GDP, it should fully exploit all the natural resources available across all the regions. Full employment cannot be achieved if any resources are left idle instead of being used for meaningful purposes.

Realistically, full employment may not be achieved for there is no perfect economy in existence. However, every economy should try to work hard and use all the available tools and resources to create employment for the people.

Reference

Horst U., Jouko J.H., Augusto L. & Thomas M.1990.The European monetary system: developments and perspectives. Washington, D.C.: International Monetary Fund, p.46.

There is no standard way of running economies in the world thus giving way to a variety of economic systems. Though methods of running governments are highly different, capitalism and socialism have been identified as the most prevalent forms of economic systems. Capitalism is defined as a form of economic system where the means of production are owned by a few people who then determine which products can be produced and which ones cannot (Henslin, 2011).

Nowadays, capitalism is used to refer to a system in which government interference to certain areas of the economy is minimal or absent. In this system, the means of production are therefore controlled by the private sector. On the other hand, socialism refers to an economic system where means of production are communally owned through cooperatives, trade unions or the state (Henslin, 2011). In this regard, the control of the means of production is with the people as a whole and not any individual.

It should be noted that the two types of economic systems have various differences though they share some ideas. To begin with, capitalism insists on the maximization of individual profits by the owners of the means of production. As a result, capitalists care more about how much they earn rather than how other people will gain.

On the other hand, socialism requires people to contribute to the society according to their ability while each person should be allocated resources according to his or her contribution. Similarly, socialism demands that in addition to the wages that employees receive, the profits made should be distributed among members of the workforce.

Moreover, it is the idea of socialists that the markets has various imperfections and thus cannot perfectly meet the requirements (Henslin, 2011). Consequently, government intervention is required to guide the market. On the same note, socialism emphasizes on equal opportunities for all to succeed.

In addition, workers are expected to have a say at their places of work. On the contrary, capitalism is based on the beliefs of market freedom. In this regard, the government is supposed to keep its distance as far as the regulation of the market is concerned since this will make the market inefficient (Henslin, 2011). Therefore, owners of the means of production produce what they feel they have a competitive advantage in producing.

Generally, capitalism supports competition between producers to produce a given commodity and among consumers to get the commodities produced. Consequently, capitalists are usually competing to either make the highest profits or to secure the cheapest prices when buying commodities.

On the contrary, socialists are proponents of cooperation among members of the society to ensure that they produce what the society as a whole needs. It is the philosophy of socialism that the welfare of the society should come first before many individual is considered (Henslin, 2011). Furthermore, socialists believe that it is the moral duty of every member of the society to care for others and this will make people work hard. As a result, it is pointless to make people compete in the hope that they will increase their productivity.

It is important to note that the two systems of economic governance have proved successful in various nations. Therefore, it will be unfair to say that one of them is better than the other. However, human beings are highly motivated to work when their personal wealth increases.

Therefore, capitalism leads to high individual productivity compared to socialism. On the other hand, there are some sensitive sectors of the economy which cannot be left to the private sector. Consequently, in the long run it is a mixture of the two forms of economic system that will prevail.

References

Henslin, J. M. (2011). Sociology: A Down-to-Earth Approach. Upper Saddle River: Pearson.

Free market and mixed economy

An economic system is made up of the organizations and the techniques that are used to determine the commodities to be produced, the approach of producing them, and the intended consumer of these commodities. These decisions are important because resources are scarce. There are several types of economic systems. In this paper, the free market and mixed economy will be discussed. The two economic systems have different characteristics. In the case of a free-market economy, resources are allocated by the forces of demand and supply. Thus, either an individual or a group of central players cannot allocate resources. In a free-market economy, the price mechanism ensures that all aspects of the economy are in balance (Douma & Hein 2013).

For instance, growth in demand pushes the price upwards. This stimulates manufacturers to increase production. Further, the amount of consumption depends on the income of individuals. Therefore, in a free-market economy, a government will concentrate on safeguarding property rights (Tucker 2010). A free-market economy is hypothetical and does not exist in the real world. In the case of a mixed economy, resources are owned by both the public and the private sector. A mixed economy can also be viewed as a market economy with significant government involvement. In most cases, a government intercedes to rectify market failures and to provide public and merit commodities. Most economies in the world are mixed (Ruth & Hannon, 2012).

A change in quantity supplied and change in supply

There is a difference between a change in supply and a change in quantity supplied. The differences are explained below.

A change in quantity supplied

A change in quantity supplied can be explained as the movement long a stationary supply curve while holding other factors constant. This movement is drawn from the law of supply, which states that there is a positive relationship between price and supply while holding other factors constant (Perloff 2012). Thus, if the price moves up along the y-axis, the quantity supplied will move to the right along the x-axis. A change in quantity supplied is caused by price movements. This relationship is shown in the graph below.

An increase in price from P1 to P2 will cause an upward movement on the supply curve, as shown by the arrow. This will cause the quantity supplied to increase from Q1 to Q2 (Adil 2006).

Change in supply

Change in supply is caused by non-price factors that influence the quantity supplied. These factors can make the supply curve to shift to the right (an increase) or to the left (a decrease). Some of the non-price factors are increases in the number of suppliers, change in technology, subsidies, and a decline in the price of raw materials, among others. A change in supply can be illustrated using a graph, as shown below (Parkin 2007).

In the graph above, favorable non-price determinants will cause the supply curve to shift from SS1 to SS2. This makes the quantity supplied to increase from Q1 to Q2. It can be noted that the price does not change. An opposite movement occurs if unfavorable non-price determinants are experienced (Bade & Parkin 2013).

Cross price elasticity of demand

This type of elasticity measures the degree by which a change in the price of one commodity affects the change in demand for another commodity. In arithmetic terms, it is the percentage change in quantity demanded of one commodity, Y, divided by the percentage change in the price of one commodity, X. The resulting coefficient of elasticity shows how sensitive the demand for one commodity is to the changes in the price of another commodity. Examples of two substitutes are butter and margarine (McEachem 2008).

These two cannot be consumed at the same time. Therefore, if the price of butter rises, by the law of demand, the quantity demanded will fall. Further, consumers will prefer to consume more of the substitute, which is margarine. In the case of substitutes, when the price of one commodity increases, then the quantity demanded of the best alternative, that is, the substitute increases. In this case, the value of the cross-price elasticity is positive. Complementary goods are consumed together (Moon, 2013).

Examples of two complementary goods are rice and chicken. If the price of chicken goes up, then by the law of demand, its quantity demanded will drop. Since rice complements chicken, then its quantity demanded rice will also drop. Based on the analysis above, if the cross-price elasticity is zero, then it implies that the two commodities being analyzed are not related (Barber 2010). Further, if the value of elasticity for the commodities is less than one (negative), then it indicates that the two products are complementaries. Finally, if the elasticity is greater than zero (positive), then it shows that the two commodities being analyzed are substitutes. In the United States, the cross elasticity between cantaloupe and watermelon is 0.6. This shows that they are substitutes. Further, the cross-price elasticity between chicken and rice is -0.1309. This implies that they are complementaries (Jain, 2006). Thus, the study of cross-price elasticity helps in monitoring market trends.

Income effect and substitution effect

Based on the law of demand, a change in price can be described in terms of income and substitution effect. The diagram presented below will be used to explain these effects.

The two items that will be analyzed are commodity Y and X. According to the law of demand, a drop in the price of commodity Y will lead to an increase in quantity demand. The increase will cause the budget line to pivot from BC1 to BC2. Also, the indifference curve will shift from I1 to I2. This represents a movement to a higher indifference curve. The equilibrium position is the point of tangency between the budget line and the indifference curve (Tucker 2012).

When the price of commodity Y falls, a consumer will be indifferent between consumption at point A and B because they lie on the same indifference curve. However, at point B, the consumer shall not have exploited the budget. A fall in price increases the quantity of commodity Y that can be consumed as represented by budget line BC2. This shows that real income has grown as a result of a drop in price. Thus, the consumer can increase consumption to point C on a higher indifference curve I2 from point B on a lower indifference curve (Baumol & Blinder 2011). At this point, an individual will consume Y3 and X3 of commodity Y and X, respectively.

Thus, the movement from Y2 to Y3 is due to the income effect. The change from point A to B is known as the substitution effect. This can be attributed to the fact that the individual will reduce consumption of X, from X1 to X2, and increase the use of commodity Y, from Y1 to Y2. It can be observed that this occurs on the same indifference curve I1 (McEachern 2011). It implies that the consumer is substituting Y with X. The total effect is the sum of income and substitution effect, that is, the sum of the movement from Y1 to Y2 (substitution effect) and change from Y2 to Y3 (income effect).

Perfect competition and monopoly

Perfect competition and monopoly are considered to be the extreme forms of market structures. These two have distinctive features. Some of the features are discussed below.

Number of firms

There are several firms that operate in a perfectly competitive industry is made up of a large number of small firms. These firms are price takers. Besides, no single firm can have market control. Under monopoly, there is only a single firm that has market control. Moreover, it determines the price in the market (Mankiw 2012).

Availability of substitutes

Under perfect completion, the commodities are homogenous, and there is an infinite number of products. In the case of a monopoly, there is only one commodity with no close substitute (Arnold 2008).

Entry and exit

Under perfect competition, there is free entry and exit of firms. Barriers do not exist. In the case of a monopoly, there is a barrier to entry.

Information

In the case of perfect competition, information concerning the production methods and prices is readily available and known by all players. This information is not readily available in the case of a monopoly (Anderton 2008).

These unique characteristics create differences in the shape of the revenue and cost curves (Baldwin & Scott 2013). The graphs presented below show the equilibrium position of the two market structures.

Perfect competition

Monopoly

References

Adil, J 2006, Supply and demand, Capstone Press, USA. Web.

Anderton, A 2008, Economics, Pearson Education Inc., UK. Web.

Arnold, R 2008, Economics, South-Western Cengage Learning, USA. Web.

Bade, R & Parkin, M 2013, Essential foundations of economics, Pearson Education Inc., USA. Web.

Baldwin, W & Scott, J 2013, Market structure and technological change, Taylor & Francis Publishers, UK. Web.

Barber, R 2010, Elasticity, University of Michigan, New York. Web.

Baumol, W & Blinder, A 2011, Economics: principles & policy, Cengage Learning, USA. Web.

Douma, S & Hein, S 2013, Economic approaches to organizations, Pearson Education Inc., London. Web.

Jain, T 2006, Microeconomics and basic mathematics, V.K Publications,New Delhi. Web.

Mankiw, G 2012, Principles of microeconomics, South-Western Cengage Learning, USA. Web.

McEachem, W 2008, Microeconomics: a contemporary introduction, Cengage Learning, USA. Web.

McEachern, W 2011, Economics: a contemporary introduction, Cengage Learnings, USA. Web.

Moon, M 2013, Demand and supply integration: The key to world-class demand forecasting, Pearson Education Inc., USA. Web.

Parkin, M 2007, Economics, University of Michigan, USA. Web.

Perloff, J 2012, Microeconomics, Pearson Education Inc., England. Web.

Ruth, M & Hannon, B 2012, Modelling economic systems, Springer Science & Business Media, USA. Web.

Tucker, I 2012, Macroeconoics for today, Cengage Learning, USA. Web.

Tucker, I 2010, Survey of economics, Cengage Learning, USA. Web.

Presentation of economic data for three countries(Australia, China, and Greece ) in charts

Economic data refers to statistics for variables that are the key indicators or determinants of economic growth. The following charts represents the economic data for Australia, China, and Greece.

Both of these three countries have experienced global financial crisis (GFC) which destroyed many countries economy as a result of inflation. The charts below are illustrated as per the data obtained between 1999 up to 2012, being the most recent one.

Interest rates

• Australia interest rate
• China interest rate
• Greece interest rate

GDP

• China GDP
• Australia GDP
• Greece GDP

Annual GDP growth rate

• Australia annual GDP growth rate
• China Annual GDP growth rate
• Greece annual GDP growth rate

GDP per capita

• Australia GDP per cap
• Greece GDP per capita

• China GDP per capita

Government budget

• Australia Government Budget
• Greece Government budget

• China government budgeting

Unemployment rate

• Greece unemployment rate

• Unemployment rate in Australia

• China unemployment rate

Inflation rates

• China inflation rate

• Greece inflation rate

• Australia inflation rate

Comparison of the economic data in charts for each three countries

The comparison of the three countries based on the data above shows that all countries, since 1999 have experienced an increase of their GDPs proportionately up to date. The countries of Greece and Australia have experienced proportionate increases until 2009 when they started to decrease. On the other hand, China experienced growth throughout this period under study.

When it comes to inflation, Australias inflation rate was high at the beginning of the period, but due to control measures that were put in place to deal with this skyrocketing rate, it reduced significantly (Gary 2009). As for Chinas case, there was boom and recession showing times in which the country was facing inflation that affected its economy negatively.

Unemployment rates for the three countries show a rise in job at the end and a decrease at the middle of the period. As for China and Australia, there was frequent fluctuation of the rates but for Greece the rates started from a higher level before they decreased and finally, they returned to high levels.

Its worth noting that the interest rates for China and Australia were fluctuating from the beginning due to changes in the economy brought by factors like global financial crisis (Taylor 2008).

This indicated some decreases at the end in both of the countries justifying the presence of challenges towards the lapse of the period. There is much of increase of GDP per capita in each country as shown in the charts above. The real GDP growth rate is fluctuating in both countries from the beginning but with an increase at the end.

The budgetary position for Australia and Greece has been increasing from 1999 up to 2009 when the GFC occurred making the governments of these countries to reduce national expenditure and increase taxation to curb the challenges in the market and control money in the hands of the public (in circulation).

These changes in their budgetary decision was due to the situation of the economic crisis that demanded efficient control measures to prevent the economy from further collapse

How the GFC has influenced the economies of China, Australia and Greece

Global Financial Crisis (GFC) refers to a situation whereby most countries worldwide face challenges in form of loss of value for money due to inflation. This results because of the presence of much money in circulation or lack of money leading to increment of prices of goods and services, resulting to starvation.

The common public are unable to budget properly for their expenditure because the value of their money is lost as they pay a lot for less service. The price fluctuation is the key contributor to unbalanced financial economy.

Some people have defined GFC as a combination of shocks and increase in risks to all markets worldwide, which creates tension to households and investors. Thus, the future of the economy is determined by the form of the crisis (whether permanent or temporary).

The GFC causes a variety of effects to economic variables, which in turn influence the performance of financial markets. GFC is believed to cause economic contraction in global trade and production. This explains why you find that the trade activities reduce while the GDP may still be high because companies are still engaging in production.

This crisis also has a risk of ceasing interbank lending, hence leading to increase of interest rates to a point whereby it may not be economical for them to engage in any transaction. Due to contraction of trade, the prices of commodities offered increases leading to a rising inflation rate and vice versa.

This may prompt a government to respond to this situation by coming up with fiscal and monetary policies to control inflation in the economy. Monetary policies involve increasing the borrowing for commercial banks from the reserve bank so that these entities may extend the same to the public (customer) to discourage loans.

On the other hand, the fiscal policies involve government increasing their tax rates especially on luxurious commodities to discourage expenditure that increases money in circulation. These control measures (fiscal and monetary policies) adopted by the government to deal with inflation in turn affect the activities and flow of financial trade leading to unemployment in time of deep recession.

This has been one of the major effects that have been emerging leaving many citizens unemployed. Hence, such situations call for government to intervene maybe by use of subsidizing programs to improve the situation.

The following is information on the effects of GFC to economic variables as discussed in tables presented above. The trade reduced, while the production increased leading to increase in real GDP. In the year 2011, Australias real GDP increased by 0.8% resulting to a fall in trade by 4.7% which in turn influenced a drop in real GDP per capita.

The presence of a deep recession resulted to an increase in unemployment rate leaving many people without jobs, since the trading activities got reduced and many industries started to close down because the cost of production was rising at a high rate. Once the trading activities get reduced, the real GDP per capita decreases and the annual real GDP growth increase (Frank 2001).

As for the case of Australia and Greece, their government expenditure must be reduced significantly in order to reduce the amount of money in circulation. In addition, the taxes must be increased in order to collect money back from the public to help in reducing inflation.

The effects of the GFC in each country may differ due to factors such as control measures involved, its status in terms of whether its permanent or temporary (Eisenberg 2002).

Financial crisis in 2009 led to many problems in Australia in leading to inflation, increase interest rate, and decrease in GDP per capita thus influencing government to intervene by reducing their expenditure and improving taxes to control a lot of money in circulation.

AE diagrams to analyse and contrast the macroeconomic behaviour of Greece and Australia

The differences for the AE diagrams is brought by the number of factors some including, population whereby Australia has large population than Greece hence leading to unemployment and inflation to rise. This population also exerts pressure on the available resources including labour and capital necessitating the government to create additional jobs (Smith 2006).

On the other hand, Australia encourages the use of innovation thus leading to many companies coming up with appropriate measures to curb the unemployment situation so as to improve the lifestyles of the countrys population.

World economic depletion since 2008 during the GFC which almost affected all the countries left Greece in a problem up to date. This inflation made the prices to increase causing the goods and services to be unaffordable to most of the Greece citizens.

The difference in government policy is another factor to consider. Every country has its own policy and ways of dealing with economic situations therefore bringing about the differences in the AE diagrams. These policies are usual passed by those in the legislative system and hence, one cannot expect different countries to pass the same policies.

The stages that these countries undergo in economic development are other sources of differences, since countries are in different stages of development (Adams 2000). For instance, Australia is more developed than Greece and this is reflected in the EA diagram below.

AE diagram illustrating Australia and Greece economic data

From the above information, china is one of the countries that have been known for having the greatest change or rise in economy though it has a very large number of people.

Greece economy declined from the 2008 during GFC in Europe and up to date its not doing well compared to the rest (China and Australia). Australia is a medium class country whereby the government ensures creation of jobs to discourage unemployment (McGrath 2005).

References List

Adams, Y 2000, Economics: Emerging Economies, Yale University Press: New Haven.

Eisenberg, K & Melvin A, 2002, Economics: Economic Growth, The BarBri Group: Chicago.

Frank, S 2001, Business Studies: Gross Domestic Product, McGraw/Irwin: Homewood.

Gary, S 2009, Business and Economics: Economic Growth Factors, Cavendish: New York.

McGrath, T 2005, Business and Government, Cima Publishing: Boston.

Smith, J 2006, Business studies: Economic data, Sweet and Maxwell: London.

Taylor, H 2008, Economics Studies: Inflation Rate, Harvard Business Review: Boston.

What do you understand by the word development?

In my understanding, development means being in a position to meet basic needs and to generally live a good life. For example, when people have enough food, can access health care services, and take their children to good schools, this is development. At a national level, development involves having a growing economy which makes it possible for the government to provide its citizens with essential services and develop infrastructure. Development can also be explained in terms of social and spiritual progress where social institutions are strong and people live without the oppression of any kind. This gives them a chance to interact with their friends freely and share important ideas that improve their lives. In summary, it involves socio-economic, religious, and political growth that enhances the quality of life of the people.

Identify at least three concrete examples where economic development activities raise ethical questions

The first economic development activity that can raise ethical questions is an unjustified increase in taxation on consumer goods. People can revolt against an increase in taxes because this impoverishes them. They can defend their position by referring to the production costs of goods relying on information from manufacturers.

The second example where economic development activities can raise ethical issues is the practice of unethical labor practices where people are paid low wages. People can move to organizations where they are paid higher wages. This can be defended by arguing that the low wages they earn cannot cater to their needs. The decision is made based on information from other companies on how labor is compensated. The value judgment would be that their hard work should be compensated fairly.

The third ethical issue is the termination of employment without adequate notice. Employees can take a hard position by insisting on their right to security of tenure. Their position can be defended based on existing labor laws that protect employees from exploitation, such as dismissal without adequate notice. Their value judgment would be that if their contracts are terminated prematurely, then they should be paid.

How do normative frameworks affect policy decisions and outcomes?

Normative frameworks influence policy resolutions and outcomes in different ways. For instance, they determine the nature of data collected and influence analysis. Normative frameworks are also associated with determining the importance attached to political topics and influence social movements (Deneuli & Shahani, 2009). Besides, these frameworks motivate professionals morally or ethically and determine their philosophical credibility. Policy priorities and outcomes depend on normative frameworks. For example, my decision to pursue higher education in a specific institution based on quality education forced me to pay a large amount of money than I could have paid in a different institution.

Why do you think the basic intuition that human concerns should be the ultimate goal of economic activity continues to be ignored in policy all over the world?

The basic reason why this happens is that development is assessed in economic terms, especially the annual growth of income per capita. As a result, policies do not bother about the consequences of economic growth on the quality of life of the people. Most countries do not focus on human concerns because this is not the parameter that is used to determine their economic growth. It is assumed that when the economy generally grows, then the lives of the people are improved in terms of health and education. Most policies, therefore, believe that economic development automatically reduces poverty and other problems that people might face hence there is no need to focus on them so much. It is not always the situation because economic growth does not automatically guarantee people good lives.

Reference

Deneuli, S., & Shahani, L. (2009). An Introduction to the Human Development and Capability Approach: Freedom and Agency. London: Earchscan.

Taxation

Carbon tax

The carbon tax will increase the cost of production meaning that the supply of those products will reduce from Q₀ to Q₁; therefore, the supply curve will shift to the left (shift up) that is from S₀ to S₁. Conversely, assume that the firm transfers its the cost of production forward that is to the consumer, this implies that the price of the good increases from P₀ to P₁ resulting in to decrease in quantity demanded thus leading to an upward movement on the demand curve from y to x due to increase in price as shown below. Thus a new equilibrium point x will be established.

New car demand

Oil and cars are compliment goods, which are used together; thus if the price of oil per barrel goes up to $200 this means that the demand for new cars will reduce that is a shift to the left from D₀ to D₁, this reduction in quantity demanded will force the car price to decrease from P₀ to P₁ leading to a new market equilibrium (v) whilst the supply curve S will remain the same because the production cost of the car is not affected by oil prices though there will a movement down the supply curve due to decrease in price to a much lower supply level.

If the severe global recession takes place a year after the increase in oil prices, this will lead to an increase in purchase price (P₃ to P₄) to the consumer and firms cost of production for new cars, which reduces quantity supplied from Q₃ to Q₄. This implies that the supply curve will move to the left from S₃ to S₄, establishing a new equilibrium point (w) while the demand curve will remain the same though there will an upward movement on the demand curve as a result of a price increase.

Free trade agreement

If consumers expect that the price of imported cars will reduce in six months this will lead to shifting of the demand curve to the left from D₀ to D₁ due to reduced demand from Q₀ to Q₁, and the price will reduce from P₀ to P₁ as a result point b will be the new equilibrium.

After the implementation of the policy, the supply curve will shift from S₀ to S₂ due to an increase in demand accordingly there will be a movement on the demand curve to the right from equilibrium point b to c due to an increase in quantity demanded from Q₁ to Q₂ which result to decrease in price from P₁ to P₂.

Profit

1. Normal profits are determined by the product price and the average cost of production where the rise in supply triggers a decrease in cost as a result, the price will equal average cost plus it will change with the economic state in the long run because when the economy is at boom more goods will be demanded which attract new competitors into the industry in case of perfect competition (Willamette.edu, 2010).
2. In the long-run firms making abnormal profit attract new entrants in the market-leading to an increase in supply (Willamette.edu, 2010) which eventually reduces the price from P₁ to P₂ in this particular point the price equates to average cost. Thus the companies are earning normal profit at point x, assuming that the demand curve does not shift.
3. Normal profits (point x above) are considered as a cost because when the firms are operating in the long-run as shown in part b above, they normally equate the price of a good to its average cost of production(Willamette.edu, 2010).
4. A firm continues to operate in the short-run even when it is making losses because it has to cover fixed costs and some variable costs and if it decides to cease operation it will still incur the unavoidable cost such as rent, depreciation plus it will not be receiving anything to offset its costs (Willamette.edu, 2010).
5. Abnormal profits will encourage new entry into the industry thus increasing the quantity supplied and the number of firms operating in the sector.

Profit calculation

Point x is the profit-maximizing output and the firm is making a supernormal profit of $3 per unit ($14  $11).

The price will eventually reduce in the long run due to an increase in supply due to many firms in the industry.

Information on average cost is important to determine the level of output at which the firm needs to produce to maximize profit.

Kinked demand curve

a. The failure of a company to forecast with firmness the rivals reactions make it almost impracticable to approximate MR data and demand that an oligopolist faces. With no such data, companies do not decide on their output and price that maximizes profit- even in the hypothesis (Cliffnotes.com, 2011).

Where Dnr and Dr are the output where oligopolists do not react and where they react respectively.

An oligopolys marginal revenue must be equal to marginal cost to maximize profit at which point the equilibrium output is attained (Cliffnotes.com, 2011).

Natural energy sources

To endure on this planet, energy must be relied upon, although there is no unrestrained natural energy source, which will end very soon there is still a need to think of alternative options; nuclear is one example (Sloman, Norris and Garratt, 2010).

There are various motives as to why people do not prefer nuclear energy because it results in severe environmental damage and can be used in manufacturing bombs (Sloman et al, 2010). Additionally, the environment needs to be clean which means safe inexpensive renewable energy that is economically viable, reliable, socially acceptable, affordable, and sound is needed. Any impact on the society from this waste is referred to as externalities: they are normally third party or side effects, of the process of production (Sloman et al, 2010). In this case, individuals will be affected negatively, thus nuclear energy will lead to external costs (Sloman et al, 2010).

For instance, when a company dumps its chemical waste into the water body and air, society incurs costs extra to those accepted by the company. In that case, the marginal social cost (MSC) of chemical creation surpasses the MC (marginal private cost). In a diagram the marginal social cost curve is over the marginal cost curve, this is assuming that the company is doing business in a perfectly competitive environment and it thus takes the price (price taker) that is it is faced with a horizontal demand curve (Sloman et al, 2010) as shown below.

The socially best output will be Q₂ where P=MSC; thus the company manufactures Q₁ that is more than optimum. Therefore, external costs resulting in over-production from the community perspective. The external cost will be the difference between the marginal social cost and marginal cost.

Protecting employees

The Work Choices legislation that was effected in 2006 brought considerable variation to employment regulation conditions plus sector relations and the bill was instituted in 2005 to the House of Representatives (Sloman et al, 2010).

The employees were treated unfairly by the Work choice Law (Sloman et al, 2010) although from the employers perspective it was a superior law it was unethical. The government failed to deal with the main issues that were upsetting working families such as lack of protective laws from unjust dismissal, no assurance of any financial award, and no restriction on employers power to manage rosters (Sloman et al, 2010).

It did not assure employees whether they will be fairly paid or be financially compensated and the employer facing economic difficulty was not required to offer compensation. The unemployed individuals, young people, disabled and sole parents working in-country and regional areas were not secured in the fairness test; thus unjust dismissal and illegal termination was the main weakness of this law (Sloman et al, 2010).

Conclusion

In 2009, the Fair Work law was signed and restricted the extent of compensation discrimination claims (Sloman et al, 2010). Employers must make themselves acquainted with the new legislation to lessen the possibility of future risk plus to make sure that they comply (Sloman et al, 2010).

For instance, an employee (Lilly Ledbetter) of a rubber firm sued her labor force when she recognized that the male employees were being salaried more for the identical job description (Sloman et al, 2010). This law covers more than gender discrimination as it also safeguards the employees against pay discrimination based on color, race, age, nationality, religion, and disability (Sloman et al, 2010).

Reference

Cliffnotes.com. 2011. Kinked demand theory of oligopoly. Web.

Sloman, J., Norris, K. & Garratt, D. 2010. Principles of Economics, 3rd edn, Pearson, Frenchs Forest, NSW.

Willamette.edu. (2010). Economic Cost. Web.

Explain how governments supply-side policy can influence the economy and list the main types of side policy

In every economy, the nations government is usually responsible thus intervening in most of the cases (Sahu, 2011, p.1). Among the many types of government interventions is the supply-side economic policy. The supply-side policy is used by the government to enhance productivity, growth as well as the efficiency of the nations economy. It is therefore evident that the governments intervention through the supply-side economy has a great influence on the economy.

This is because, for one, when the countrys economic productivity is increased, the rate of inflation will possibly go down. A low rate of inflation has a positive effect on the economy by improving it tremendously. Secondly, increased productivity through the supply-side policy makes the nations commodities fetch high foreign exchange in the global market thus in return improving the economy.

The main types of supply-side used by most governments include the Interventionist policy which is used as a tool to overcome market failures and the Market Oriented supply-side policy whereby a free market is created through reduced regulations.

Describe the relationship between unemployment and inflation. Include in your answer reference to the Philips curve and expectations

Unemployment can be defined as the situation whereby there exists a large part of a countrys population willing to work but for some reason end up without employment. Inflation on the other hand is a situation whereby the prices of commodities in a country go high making them unaffordable by most people in the population (Lipsey and Harbury, 1992, p.367). The two situations seem to have some degree of correlation since their interplay has an impact on the economy.

The economist professor Philips had long-run research running between the 1870s to the 1950s which enabled him to discover that employment and inflation had some correlation (Froyen, 1998, p.143). His research led to the development of the Philips curve which is now used to describe the relationship between inflation and unemployment. In his theory, Philip argued that reducing the unemployment rate in a country would lead to a definite increase in the inflation rate of the same nation. The vice versa of this statement is also true, meaning that an increase in the unemployment rate would lead to a reduction in the inflation rates. Below is an example of the Philips curve showing the relationship between inflation rates and unemployment.

From the graph above it can e saw that high rates of both employment and inflation rates hurt a countrys economy (Mankiw, 1998, p.87). The curve slopes downwards which is an indication that to increase or decrease either situation, the other should be decreased or increased respectively. Just like most graphs in economics, there are various instances in the economy that may lead to a shift in the Philips curve (Blanchard, 2000, p.95).

Some of these instances could include; change in the interest rates, oil prices, flexile markets just to mention but a few. However, looking at the trend in the curve, it can be depicted that this trend has not been steady because of the different periods of trade-offs.

Reference List

Baumol, J., and Blinder, S. (2005). Economics: Principles and Policy. Thomson South-Western.

Blanchard, O. (2000). Macroeconomics (Second ed.). Prentice Hall.

Froyen, T. (1998). Macroeconomics: Theories and Policies. 6th ed. Upper Saddle River, NJ: Prentice Hall,

Lipsey, R. and Harbury, C. (1992). First Principles of Economics. Oxford University Press.

Mankiw, N. (1998). Principles of Macroeconomics. Dryden Press.

Sahu, A. (2011). Economic Policy. Web.

Introduction

Assuming supply to be constant, an increase in the price of oil from P0 to P1 will result in a decrease in quantity demanded and supplied new cars from Q0 to Q1. If the recession occurs after the rise in oil prices, it will result in a decrease in the purchasing power of consumers. Cars are a luxury commodity thus the quantity demanded will fall as the national income per capita will fall; this will also result in a low production of cars.

Answer 1

A free trade agreement means low tariffs on the import of cars into Australia. This will result in an increased competition in the domestic market, which would eventually mean increased demand for these imported cars because of their lower prices.

As the imported cars proliferate in the market, the supply will increase. Prices will decrease because of the free trade agreement which will further increase the quantity demanded of these imported cars from Q0 to Q1. This will be detrimental for the local car manufacturers who may even be driven out of the market.

Answer 2

Normal profit is the opportunity cost of profit being earned in one industry. The economic cycle will determine the size of normal profits, which will be higher in booms and lower in recessions.

A decrease in the price of personal computers has increased the quantity demanded. This decrease resulted because of a rapid technology change, making the demand curve more elastic. This means the cost of production for personal computers has fallen due to economies of scale and it is now able to pass on the reduction in costs to the consumers in the form of lower prices, which eventually means higher revenue. As profit can be calculated by subtracting total costs from the sales revenue, as the proportion of total costs reduces, more is left in profit.

The diagram shows that initially the PC industry was operating at a loss which is shown where total cost was greater than total revenue but as it achieved economies of scale, it started making a profit whereby the total revenue is greater than total cost.

Answer 4

Normal profit is the minimum amount of profit needed for a company to carry on its operations. It is a component of implicit costs because it represents the opportunity cost of producing and operating in a certain business.

Firms will continue production even if it operates in a loss provided it is covering its variable costs in the short run. If it can cover its variable costs like rents, wages, etc which need to be paid off in the short run whereas fixed costs do not need to be paid off in the short run for a firm to survive. However, when it is unable to pay the cover the fixed cost, then it must shut down.

As shown in the diagram above, the firm must shut down after marginal cost increases the average variable cost.

Answer 8

The firms will increase the output to meet the rising demand for the product. However, an increase in prices will also increase the cost of raw materials for the firms. But since they are now making more than normal profits, they may not think it is necessary to raise the output and would continue to earn abnormal profits. The number of firms in the industry will depend on the barriers to entry. Fewer barriers to entry would allow more firms to enter and share abnormal profit. So in the long run, abnormal profits cannot be sustained in a perfectly competitive market.

Challenge Question

If this firm was typical of others then it would be a perfectly competitive market structure thus, in the long run, this supernormal profit will not be sustained. Lack of barriers to entry would encourage more producers to open up in the industry causing the automatic mechanism to work.

Market Failure and Reform

The use of nuclear for power generation will result in a negative externality to society. This will include not only a private cost of much expensive process of power generation than coal to the government but may have negative social costs as well. These may include uranium particles and their side effects, the difficulty of sustaining the environment and protecting from the harmful effects of nuclear energy.

Thus this task should be centralized with the government and not be left to the market economy, as the market may fail. The private producers will be unable to provide the service at lower costs as they will have to pass the high production costs to the customers. Thus government intervention in the form of taxes and subsidies will be essential. Regulations will have to be enforced about the dumping of waste and carbon emissions (Laffont 1988).

Labour Markets

The Howard government in 2005 to replace the Industrial Relations Law in Australia passed work Choices Legislation. The main purpose was to ensure workforce protection against changes in legislation. It further protected workers against unfair dismissals, giving them legal rights to go on a strike, bargain for guaranteed benefits or conditions, and to minimize trade union activity. However, in 2009 it was replaced by Fair Work Legislation primarily to promote the bargaining power of the workforce in good faith.

So the fair Work gives trade unions greater bargaining power to negotiate minimum wage levels in industries, workers and managers can have a platform to discuss the issues, non-unionized workers will also benefit from the higher wages and the unions may put pressure on the government to pass legislation (Fair Work Australia 2010).

As shown in the diagram above, with the change from Work Choices to Fair Work legislation, the minimum wage rate will increase from W2 to W1 as the workers will now have more bargaining power however, the quantity demanded of labor will fall as the burden of higher wages falls on the producers who want to cut back on their costs.

List of References

Fair Work Australia, 2010. Fair Work Australia. Web.

John, S., 2007. Essentials of Economics. New York: Prentice Hall.

Laffont, J.J., 1988. Fundamentals of Public Economics. Oxford Journals 85 (4), pp. 873-875.