The Consumer Financial Protection Bureau (CFPB) publishes a report every six months on violations of the law that were identified during inspections. The Bureau vetted companies and suppliers for compliance with the Fair Credit Reporting Act (FCRA). The CFPB found multiple violations, especially inaccurate information in credit reporting and illegal pay-to-play (Consumer Financial Protection Bureau, 2022) Fees in Mortgage Servicing. In addition, the Bureau found violations and problems with The Coronavirus Aid, Relief, and Economic Security Act (CARES Act-related or COVID-19-related workflow (Consumer Financial Protection Bureau, 2022). The CFPB assessed mortgage lending operations and found consumer protection law violations and Regulation Z.
The Mishandling of COVID-19 Relief
During the coronavirus pandemic, benefits were transferred to consumer accounts to help those who lost some or all of their earnings. The CFPB investigated how financial institutions handled pandemic relief benefits and whether policies and procedures were used that caused people to lose their benefits. The Bureau identified cases of abuse by financial institutions that used payments to pay off loan balances, which was illegal. The CFPB instructed companies to make amends to borrowers and change procedures to comply with state and local consumer protection measures. Moreover, the Bureau found violations related to the late provision of benefits to homeowners following the CARES Act. The reviewers also found that service providers unfairly charged some individuals while operating under the CARES Act and did not follow policies and procedures reasonably designed to evaluate homeowners loss mitigation options properly.
Inaccurate Information in Credit Reporting
Nationwide consumer reporting companies (NCRCs) are required to provide national credit reporting, including complaints received from consumers. NCRCs must take action to verify complaints to verify that all legal obligations have been met. CFPB experts found that NCRCs violated the law in several ways. First, they should have reported to the Bureau on the results of the inspections and the fulfillment of legal obligations. Second, NCRCs must resolve consumer complaints regardless of the validity of the claims, but many companies ignore this requirement (Consumer Financial Protection Bureau, 2022). The CFPB has requested consumer reporting and changes to complaints policy and procedures to make the process more transparent (Consumer Financial Protection Bureau). Moreover, similar violations by furnishers regarding NCRCs have been found. Furnishers had to correct the inaccurate information and simplify for consumers submission process.
Illegal Pay-to-Pay Fees in Mortgage Servicing
The CFPB concluded that federal law prohibits collectors from using a pay-to-play fee, often referred to as a convenience fee. Mortgage brokers violated this law by collecting a significant pay-to-pay fee. When borrowers telephoned the support line, they were unaware of the availability of phone calls and counseling fees. However, borrowers were charged a significant amount of money illegally. The CFPB required service companies to refund all money taken from borrowers for telephone calls if they were not warned about a charge (Consumer Financial Protection Bureau, 2022). The CFPB has taken a general look at the practices of charging for unnecessary services. The Federal Consumer Financial Protection Act prohibits collection companies from charging a convenience fee to pay off balances.
Conclusion
Having inspected financial institutions activities in the first half of 2022, CFPB found several violations of legislation in the field of mortgage lending. The original press release covered many topics and violations in different areas. This article looked at mortgage breaches related to the misuse of COVID-19 assistance, inaccurate credit reporting, and illegal pay-to-pay payments. All of them were regulated by the recommendations of the CFPB, and the affected borrowers received compensation.
In reading Sun Yuans The following factory of the world: How Chinese investment is reshaping Africa, one can arrive at ideas about why capitalism continues to work and how society contributes to it. The author draws attention to the problems of the clash between the inner core of Africa and the progress China wants to bring there. The many investments and the expansion of Chinas influence over the whole continent could lead the community to a new stage of the social and industrial revolution. In addition, we can expect a change in the very perception of Africa at the global level. In this paper, I want to focus on Chinas place in shaping the globalized economy on the world stage and in Africa.
Sun Yuans work involves the analytical ability of the reader to understand and accept the new economic reality that Africa is striving for and being pushed into by China. Africas development has always been insufficiently stable, and China can now set its economy on a straight path. Sun Yuan points out that Chinese contractors and businessmen use China to form their sites and establish businesses (2017). Africans are working in their businesses, strengthening Chinas position within the continent. The African economy is collectively in crisis: not all countries are as successful as Egypt in turning money around. The role of Chinese entrepreneurs is to strengthen Africa as a trading point through duty-free trade opportunities (Sun Yuan, 2017). I think China will play an essential role in Africas future because the republic will be able to optimize industry and stimulate development toward technology. Chinas proposed work will help Africans avoid the critical consequences of poor schooling and higher education. Finally, Africa will embark on a path of economic growth as a single continent with opportunities in the form of an industrial revolution.
As part of the global implications of Chinas introduction into the African market and its interference in trade and economic routes, the world economy will be in limbo. Although China will strengthen its position, Africans may stall in technology development, and Chinas dominance will be less pronounced. As long as the republic grows crops in harsh Africa, its global status will suffer, if not decline, due to its inability to make risky deals. Consequently, Chinas dependence on services, factories, and businesses could translate into the collapse of small economies. The inability to engage in active trade will lead to a reduction in the number of world market leaders and an increase in accumulated debt. Moreover, America and Asia can be expected to refuse to cooperate directly with Africa under the guise of instability. Although they would be right, China would have to convince its business partners that it has a gold mine. Otherwise, Chinas integration into Africa can be expected to hurt international relations due to its high dependence on Chinas influence and opinion.
Thus, Sun Yuans book offers an opinion on Chinas role in shaping the economies of developing countries and the international trade arena. Chinas influence on Africa is evident: the country is likely to develop industry and switch to new types of production and technology. We can expect development if China manages to attract its global partners. As much as Chinese investors see Africa as a gold mine, it needs support establishing trade routes. China should consider the adverse effects of decreasing demand for its services and jobs.
Reference
Sun Yuan, I. (2017). The next factory of the world: How Chinese investment is reshaping Africa. Harvard Business Review Press.
Bond yield risk is the possibility of investment losses brought on by an increase in the going rates for brand-new debt instruments. For example, if interest rates increase, the secondary market value of a fixed-income investment or a bond will decrease. The price and yield have an inverse relationship, and if the yield rises, the investor runs the danger of losing money. The danger posed by these shifts in interest rates includes the need to reinvest earnings at a rate lower than what the resources were previously earning and the possibility that bonds would have a negative rate of return when inflation rises sharply.
The inverse relationship between yield rates and bond prices is the first concept a bond buyer needs to comprehend. Bond prices increase as interest rates decrease and often decline as interest rates rise. This occurs because investors strive to lock in or capture the highest rates possible for as long as they can when yield rates are declining. To achieve this, they will purchase current bonds that offer interest rates above the going market rate. Bond prices rise as a result of this increase in demand (Del Negro et al., 2019). On the other hand, if the current interest rate is rising, investors would instinctively sell bonds that offer lower interest rates, which would drive down bond prices.
Reinvestment risk, or the risk of having to reinvest proceeds at a lesser rate compared to previous earnings, is another threat bond investors face. This risk manifest when interest rates decline over time and the issuers exercise callable bonds. The bond can be redeemed by the issuer before it matures thanks to the callable feature. The bondholder as a result receives the main payment, which frequently comes at a small premium above the par value. The drawback of a bond call is that the investor is left with a large sum of money that they would never reinvest at a similar yield. This reinvestment risk has the potential to reduce asset returns over time. Investors receive a higher yield on the bond to compensate for this risk than they would on a similar bond that is not callable. Active bondholders can try to reduce portfolio reinvestment risk by stupefying the potential call dates of different bonds.
In essence, when an investor purchases a bond, they agree to receive a return rate, either variable or fixed, over the duration of the security. When inflation and the cost of living rise than income investment, investors will experience a decline in their purchasing power and, after accounting for inflation, a negative rate of return might be experienced (Del Negro et al., 2019). The investors exact rate of return is -1% when inflation increases by 4% following the bond purchase as a result of the loss in buying power.
An investor is buying a certificate of debt when they buy a bond. In other words, the business must eventually repay with interest. Many investors are unaware that corporate bonds rely on the issuers ability to repay the loan and are not fully backed by full confidence and credit. Investors must take into account the potential for default and account for this risk when making investment decisions. Before investing, some analysts and investors will look for a companys coverage ratio as one way to assess the risk of default (Drechsler, Savov & Schnabl, 2021). They will evaluate the cash flow and profit statements of the company to ascertain its net margin and cash flow before comparing it to its debt servicing costs.
Major rating agencies like Poors Ratings and standard Services and Moodys Investors Service routinely assess a companys capacity to function and repay its debt obligations. Investors heavily rely on the judgments and choices made by these agencies. Banks and lending organizations will take heed and may demand high interest rates for future loans if an issuers corporate credit rating is poor (Fabozzi & Fabozzi, 2021). This could damage current bondholders who may have been trying to sell their stakes and have a negative effect on the companys capacity to pay down its debts.
Low bond liquidity also causes price volatility which is a risk factor. Government bonds usually always have a ready market, but business bonds can occasionally be very different animals. Due to a crowded market with few investors and buyers for the bond, there is a chance that an investor wont be able to swiftly sell their corporate bonds. Low purchasing interest in a specific bond issuance can cause significant price fluctuation and have a negative effect on the total return received by the bondholder upon selling. You can be compelled to accept a much lower price than anticipated when selling your bond position, similar to equities that sell in a thin market.
References
Del Negro, M., Giannone, D., Giannoni, M. P., & Tambalotti, A. (2019). Global trends in interest rates. Journal of International Economics, 118, 248-262. Web.
In the process of a long evolution, all countries have established the predominance of the market economy as the basic and most efficient form of economic management. It is based on commodity production, which is possible due to technology. Market economy assumes the production by individual, isolated producers specializing in a single development (Spradley and McCurdy 117). Therefore, satisfying social needs requires purchasing and selling products in the market and their exchange. Market and conflict as ways of communication between people become identical concepts but reflect different sides of the interaction of people in exchange (Spradley and McCurdy 117). At the same time, there are different levels of conflict between suppliers, consumers, and the state itself.
However, the primary, original form of economy was the subsistence one. It was historically based on land property rather than technology, which was the foundation of all socioeconomic relations. It is a form in which material goods and services are created for consumption; external relations and exchange are not developed here (Spradley and McCurdy 118). In this case, each economic unit produces all kinds of work, from the extraction of different types of raw materials to the complete preparation of the products of labor for consumption.
In this culture, there is only an internal conflict; the contradiction between production and consumption is resolved within the economic unit. It is hard to say there is a conflict between the market and the natural economy. In the natural type, there is no exchange, and it does not resolve the contradiction between production and consumption, which makes the interaction of systems impossible (Spradley and McCurdy 130). However, it should be noted that the economy affects culture. It affects the degree of openness of society, the level of interaction between individuals, and the nature of resource distribution.
In numerous cases, sympathy or antipathy for a person is subject to the principle of reciprocity. In my life, reciprocity is an indispensable principle for a good partnership. Conflicts are inevitable, and they will occur in any interaction. Still, how people listen to and respect each others rights determines the foundation for a lasting or weak partnership. It is the point of growth because there is a redistribution of influence and resources. Sometimes it turns out that, due to conflict, people got rid of things they did not need but had value and benefit for their counterparts and vice versa.
Work Cited
Spradley, James P., and David W. McCurdy. Conformity and conflict: Readings in cultural anthropology. Jill Potash, 2012.
The United States economy is not dependent on fossil fuels for growth. Gas provides about 24% of total energy sources, and its price is, therefore, a major factor in overall economic productivity. There have been relatively mild changes in the price of gas over a long period, with pronounced shocks in the 80s and 2000s decades. On a long term scale, rising gas prices have caused a general slowdown in the total factor productivity. However, the immediate effects of the changes in prices continue to vary by scale and sector.
States that depend on gas-related industries are the most affected by changes in prices, just like firms that have energy costs higher than 5% of their output value. In addition, the changes in the technologies of energy-related industries have also changed their exposure to gas price changes. Many petrochemical and refining industries retain their profit margins with relative changes in prices. Thus, contrary to the effects in the 80s, todays price shocks are only severe for extractive industries whose incomes depend on the prevailing prices. On the economy, as a whole, the Federal Reserve has been responsible for initiating policy changes to counter the likely effects after high or low sudden prices of gas. The changes affect consumer price index inflation and other inflation rates, but the effects show up in the medium term, after about five years.
The Impact of Gas Prices on the U.S. Economy
The U.S. attained its competitive edge due to an adequate supply of gas, which led to reduced prices of the commodity. The country could now produce and transport goods cheaply and, therefore, compete with other countries that enjoyed high technology advancement and low labour costs. Chemical manufacturers in the U.S. that rely on natural gas and its derivatives may also increase their production of plastics to substitute other materials for making goods, given that sustained low prices of oil will make production costs significantly cheaper.
A number of factors limit the immediate translation of low gas prices in the U.S. economy. Policy changes on natural gas exposures and emission targets affect current and projected consumption targets. Any technological breakthrough for gas or alternative fuels also affects eventual demand. The changes in interest rates affect the allocation of capital for investment and, therefore, influence the overall long term supply decisions. The decisions, in return, shape price projections for gas. In addition, the relative position of the U.S. dollar to other currencies also affects the level of gains that the U.S. economy can make regarding lower gas prices (Ladislaw, Hyland, Pumphrey, Verrastro, & Walton, 2013).
Historically, low prices have mostly affected industries that are heavy energy consumers. Other industries only register marginal benefits that are direct or passed from the heavy energy-consuming industries. In the U.S. only, about 10 per cent of manufacturing companies energy costs makes up more than 5 per cent of the value of their output. Another relevant statistic is the fact that less than half of 1% of U.S. workers are in manufacturing industries that are likely to receive competitive benefits when the electricity prices lower (Ladislaw et al., 2013).
Explorations of shale gas in the U.S. have grown in the last several years, despite earlier concerns about the limited availability of the resource. In fact, continued production has now demonstrated that the resource is abundant, and this has the effect of reducing pressure on gas prices that would arise with decreasing production (Ladislaw et al., 2013). In short, reduced gas prices would lead to a vibrant economy.
At the beginning of the 2000s decade, the price of crude oil started to increase and rose to the highest level since 1980 (Adelman & Watkins, 2005). The prices remained relatively high for the years leading to the economic recession. The main reasons for the high prices were a strong demand for the growing economy and weak supply. In the 2004-2006 periods, high crude oil prices siphoned off buying power from the United States.
Residents paid more for energy importation. As a result, their investment and another spending in the economy reduced. A very small effect of high prices was the shift in income and wealth within the United States towards energy producers and owners of energy assets. Therefore, high prices promoted investment and speculation activities for oil-related industries and caused a rise in their stock prices (the United States Congressional Budget Office, 2006).
Price increases dampened the growth of the economy by about a quarter of a percentage in 2004 and less than a half of a percentage point in 2005, with signs of a similar dampening in the following year (the United States Congressional Budget Office, 2006). High prices affected non-energy consumer prices by about a half percentage point in 2005. The expectation at the time was that there would be no further increases in prices and inflation would remain at a core level of 2-3% throughout the period; from 2006 to 2007 (United States Congressional Budget Office, 2006).
In 2015, drops in energy prices caused a drop of inflation to zero as consumer prices remained unchanged from their levels in September 2014 (Lawyer, 2015). This effect was due to a drop of nine per cent of gasoline prices. However, the lower prices did not affect food and shelter costs in the short-run. Another indicator, the core inflation, went up by 1.9 on an annual basis as of September 2015. The core inflation does not consider food and energy costs and represents the general status of the economy (Lawyer, 2015). This shows that a drop in energy prices in the short-run has a limited effect on core inflation because it does not affect fundamental factors that comprise the gross domestic product.
Americas economic strength arose because of abundant and inexpensive energy. The present sources of energy are both renewable and fossil sources. The fossil sources account for 90 per cent. Out of this share, natural gas takes up 24%, while petroleum takes up 37 per cent (Miller, 2011).
Rises and falls in gas prices affect medium-term economic indicators like total consumption and savings levels. A review of the levels of household spending and the relative price of motor fuel and fuel oil from 1970 to 2006 provides a glimpse into the historical effects of energy prices. The representation below shows that real spending fell sharply in the early 1980s as prices rose. However, the period from 1990 to 2005 experienced a relative increase in real spending amid an accompanying increase in prices. The data showed that households real spending became less prone to changes in energy prices. One of the potential reasons was the increase in the availability of debt instruments to cushion consumers against the rising costs of living.
Figure 1: Real spending per household on the relative price of motor fuel and fuel oil. Source: the United States Congressional Budget Office (2006, p. 8).
While consumer spending seems to fluctuate with changes in energy prices, the income and expenditure of corporate sector seem to stay relatively stable as energy prices rise. From 2003 to 2006, the corporate profitability in general in the United States grew rapidly, especially for energy producers. As long-term interest rates remained low during the period, many firms opted to restructure their debts and enjoy higher profitability. Nevertheless, the rise in profits was not due to the rise in oil prices, but due to the overall better performance of the economy at the time. In fact, the increase in the prices of energy led to the reduction of profitability marginally (United States Congressional Budget Office, 2006).
The total factor productivity of the economy reduced to an average of 0.8 per year from 1973 to 1994, which came after a 1950 to 1973 annual growth of 2.1% (the United States Congressional Budget Office, 2006). This reduced rate also coincided with a period when oil prices were increasing. The reality is that when the country relies much on imported gas, a high rise in the international price will lead to reduced growth of productivity for a while. The recovery of the growth depends on the extent of the high prices and their duration. After 2010, the effects of recession had caused a slowdown in the global economy, leading to reduced demand for oil. The expectation was that lower prices would help to stimulate the production of the economy and lead to higher growth rates as the country became competitive once more.
The global prices of oil went down sharply in the 19th and 20th centuries. In 1985-86 and in 2008, the prices declined, and the effects on the economy were felt. Mostly, there was notable growth in the economy in the years after the massive drop in prices. The change was attributed to strategic choices that firms took to improve their positions and took advantage of lower energy costs. However, a larger effect was in the import bill of the country, which translated to better macroeconomic factors. In 1985-86, high oil prices had led to conservation practices that caused a massive slowdown of consumption. The same effects were witnessed in 2014. In both cases, new discoveries of oil changed perceptions about the scarcity of oil and caused additional drops in prices.
The biggest effect of changes in gas prices on consumers is an increase in disposable incomes, which eventually leads to increased spending or saving. However, the increase in spending power is offset by the reduction in earnings for oil producers. In addition, the U.S. now produces two-thirds of its consumption of oil and has become less prone to changes in international prices. Another factor worth considering is the uneven distribution of gas reliance within the economy, which leads to uneven effects across different economic sectors of the United States.
States that rely on oil production for their economies are hurt by lower gas prices while those that are net consumers of gas benefit when there is a substantial reduction of prices. In addition, the overall level of demand also affects the earnings of oil-producing states at any time (Brown, 2014). In the 1980s, states that benefited from low energy prices were those that had intensive refining and petrochemical industries without or with little energy extraction industries. They included South Carolina and New Jersey. In that period, the effects of changing prices on the economic prospects of refining and petrochemicals were high. However, changes in technologies and diversification have now reduced the exposure of those states to massive swings in energy prices.
When there are oil price shocks, the Federal Reserve tries to influence the consumer price index inflation and the GDP growth forecasts by changing its rates target. Studies that have sought to find out the exact effects of oil price increases on the economy have tried incorporating the prices as part of the variables affecting the respective indexes. One such study was by Bachmeier, Li and Liu (2008), who revealed that oil prices as predictors do not significantly affect forecasts for CPI inflation or the various measures that are used for output and monetary policy. Therefore, oil prices can signal the Federal Reserve to consider making changes to the monetary policy, but the price changes do not dictate the exact charges that will be done to correct the price effects on the economy.
The changes in the behaviour of the Federal Reserve or firms that are not directly dealing with gas are not readily clear. However, when consumers change their behaviour or firms that are directly affected by energy prices change their behaviour, then the results can be attributed to the changes in gas prices. Nevertheless, the Federal Reserve is in charge of safeguarding economic progress through appropriate policies. It understands the effects of price changes for gas, and it is seen to take corrective measures that reduce any shocks to economic growth (Bachmeier et al., 2008). The most indicative sector of the economy for reactions to changes in gas prices in the stock market. Reactions of markets in the past few decades showed that energy price shocks were not similar.
The study by Broadstock and Filis (2014) confirmed that the effects of oil shocks on stock prices were different, although they related mostly to the types of shocks witnessed. The impact varied with industries and the U.S. stock markets became generally less resilient to energy price shocks compared to China. Energy price shocks can be supply or demand-driven as discussed earlier when comparing 1985-86 shocks to the 2014 shock that reduced prices significantly.
When there are aggregate demand shocks, the positive correlation of the shocks with the fluctuation of prices at the New York Stock Exchange (NYSE) is more pronounced than in the supply-driven shocks (Broadstock & Filis, 2014). It is likely that speculation on the oil and gas market has also been driving market-specific shocks witnessed in the stock exchanges in the U.S. The increase is attributed to the overall improvement in stock activity in the country. There are more hedge funds participating in the market, and they create an increased correlation between prices and stock returns. The increased activity on energy-related stocks is also partially responsible for the increase in the overall real spending of the consumers (Bachmeier et al., 2008).
The connection arises in the way companies continue with production and hiring of labour, even as prices increase. Meanwhile, investments in oil-related industries, including extractions, continue at a higher rate than they were in the 80s. Thus, todays energy price shocks are less significant in their effect on consumption practices because there are multiple other factors affecting the eventual transfer of the shocks to consumers (Broadstock & Filis, 2014). Since companies do not cut production immediately and credit access continues to be high relative to prevailing interest rates, the economic effects continue to narrow to the specific extractive industries and energy-dependent manufacturing sectors that use gas.
Bahgat (2014) indicates that the U.S. continues to become self-sufficient in oil and gas. Therefore, the country is less inclined to rely on the Middle East for its imports or the regulation of the price of energy in the global market. There has been falling demand in recent years, while supply has increased because of improvements in technology. Consumer trends are also changing as more Americans buy fuel-efficient cars and live in smaller homes. These factors are yet to dominate the effects of gas prices on the economy, but they are gradually building up to contribute to an overall decline in gas demand relative to the demand for other energy sources and the total demand for energy in the economy.
The U.S. had 1,919 drilling rigs that were active. They were more than the rest of the world combined. The effects of high prices in the 2000s decades led to major investment in gas extraction industries. The improvement in shale extraction technology also led to more investment, which eventually caused an increase in the production of domestic gas to reduce dependence on imports. Unlike cheap imports that lead to reduced import bill, low prices for local products do not provide a significant effect on the balance of trade and on the value of the U.S. currency. However, in both cases, the cost of production in the economy reduces, according to the distribution of industries related most to the energy sector, as discussed earlier.
In the end, this paper shows that monthly changes in inflation only occur in commodities directly affected by day-to-day changes in prices of gas, such as food. Core inflation remains the same or changes slightly unless price changes of gas are significant. Finally, the U.S. is less exposed to international oil price changes in regards to its import bill. This has reduced the severity of the shocks on the countrys competitiveness and overall economic growth prospects. In addition, consumers are affected differently by rises and fall in gas prices. Thus, it is not enough to look only at the major economic indicators for the whole economy.
In conclusion, the inflation, unemployment rates, and savings rates will differ in specific states, according to the dependence of the economies of those states to gas as a factor of production and as a resource. States like Texas, where gas is part of the natural resources available end up negatively affected by low prices. However, sustained low prices also create a new baseline that informs investment decisions. This explains why there was increased investment in gas extraction in the 2000s after relatively stable prices in the 90s, as prices were increasing and investors saw the sector as a profitable frontier. Overall, the U.S. economy has shown mixed results in its reaction to changes in gas prices. Nevertheless, a pattern emerged in the distribution of gains and losses among states and sectors of the economy.
References
Adelman, M., & Watkins, G. (2005). U.S. oil and natural gas reserve prices, 19822003. Energy Economics, 27(4), 553-571.
Bachmeier, L., Li, Q., & Liu, D. (2008). Should oil prices receive so much attention? An evaluation of the predictive power of oil prices for the U.S. economy. Economic Inquiry, 46(4), 528-539.
Bahgat, G. (2014). The shale gas and oil revolution : Strategic implications for United States policy in the Middle East. The Journal of Social, Political, and Economic Studies, 39(2), 219-231.
Broadstock, D. C., & Filis, G. (2014). Oil price shocks and stock market returns: New evidence from the United States and China. Journal of International Financial Markets, Institutions and Money, 33, 417 433.
Ladislaw, S. O., Hyland, L. A., Pumphrey, D. L., Verrastro, F. A., & Walton, M. A. (2013). Realizing the potential of U.S. unconventional natural gas. Washington, DC: Center for Strategic and International Studies.
Miller, B. G. (2011). Clean coal engineering technology. Burlington, MA: Butterworth-Heinemann.
United States Congressional Budget Office. (2006). The economic effect of recent increases in energy prices. Washington, DC: Congressional Budget Office.
Foreign direct investment is guided by various theoretical approaches. Theories of FDI provide a guideline, motivation, and direction of FDI application. These theories can either be macro or micro. As the paper reveals, macro-level theories of FDI explain various macroeconomic factors that are responsible for FDI uptake. Macroeconomic theories of FDI address the force behind foreigners investing in a host country. Some of these motivators may include the GDP of the host country, market size, the presence of natural resources, the state of infrastructure, political position, and the economic growth rate. On the other hand, micro-level FDI theories explain various factors that come into play at the company level.
Macro-level FDI Theories
Capital Market Theory
The capital market theory stipulates that FDI is driven by interest rates. The theory was developed by Boddewyn in 1985. It presents three factors that fuel the adoption of FDI in developing countries. According to Zhang (2001), undervalued exchange rates in developing countries pave a way for a low cost of production of goods and services. Secondly, most of the developing countries have no organised securities. Hence, when one makes a long-term investment in such countries, the FDI becomes the securities. This observation means that it is better to engage in FDI, rather than buying securities in developed nations (Nwankwo, Ademola & Kehinde 2013).
The utilisation of FDI in developing countries is also motivated by the inadequate knowledge concerning a host countrys securities by most foreigners. This situation makes many people fail to understand why growing economies adopt FDIs that permit the control of assets. The timing of FDI depends on the changes in the macroeconomic environment. Such macroeconomic factors in the investment environment include domestic investments, the productivity of trade, and openness to exchange, gross domestic product (GDP), and exchange rates (Baltabaev 2014). These factors determine how FDI moves in the environment. The theory presents FDI as a long-term strategy in multinational companies.
Exchange Rate and Economic Geography theory
The exchange rate and economic geography theory presents a relationship between exchange rate in a particular country and foreign direct investment. According to this theory, FDI significantly affects the exchange rates in a host country. It presents FDI as a major tool for the exchange rate reduction in a host country. The theory is anchored on the economic geography of a particular country. It explains the reason why internationally successful companies come up in certain countries. Various enabling or inhibiting factors such as the presence of natural resources, infrastructures, labour, and demand for goods and services locally determine FDI uptake in a certain country (Agada & Okpe 2002).
Local resources that a foreign investor may consider before undertaking an investment are controlled by the local government and political systems. Therefore, it is important for the exchange rate and political influence and boundaries to be considered while opting for FDI (Zhang 2001). The theory elucidates the presence of more economically developed cities, counties, or regions within a given country.
The level of relationships between countries that engage in economic transactions also determines FDI uptake in the respective countries. For instance, close geographical, cultural, or economic relationships enhance the flow of FDI between nations. The relationship factor, which influences the level of FDI, is highest when the affiliation is mutual (Chia & Ogbaji 2013). Traditional factors that dictate the affairs of any two countries, for instance their sizes, distance between them, development levels, and investor protection, are important variables that this theory addresses when it comes to FDI.
Micro-level FDI Theories
The Theory of Existence of Firm-specific Advantage
The premise of subsistence of firm-specific advantage was developed by Stephen Hymer in 1976 (Wilson & Baack 2012). The supposition is based on the premise that all firms consider investing in foreign markets following some gains that they foresee, for instance the economies of scale, superior management, and the presence of raw materials, trade patents, and names. This theory holds that a smooth flow of markets in a particular environment reduced trade barriers. In such a setting, competition becomes healthy even in the global front. FDI becomes the better option in international trade. Most of the local companies stand at a point of advantage in investing in their immediate market since they are more informed about it. On the other hand, FDI depends on a firms understanding of the market and its capacity to identify its (the market) points of imperfection (Wilson & Baack 2012).
FDI thrives in such an environment since imperfection opens another route that alters the normal competition within a given market. The market advantage supposition attributes the success or failure of FDI in individual firms and not the capital markets or economies. According to Durham (2004), a firm can use FDI to change its knowledge base and resources into a means of production in a foreign market. It strategically addresses FDI situation in oligopolistic markets. For instance, in every foreign investment, two parties come into play. One of them creates intermediate products while the other develops finished products (Wilson & Baack 2012).
In FDI, each of these investors independently makes a resolution on whether to venture into a foreign market. Changes must be witnessed whenever any of the two companies enters a foreign market. For example, a direct spillover of production technology must be witnessed. Such a situation translates into a reduced cost of production in the local markets. In most cases, firms will track their competitors in foreign markets to avoid making losses at the entry level. The theory presents FDI as a defensive move to venture into a foreign market (Wilson & Baack 2012). Such competing firms in oligopolistic markets result in actions and counter actions in foreign markets. Most firms that involve themselves in FDI follow the market leaders. Hence, when a market leader engages in FDI, other firms also turn to it. The oligopolistic equilibrium remains.
The Internalisation and Electric Theory of FDI
The internalisation and electric theory of FDI is a hybrid that was developed by Buckley and Casson in 1976 in conjunction with John Dunning. The theory holds that companies turn to their monopolistic advantage because of market imperfections. Using a firms own markets makes it easy for a company to overcome market limitations. Instead of using intermediate businesses, companies can adopt the technique of vertical integration of operations of their affairs (Escobari &Vacaflores 2015).
The speculation is also based on a firms ability to eliminate competition by developing a competitive edge in the market. The conjecture is drawn from other FDI theories. For instance, internalisation theory, which was the initial component, is applied in the electric theory (the other component) to explain the flow of FDI. Electric theory borrows from both macroeconomic and microeconomic theories of FDI (Wilson & Baack 2012).
It is also based on advantages such as possession, position, and internalisation (Forte, & Moura 2013). For instance, the possession of some intangible assets that a firm can transfer to a foreign market makes it stand at an advantage since it will incur lower operations cost. In the same way, ownership of natural resources, brands, and trademarks are also advantageous in FDI. Location advantages such as communication, infrastructure, culture, resources, and markets also affect FDI uptake. Internalisation comes in after the first two factors since firms must be profitable through their understanding of foreign environments.
Cost-Benefits Analysis of FDI
Cost-benefits analysis of FDI is a technique for determining the viability and limitations of options that gratify dealings, actions, or practical demands for a business such as FDI. The major beneficiaries of FDI happen to be both the host country and the investors (Agada & Okpe 2002). In their opinion, Escobari and Vacaflores (2015) claim that FDI offers an opportunity for money to reach businesses with prospects for growth across the world. Investors are given an opportunity to invest anywhere in the world for best returns. This flexibility makes FDI overcome barriers such as colour, race, politics, and religion. It makes a business competitive in its line of transaction. Another benefit of FDI is that it gives individual investors an opportunity to diversify their investments from one country (Forte & Moura 2013).
Such diversification increases investment returns while at the same time reducing risk. Agada and Okpe (2002) reveal how the recipient businesses also reap from guidance from business leaders in venturing into foreign markets. This guidance may take the form of legal, financial, knowledge, or technological support. The guidance also benefits the human resources since companies endeavour to keep with best practices. FDI results in the rising of living standards in the host country (Chia & Ogbaji 2013). For example, in Nigeria, GDP has continued to increase with an increase in FDI. In Nigeria, by 2012, FDI was at 3,199.89 dollars while the GDP was 261,855. When the FDI increased in 2013 to 6, 7400.00 dollars, the GDP also rose to 285,655 following the increased tax revenue from FDI adding to the national kitty.
According to Onu (2012), job opportunity, learning experience, and trade are also enhanced. As Baltabaev (2014) confirms, a foreign firm can own strategically important companies in a certain country through FDI. It can exercise undue control of resources to the disadvantage of its citizens, for instance, the ownership of oil extraction companies by Japanese people in Nigeria. Since FDI is mainly undertaken by competitive companies, mostly from foreign nations, foreign investors end up exploiting the available resources without benefiting the host countrys economy (Nwankwo, Ademola & Kehinde 2013). Besides, foreign investors may use their company as local collateral in borrowing and investing the money back to their motherland (Bemde-Nabende, Ford & Slater 2002). This possibility does benefit the host country. In addition, FDI may result in unfair business competition with locals since foreign investors may adopt the low-cost production strategy (Onu 2012).
Conclusion
As discussed in this study, there has been an increase in FDI across developed and developing nations. FDI involves organic or inorganic acquisition of controlling the ownership of a business by a foreign entity. FDI has always taken the form of mergers and accusations, new facilities, and investment of foreign capital. FDI theories may either take macro-level form such as the capital market theory, rates theory, dynamic theory, economic, geography, and institutional-based theories, or the micro-level forms such as the existence of firm-specific advantages theory, internalisation and electric theory, and oligopolistic FDI theories. FDI can be a beneficial and costly affair for both the foreign investor and the host country. Hence, it is important for investors to weigh the costs and benefits of the FDI before undertaking any investment.
References
Agada, O & Okpe, J 2002, Determination of risks of foreign investment, Journal of Economic and Social Research, vol. 11 no. 2, pp. 1-7. Web.
Baltabaev, B 2014, Foreign Direct Investment and Total Factor Productivity Growth: New Macro-Evidence, World Economy, vol. 37 no. 2, pp. 311-334. Web.
Bemde-Nabende, J, Ford, S & Slater, J 2002, Foreign Direct Investment in East Asia: Trends and Determinants, Asia Pacific Journal of Economics and Business, vol. 6 no. 1, pp. 4-25. Web.
Chia, S & Ogbaji, E 2013, Impact of foreign direct investment on telecommunication sector on Nigerian economy, International Journal of Modern Social Sciences, vol.2 no. 3, pp. 195-215. Web.
Durham, B 2004, Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth, European Economic Review, vol. 48 no.2, pp. 285-306. Web.
Escobari, D & Vacaflores, E 2015, Expectations and the Dynamic Feedback between Foreign Direct Investment and Economic Growth, International Economic Journal, vol. 29 no.1, pp. 121-136. Web.
Forte, R & Moura, R 2013, The Effects Of Foreign Direct Investment On The Host Countrys Economic Growth: Theory And Empirical Evidence, Singapore Economic Review vol. 58 no. 3, p. 1. Web.
Nwankwo, G, Ademola, O & Kehinde, O 2013, Effects of Globalisation on Foreign Direct Investment in Nigeria, Lorem Journal of Business and Economics, vol. 1 no. 1, pp. 11-17. Web.
Onu, C 2012, Impact Of Foreign Direct Investment on Economic Growth in Nigeria, Interdisciplinary Journal of Contemporary Research in Business, vol. 4 no. 5, pp. 64-75. Web.
Wilson, T & Baack, W 2012, Attracting Foreign Direct Investment: Applying Dunnings Location Advantages Framework to FDI Advertising, Journal of International Marketing, vol. 20 no. 2, pp. 96-115. Web.
Zhang, H 2001, Does foreign direct investment promote economic growth? Evidence from East Asia and Latin America, Contemp. Econ. Policy, vol.19 no. 1, pp. 175-185. Web.
Germany, Greece, and the U.A.E are notable economies in Europe and the Middle East. Many countries have emulated their economic models (The Global Economy 2015). For example, Saudi Arabia has tried to emulate the U.A.Es diversification strategy to decrease its reliance on the energy sector (The Global Economy 2015). This strategy has led to the growth of the non-oil sector and the emergence of new economic sectors such as tourism and real estate industries that contribute to the countrys Gross Domestic Product (G.D.P). Other Gulf Cooperation Council (GCC) countries have also emulated this economic model with varying successes (Mallakh 2014).
Germany is a leader in the European Union (E.U) because it has managed to maintain a positive balance of payment, even when most industrialized economies are struggling with current account deficits (Owen-Smith 2012). Experts have used this countrys economic success to emphasize the importance of fiscal and monetary discipline in the financial sector (Owen-Smith 2012). Comparatively, they have used Greeces economic troubles to demonstrate what not to do in terms of national economic management (Close 2014). Based on an overview of these economic characteristics, this paper explores the characteristics of the three economies with the view of identifying unique similarities and differences that would help explain what makes the three economies tick.
This analysis provides adequate information to understand the current economic situation in the three countries and predict their economic outlook as well. To come up with a comprehensive understanding of this research focus, this paper explores three key economic attributes of these economies unemployment rate, GDP growth, and balance of payments. These variables come from an assessment of the economic model Y= C+I+G+X-M. The Y = equilibrium level of national income, C = level of consumption of goods and services, I = domestic real investment in buildings, G = government expenditure, X = foreign expenditures on goods and services and M = the level of imports (in terms of goods and services purchased from other countries).
X and M explain the need to analyze the balance of payment as an important economic performance indicator, while C highlights the need to analyze unemployment (employment) rates. Lastly, Y and G emphasize the importance of analyzing GDP as another economic performance indicator. This study uses these variables as the main economic performance indicators. However, before comparing the economic performance of the three countries, this way, it is important to understand their characteristics first.
Economic Characteristics
Greece
Global economic statistics rank Greece as a developed and high-income economy (The Global Economy 2015). Greece is among the largest 50 economies of the world (The Global Economy 2015). Its purchasing power parity of $238 billion ranks it as the 51st largest economy in the world (Close 2014). Regionally, Greece is part of the European Union. Despite its troubles in the economic bloc, the country has the 13th largest economy in the union (Close 2014).
Greeces economy mainly relies on the service sector, which accounts for more than 80% of the countrys economic revenue (Close 2014). The huge contribution of tourism and shipping industries explain the countrys reliance on the service sector. About 16% of the economy is industry-based. Agriculture contributes a paltry 3% of the countrys economic output (Close 2014). Within the Balkans region, Greece is a significant investor and a powerful economic force (Close 2014). Since joining the E.U, in the 1980s, Greece uses the Euro as the countrys main currency.
The U.A.E
The U.A.E economy is among the largest economies in the Arab world (it is second to Saudi Arabia). The countrys GDP is $570 billion (Mallakh 2014). Although it primarily depends on the energy sector as its key revenue earner, recent diversification efforts have improved the contribution of the non-oil sector to more than 70% of the countrys G.D.P (The Global Economy 2015). By virtue of being part of the G.C.C, the UAE economy is the most diversified in the Arab world. Diversification mostly characterizes one emirate Dubai. Other jurisdictions have adopted a conservative approach to this strategy (Mallakh 2014).
For example, Abu Dhabi (the countrys capital) still mainly relies on oil revenue (Mallakh 2014). Consequently, more than 76% of the countrys budget financing comes from the energy sector (The Global Economy 2015). Besides the vibrant oil sector, tourism is a major income earner in the UAE. Furthermore, the real estate and construction industries contribute to UAEs economic growth (experts estimate that there are about $350 billion worth of ongoing construction projects in the UAE) (Mallakh 2014). The service sector also plays a secondary role in improving the U.A.Es economic fortunes.
This sector has accounted for tremendous economic growth in the past five decades. Broadly, experts say since 1971, the economy has grown more than 200 times (The Global Economy 2015). As mentioned in this report, the discovery of oil contributed to most of this growth. Comparatively, the non-oil sector has grown by about 28 times since the early 1980s to 2012 (The Global Economy 2015). The countrys diversification policy is the main reason for the U.A.Es impressive economic growth. For example, in 2014, the economy expanded by 5% because of the countrys diversification policy (The Global Economy 2015). According to the diagram below, the countrys G.D.P has been on an upward trajectory
Figure 1: The U.A.E G.D.P growth (Source: Zawya 2014).
Germany
The German economy is among the biggest economies in the world. The United States (U.S), China, and Japan are the only economies that rank higher than Germany (in terms of economic size) (Owen-Smith 2012). It has the fourth largest nominal G.D.P, globally (Owen-Smith 2012). It is also the biggest national economy in Europe and primarily relies on a social market economic policy. It is also heavily dependent on the export sector, with cars and pharmaceuticals being its primary export commodities (Owen-Smith 2012). The vibrancy of this sector has created a budget surplus of $282 billion in the country (The Global Economy 2015).
By virtue of being the biggest capital exporter in the world (and the third largest exporter in the world), Germany receives more than $1.5 trillion in revenue from its export businesses (The Global Economy 2015). In terms of G.D.P contribution, the service sector contributes more than 70% of the countrys output (Owen-Smith 2012). Industry and agriculture contribute the rest of the countrys G.D.P. Since the unification of East and West Germany, the country has had a steady population of 80 million people (The Global Economy 2015). Although this figure is on the decline, the German economy has remained steadfast.
This observation appears on the graph below.
Figure 2: G.D.P growth rate in Germany (Source: Waechter 2013).
Based on the above graph, the G.D.P growth rate in Germany has been on an upward trend, until the 2007/2008 economic crisis, which caused a sharp decline of this metric. However, since the global economic recovery started in 2009, the country has reported increased G.D.P growth (Waechter 2013).
Similarities and Differences among the Three Economies
Similarities
Greece and Germany are both members of the E.U. They use the Euro as the main currency. Unlike Greece, the UAE and Germany both have a positive current account balance. Germanys current account balance is $239 billion (The Global Economy 2015). Comparatively, the UAE has a positive current account balance of $66.6 billion. Greece has a negative current account balance of 1.1 trillion (The Global Economy 2015). The service industry is also a significant G.D.P contributor in all the three nations. Although Greece leads the pack in this regard, the U.A.E and German economies also depend on their service industries for economic prosperity. Economic growth is another similarity that defines the three economies. The diagram shows this phenomenon
Figure 3: Economic growth: The rate of change of real G.D.P (Source: The Global Economy 2015).
An overview of the above graph shows that the three economies have the same trend, in terms of economic growth. For example, the economic growth rates of the three economies plummeted during the 2007/2008 economic crisis. However, the U.A.E and Germany have done a better job of recovering from it.
Differences
The German economy is by far the biggest economy compared to the U.A.E and Greece. A comparison of the U.A.E and Germany shows that the latter is nine times bigger than the U.A.E economy (in terms of G.D.P). A graphical representation of this comparison appears below
Figure 4: Comparison between German and the U.A.E G.D.Ps (Source Owen-Smith 2012).
The difference, in terms of G.D.P, per capita, for both countries, is relatively small (compared to their national G.D.P differences). Germany has a G.D.P per capita of $46,268, while the U.A.E has a G.D.P per capita of $43,048 (The Global Economy 2015). Germany still fares better in this regard.
Germany and the U.A.E both have low unemployment rates of 5% and 3%, respectively, but Greeces unemployment rate is more than 21% (The Global Economy 2015). This problem stems from the countrys debt problem. The graph below shows a comparison of the unemployment rates in the three countries
Figure 5: Unemployment rates of Germany, Greece, and the U.A.E (Source: The Global Economy 2015).
Based on the above diagram, Germany offers more job opportunities to its citizens than Greece. Although the U.A.E has a relatively lower unemployment rate than Germany, the European nation has done a better job of reducing its unemployment rate after the 2007/2008 economic crisis. Comparatively, Greeces unemployment rate has soared after the crisis. It is the highest in Europe (Close 2014). Not only does Germany have low unemployment rates, it is a lucrative destination for investment because it has a higher worker output per capita, than both Greece and the U.A.E combined (Close 2014).
Comparatively, Greeces economic output per person is lower than Germany because it pays its workers high wages for little output, thereby making it a less attractive investment destination compared to its peers (Close 2014). In fact, its G.D.P per capita is like most less developed countries. This is why, over the years, Germany has increased its wealth, while Greece has decreased its wealth.
While Germany may fare better than Greece and the U.A.E in terms of economic performance, it is important to understand that population size is usually directly proportional to the economic potential of a country (Mallakh 2014). Compared to Greece and the U.A.E, Germany has a significantly higher population (more than 80 million people). Comparatively, Greece has a population of 11 million people, while the U.A.E has a population of 9 million people (Mallakh 2014). These figures show that Germanys population is ten times higher than both countries. This statistic partly explains Germanys big economic size.
The U.A.E economy differs from that of Germany and Greece because it is primarily dependent on the oil sector. Comparatively, the Greek economy is dependent on the service sector, while the German economy is dependent on the manufacturing sector. An assessment of the G.D.P growth rates across both countries also shows that the Greek economy performs poorly than both Germany and the U.A.E.
Economic Futures
Unemployment
Seven years into the debt crisis, Greece has not improved its economic performance. Although it was at par with America (in terms of unemployment and G.D.P growth) during the 2007/2008 economic crisis, the latter has made tremendous strides in improving its economic performance (The Global Economy 2015). Greece still lags behind in this regard (see appendix one). It is still early to predict the future of Greeces economy because the countrys debt burden is still high ($360 billion) (Close 2014). This burden paints a gloomy picture of the countrys potential to improve its economic fortunes. The governments budget cuts do not help in improving the economic performance of the country either because they are bound to slow the economy. The unemployment problem in Greece is likely to worsen because the countrys population of unemployed youth is at an all-time high. This bleak picture comes from the fact that unemployment at a young age tends to stifle the prospects for improved wages and employment opportunities in the future (Close 2014). Nonetheless, unlike the U.A.E both Greece and Germany are suffering declines in population growth. This is a concern because it is unclear how both economies will power future economic growth.
Current Account Balances
Although Greece continues to suffer from a negative current account balance, ongoing efforts to revive the economy should improve this index. The growth of the U.A.E non-oil sector is also likely to improve the countrys current account balance in the same way. In fact, based on the graph below, the U.A.E is likely to have a more positive current account outlook than both Germany and Greece combined.
Figure 6: Current Account outlook as a percentage of G.D.P (Source: The Global Economy 2015).
Nonetheless, Germany will continue to tower over Greece and the U.A.E, in terms of realizing the benefits of a positive balance of payment because of its innovative culture and competitiveness. Indeed, the European nation is a fundamentally stronger economy than both the U.A.E and Greece combined (The Global Economy 2015). The U.A.Es main export is oil, but this resource is slowly dwindling. Comparatively, Germanys diversified exports are likely to grow and further improve its balance of payment. Comparatively, Greeces competitiveness is low because of high wages.
Therefore, it is likely to continue suffering from low exports and a negative balance of payment. Greece has only one major export tourism. However, this resource may decline because of increased competition with other tourism destinations in Europe (especially because it is part of the E.U). This concern explains why some observers propose that Greece should leave the E.U to improve its tourism exports (Close 2014). If it does so, it would revert its national currency to the drachma, which would be cheaper than the Euro and attract more tourists.
G.D.P
The U.A.E and German G.D.Ps are likely to improve in later years because both countries do not have outstanding tax debts as Greece does. Particularly, the performance of the U.A.E economy is likely to improve on the back of the energy sector and the non-oil sector. The countrys diversification strategy should spur this growth as it diverts attention from the energy sector to other economic sectors that have similarly high potential for growth. Therefore, the countrys business environment should improve on the back of an increasingly transparent economic environment that is likely to improve investor confidence because of minimal operation risks.
It is difficult to transfer the same optimism to Greece because it has had a problem of taxpayers remitting their returns to the government, thereby undermining the governments efforts of paying its debts and reviving the economy (Close 2014). This difference not only explains possible reasons why both the U.A.E and Germany could scale to greater heights of G.D.P growth, but also contrasts the outcomes of disciplined and extravagant governments. Germany also has higher technological prowess than Greece does (Owen-Smith 2012). The U.A.Es efforts to embrace new technology also give it the same economic advantage as Germany. Comparatively, Greeces technological advantage has continued to decline in the wake of a slow economy. It is an example of how a wealthy nation could slip back in the path of economic progress. In fact, its G.D.P decline is among the greatest in history (see appendix two).
Summary
This paper has shown that Greece, Germany and the U.A.E are dominant economies in Europe and the Middle East. Although they have achieved significant levels of success in this regard, they have few similarities. Besides being members of regional economic blocs (such as the E.U and G.C.C) and relying on a few economic sectors for growth, this paper found many differences among the three economies. Therefore, they account for their varying economic differences. Germany emerged as the most dominant economy among the three countries sampled. Its current and future economic prospects are also promising because of strong economic fundamentals, such as a strong regional competitiveness, low unemployment rates and a large global market share for its goods and services.
The U.A.E also shares similar economic prospects because of its diversification policy. However, its current reliance on the oil sector continues to plague the countrys future economic outlook because, although it may support budget needs in the short-term, it is untenable to depend on the energy sector at the end. Comparatively, Greece has much more work to do to improve its current and future economic prospects because of its debt burden. Particularly, the country has to look for better ways to improve its tourist numbers because the economy remains heavily service-dependent. Collectively, these dynamics show that the three economies have different economic characteristics.
References
Close, D 2014, Greece Since 1945: Politics, Economy and Society, Routledge, London. Web.
Mallakh, R 2014, The Economic Development of the United Arab Emirates (RLE Economy of Middle East), Routledge, London. Web.
Owen-Smith, E 2012, The German Economy, Routledge, London. Web.
The economy of the United States has gone a long and difficult way from being weak and completely dependent on the outside factors to being represented by a set of rigid yet efficient rules and a number of entrepreneurships ranging from SMEs to global enterprises. When considering the effects of the transportation management and logistics strategy approved and adopted by the U.S. government, one must admit that the approach chosen by the state authorities can be deemed as rather reasonable, though it clearly could use some improvements.
Because of a consistent emphasis on the significance of cooperation with other states and, therefore, the need to come up with the design of a transportation strategy that can be both efficient and cheap, the U.S. government has propelled the state economy significantly. At present, though, innovative technologies are rather costly, which affects the state economy negatively.
Picture 1. U.S. Economic Timeline (Economics USA, 2015, par. 1)
U.S. Economy in the 21st Century: Analysis
The shift towards the global economy, which the United States also took active part in, manifested an entirely new era for the state development. More opportunities opened for SMEs and entrepreneurs, the emphasis clearly being put on collaboration and creation of a strong partnership between several organizations.
Thus, the significance of transportation issues, as well as logistics in general, is becoming increasingly important for the U.S. government. As a result, the state expenditures in the specified domain have risen significantly over the past few years, as the table provided below shows.
Picture 2. Public Infrastructure Spending (Altman, Klein & Krueger, 2015)
Apart from the issues triggered by increasing costs for transportation and logistics in general, the U.S. economy is still in the state of recovering from the crisis of 20072011 (Puri, Rochol & Steffen, 2011).
It would be wrong to claim that the recent economic crisis, which the United States residents have experienced, was caused solely by the issues in transportation according to the existing evidence, the entire world was unstable in terms of economy (Dolls, Fuest & Piechi, 2012). However, the costs, which the USA had to take in order to carry out the necessary transportations, were still far too big to ignore them (Dolls et al., 2012).
Future Effects of Transportation and Logistics on the U.S. economy
Unless the American government reconsiders the current approach towards logistics and transportation, the state economy will be under a consistent threat of a crisis (Zhou, Erdal, Creanor & Montalto, 2010).
In order to enhance the state economy and at the same time make sure that the financial resources are allocated properly, the state government must make a very strong emphasis on several aspects of the state economy, namely, R&D and logistics (especially transportation)
Logistics (Transportation )
The state government will have to reconsider the existing logistics, specifically, the transportation system, due to the negative effects, which the current strategy has on the U.S. economy.
R&D
As it has been stressed above, the U.S. government needs to come up with the approach that will allow for introducing the state economy to the concept of sustainable use of resources, and the design of the latest technological advances, which will help reduce or even mitigate the negative effects of the current transportation system on the environment. The enhancement of the R&D department is, therefore, the top priority of the United States government at present, as it will allow for carrying out most of the transportations faster and more efficiently. However, price is a major issue at present.
Sustainability
Another essential concept, which must be incorporated into the body of the American economy, the notion of sustainability presupposes responsible use of the existing resources, especially the natural ones. Particularly, the usage of oil (i.e., the production and use of petrol) and the effects, which the CO2 emissions have on the environment, will have to be addressed as the key problems of the contemporary U.S. transportation system.
Conclusion
The economy of the United States has had its moments of triumph and bitter despair. Even though the economic situation in the country can be considered rather tolerable, certain factors signify that the state economy lacks stability. Herein the need to introduce the concept of sustainability into the U.S. economy lies; the specified step can be taken by not only the government members of the United States, but also entrepreneurs. Moreover, every single citizen of America may take part in the process of improving the quality of the state economy by working on the sustainable use of resources (Shu-kun, 2013).
Problem Statement
Despite the fact that the recent technological innovations allow for reducing the impact, which the state transportation system has on the environment, mostly due to the increasing rates of oil consumption, the strategies that innovative technology has to offer are overlooked by most governmental bodies due to the lack of budget for carrying out the specified change.
As a result the economy of the state lacks sustainability, and most companies, both public and private ones, abuse the natural resources that are located in the state. As a result, the economy of the United Sates may suffer another collapse due to the lack of sustainability in the approach adopted by the state government to logistics in general and the transportation system in particular (Bartolini, 2014).
Reference List
The references included in the paper come from trustworthy sources (i.e., scholarly articles and the sites that belong to the U.S. government, the domain name being.gov); moreover, the articles are recent, which means that the information represented in them is up-to-date. The reference list includes seven sources.
Bartolini, S. (2014). Building sustainability through greater happiness. The Economic and Labour Relations Review, 25(4), 587602.
Dolls, M., Fuest, C. & Piechi, A. (2012). Automatic stabilizers and economic crisis: US vs. Europe. Journal of Public Economics, 96(3/4), 278294.
Economics USA. (2015). Houston Community College.
Puri, M., Rochol, J. & Steffen, S. (2011). Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects. Journal of Financial Economics, 100(3), 556578.
Shu-kun, L. (2013). Economies and sustainability. Economies, 1(1), 12.
Zhou, J., Erdal, Z. K., Creanor, P., & Montalto, F. (2010). Sustainability. Water Environment Research, 82(1), 1376.
GDP growth is a standard economic indicator that is used to measure the economic growth in a country by dividing the Gross Domestic Product (GDP) by the number of the countrys citizens. The higher the GDP, the better is the countrys economic performance and, presumably, the quality of life in it. Nevertheless, before GDP was implemented as a measurement tool, GNP (Gross National Product) was used (Carr par. 6).
The difference between them is simple but highly relevant: the profits of multinational corporations that operate in developing countries would be added to the developed countrys GNP (the country where the multinational corporation was established or came from), whereas GDP counts the profits to the developing country because the manufacture of products is established there (Carr par. 6). Therefore, despite the fact that the profits are reinvested in the home country of the multinational corporation, the GDP of the developing country is growing according to the GDP per capita measurement, thus showing that the quality of life is growing as well. As can be seen, GDP growth cannot always be an accurate measurement tool for the countrys economic growth because it depends on various factors.
Kubiszewski et al. point out that GDP has been mistakenly used as a broader measure of welfare (57). The major problem with it is that it does not differentiate between a welfare-enhancing activity and a welfare-reducing activity, Kubiszewski et al. argue (57). Some of the details that GDP does not include are the transactions that enhance welfare but do not involve monetary transactions. They fall outside the market and are not included in the overall GDP per capita, although they do have a positive influence on the economy or quality of life (Kubiszewski et al. 57).
Another issue that needs to be considered is income inequality. The income inequality can significantly decrease trust and happiness rates among citizens, although the countrys GDP will indicate the high quality of life (Kesebir par. 4). Inequality is also capable of decreasing the quality of life and happiness in developed countries, thus mitigating the positive relationship between economic growth and overall happiness (Kesebir par. 6). It should also be noted that the economic growth in developing countries where the population is poorer compared to developed countries does not always lead to increased happiness. As Kesebir explains, either the poverty rates or inequality rates (or both) are responsible for the lacking relation between GDP growth and quality of life (par. 10). Therefore, GDP cannot be used as the only tool for a countrys economic performance and quality of life.
Various alternatives to GDP exist. Van den Bergh and Antal examine ISEW and GPI as possible options (4). The Index of Sustainable Economic Welfare measures services that directly affect human welfare by adding or deriving services that either can or cannot directly influence human welfare (Van den Bergh and Antal 4). As to GPI, it corrects such additional categories as voluntary work, criminality, divorce, (loss of) leisure time, unemployment and damage to the ozone layer (Van den Bergh and Antal 4).
Giannetti et al. suggest the National Accounting Matrix, including Environmental Accounts, as a tool to evaluate the influence of environmental degradation on national income (13). Costanza et al. do not provide a particular framework but stress that since material consumption beyond need does not always positively influence well-being, we need to a create a new understanding of the economy, as well as a new model of it that will be based on the new-world context (94). As can be seen, GDP is perceived as an insufficient tool for the measurement of economic growth.
Costanza, Robert, et al. A Short History of GDP: Moving towards Better Measures of Human Well-being. The Solutions Journal, vol. 5, no. 1, 2014, pp. 91-97.
Giannetti, B. F., et al. A Review of Limitations of GDP and Alternative Indices to Monitor Human Wellbeing and to Manage Eco-System Functionality. Journal of Cleaner Production, vol. 87, no. 2, 2015, pp. 11-25.
The article begins with a breakdown of expenditures by foreign direct investors over the last few years. In 2016, they totaled $373.4 billion, which is lower than the $439.6 billion that was recorded in 2015 by $66.1 billion. The author notes that these numbers are above the annual average of $226 billion for the period of 2006-2008. This may indicate that the investments that China provided in 2015 are diminishing, but its effect is still significant. The majority of expenditures were used to acquire businesses, and only $5.6 billion was used to establish new firms in the United States. Even less was used on the expansion of existing firms at $2.2 billion. These statistics show that the majority of investors are risk-averse and prefer to purchase established organizations rather than creating new ones. Subsequently, the author begins to examine statistics sorted by country, industry, and other factors (Anderson, 2016).
Analysis
Manufacturing is stated to be the most popular industry among foreign direct investors in 2016 with $129.4 billion spent on various firms in the field. The most popular type of manufacturing was related to chemical factories. Other industries that caught the attention of foreign investors included professional, scientific, and technical services, financial companies, insurance, and other activities. Canada provided the most foreign direct investment into the United States at $58.5 billion, with the United Kingdom, Ireland, and Switzerland providing significant, but slightly smaller investments. California received the majority of all investments at $64.7 billion. Illinois, New York, and Texas are listed as the other states at the top. These statistics indicate that foreign investors seek to utilize manufacturing opportunities outside of the Chinese market. The following section of the article described investments used to create new firms in the country (Anderson, 2016).
Investments used to establish new businesses in the United States, or expand existing ones are referred to as greenfield investment expenditures. They make up $7.7 billion of all foreign direct investments in the United States. Greenfield investment expenditures went down significantly since 2015 when $13.8 was invested into the country. 20.7% of all greenfield expenditures were used in the real estate industry. However, $4.4 billion was used on utilities related to power generation. These statistics support the idea of investors being risk-averse (Anderson, 2016).
The number of investments in 2016 went down from 2,846 to 2,129 when comparing to the statistics of the previous year. Only 18 investments above $5.0 billion occurred during the year, and they accounted for the majority of all foreign direct investments. These expenditures were used to acquire existing businesses. The average expenditure per transaction for these acquisitions was $382.1 million. These changes are due to the decreased number of investments from China, which were common in 2015 (Anderson, 2016).
The previously described businesses employed 480,800 workers in 2016. This number is lower than the 2015 statistics by 3000 people. Total planned employment was also down to 499,700 workers, which is lower by 5,200 people than the results of 2015. Manufacturing accounted for the majority of employees at 162,900 people working in the field. Retail trade was recorded as the second top industry by the number of employees. Canada was once again the top employer out of the foreign investors. The low number of new firms being created by foreign companies caused a reduction in the number of workers (Anderson, 2016).
Other activities presented in the article include the total sales produced by companies affected by foreign direct investment, which made up $181.3 billion in 2016. This statistic is higher by 29.1% than the 2015 data. Their net income made up $8 billion, which was 4% of their sales. Their total assets were $383.2 billion in 2016. This data shows that investments of the previous years were profitable for the investors (Anderson, 2016).
References
Anderson, T. (2016). New Foreign Direct Investment in the United States in 2016. Web.
