Freakonomics by Steven Levitt and Stephen Dubner is an exploratory study of economics and the manifestation of its principles in everyday life. The main premise of the book can be described with the following quote: Morality, it could be argued, represents the way that people would like the world to work whereas economics represents how it actually does work (Levitt and Dubner 11). To back this claim, the authors take several seemingly unrelated events and phenomena and tackle them from an economic perspective. The topics include the similarities in behavior between school teachers and sumo wrestlers, the effect of abortion legalization on the crime rates, the relation between parental care and childs school performance, and the defining economic principles behind the illegal drug market, among others. By incorporating data mining techniques, the authors extrapolate the results which are unintuitive, amusing, and illustrative for those who seek the ways to apply measuring tools to a broader perspective. In essence, the book suggests the existence of a correlation between the seemingly unrelated phenomena and provides the reader with the tools to determine and evaluate the significance of the impact.
Specific Issues
Several issues brought up in the book are especially enlightening and, therefore, valuable. The first is the assertion of collusion between the sumo wrestlers in the top tier of the community. According to the book, the athletes who cannot win at least eight matches are demoted in their rank. However, such an event becomes statistically improbable once the victory count crosses a certain point. More specifically, on occasions where a wrestler with seven wins and seven losses faces the opponent who has eight wins and six losses, the former wins in the majority of cases (Levitt and Dubner 23). This fact contradicts the statistically determined outcome where the wrestler with more victories is expected to have a small statistical advantage suggested by his aptitude for winning. The analysis of the available data from the past sumo matches clearly shows the inconsistency between the rates of statistically expected and the actual outcomes in favor of the losing athletes. The authors come up with an explanation that the winning sumo wrestlers who already have their promotion secured collude with the disadvantaged ones as their final victory does not result in any incentivizing for them while hurts their opponents.
In the highly personalized environment with strong ties between the participants such behavior, while illegal and unethical, it is mutually supportive. The authors then compare the obtained results to a similar behavioral pattern among teachers and students within Chicago schools, where the former assist the latter in passing high-stakes tests with multiple choices. However, the evident parallel that can be drawn is that of collusion in the markets with an oligopoly structure. The easiest example comes from the price determination theory which postulates that prices can be artificially heightened through illegal agreements which decrease the companies independence and limit the choice of consumers. The sumo wrestling example provided in the book suggests that such agreement does not necessarily have to be shaped verbally and may, in fact, emerge from the mutual understanding of the issue and a common goal of boosting revenues. Even more importantly, the book provides us with a useful tool for locating the discrepancy and isolating it from the bulk of more voluminous yet less significant information (8-6 wrestlers versus 7-7 ones in contrast to those with other ratings).
Another relevant issue is illustrated in the book through the example of aspects of parenting and their mixed influence on the childs test results. According to the evidence provided by the authors, their performance is correlated with several seemingly evident factors such as the level of education of parents, their involvement with parent-teacher associations, socioeconomic status, and the availability and accessibility of books as sources of information (Levitt and Dubner 152). At the same time, several other factors which at a glance look equally relevant to produce little to no correlation. These include more time spent with the kids prior to their acceptance to kindergarten, regular visits to museums, and the amount of time spent on watching television, among other things (Levitt and Dubner 154). While such results are not directly applicable to the economic theories, they can be used to illustrate the necessity of quantitative assessment of available data for determining the viability of each investment option. Such an approach can be especially useful as a part of the utility maximization model as it allows minimizing expenses based on inappropriate assumptions.
Finally, the book explains the seemingly unexpected low revenues of the individuals involved in the illegal drug trade. The analysis of the available data reveals the actual gains which are so low that it forbids some of them from leaving the home of their parents (Levitt and Dubner 93). However, the results become far less controversial when the supply chain model is applied. Since drug dealers are at the bottom of it, their revenues are not even remotely illustrative of the enormous cash flow that is characteristic of the industry. In this case, the application of the most basic economic concept provides us with otherwise unattainable insights.
Conclusion
As can be seen from the described issues, the authors deliberately choose the topics which are only remotely related to economics. However, this approach allows them to illustrate the diversity influence of economic factors beyond the traditionally narrow scope and present the issue from the unconventional angle.
Work Cited
Levitt, Steven, and Stephen Dubner. Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. Harper Collins, 2005.
Oil prices rise and fall depending on the demand and supply of the commodity in the market. Several factors affect demand and supply and a balance of these two is required in order to keep prices stable (Hansen, 2005). Due to uncertainties in oil supply, strategic oil reserves are held by many countries. The increase in demand for oil in the future due to factors such as increase in population would lead to increased production. Theorists predict that production of oil will be characterized by a rise, peak and fall (Duncan, 2001). Conservationists fear that oil would be overexploited to a point of depletion. The future is uncertain since several factors affect demand and supply of the commodity.
Introduction
The recent rise and current decline in oil prices may be described using the economics of oil markets. Oil prices are usually influenced by changes in supply and demand for the commodity. As demand increases, the prices increase. Consequently, as supply increases, the oil prices decrease. Oil markets have significant effects on the state of individual economies since oil is the largest globally traded commodity. Oil prices affect several industries within an economy. However, others are affected more. In order to ensure availability of oil during an energy crisis, countries have employed the use of strategic oil reserves (Owen, Inderwildi, & King, 2010).
Causes of Recent Rise and Current Decline in Oil Prices
Currently, oil prices have dropped to approximately one half of its price in the 1990s. From a price of about U.S. $30 per barrel, the price has dropped gradually but systematically to about $20. However, the prices rose back and stabilized at about $15 per barrel. The changes in oil prices may be explained best using economics. It is also important to understand how speculators influence oil prices. It is assumed that oil prices fluctuate more in the short run but less in the long run.
This is mainly due to the fact that consumers and producers do not adjust immediately to the changes. They tend to be reluctant to make adjustments when changes in supply and demand occur. In the short run, both demand and supply are highly inelastic. Huge fluctuations in price would have a small impact on demand (Lutz & Vega, 2011). In this case, the demand curve would look like the one below.
Fig 1: Demand curve
In the late 70s, for example, many oil-producing countries reduced the supply of the commodity. The expectation was that there would be a slight decrease in demand. They rightfully predicted that their oil revenues would rise. What resulted in the short run was an increase in revenues due to their resistance to change.
If consumers expect oil prices to remain high, they would limit their use of oil. For example, they can start using economy vehicles instead of the high-consuming ones. They could as well prefer using public transport. During winter, consumers may reduce the use of oil-powered machines and opt to increase insulation in their houses and dress warmly. However, demand is not the only factor that causes decline in oil prices.
Changes in supply also contribute significantly. Suppliers also adjust accordingly in the event that they believe prices would remain high. They could uncap wells that had been abandoned due to high costs associated with them. They could also drill deeper for oil despite the costs that would make the venture unprofitable. With the increase in prices, the quantity would increase slightly in the short run. In the long run, supply would increase substantially. The decrease in demand and increase in supply eventually lead to a decrease in oil prices (just like in the 1970s).
In 1986, oil prices fell suddenly and significantly. This was the long term effect of the demand and supply of the commodity. For a decade, the prices only fluctuated slightly. The changes in oil prices during the 80s and 90s were mainly caused by two major factors. Firstly, the demand for the commodity increased due to the rate at which the Asian economies were growing.
Secondly, the advancement in technology helped reduce the costs of exploration. Other areas that were supported due to advancements in technology included transportation, drilling, refining and pumping. During the Asian financial crisis in the late 90s, the demand for oil and its products fell sharply. Countries involved included Singapore, Hong Kong, Japan, South Korea and Thailand. Consequently, this led to the sharp fall in prices (Lutz, 2008).
With time, demand in the European countries and the U.S. increased. However, its supply decreased. Suppliers had stopped exploring and had ceased exploiting deep due to high costs associated with the exercise. It was expected that oil prices would rise over time due to changes in supply and demand. However, the prices rose drastically over a very short period. The only explanation for this is the presence of speculators. After learning about the decision of the producers to stop producing, the speculators believed that it would lead to increased prices. Therefore, they stepped in fast so as to purchase the oil before the prices could rise. This led to the sharp increase in price.
Fig 2: Demand and supply curve
What the future holds
In the future, the prices of oil are likely to decrease due to increase in production and decrease in demand. Oil production in the U.S., for example, is expected to grow dramatically over the years. This would make it the worlds largest oil producer. Canada is also expected to boost its production capacity. Increase in production would decrease the countries reliance on foreign sources of oil and the consequent decrease in oil prices.
With advancements in technology, oil-producing countries are expected to have increased productive capacity. Such technologies include horizontal drilling and fracking. However, countries would need to reduce their production of oil in order to prevent the prices from falling too low. Apart from increase in supply, the demand for oil has been slow and may be the case in the future (Miller & Sorrell, 2006).
Impact that oil markets have on the state of the global economy
Oil is the largest globally traded commodity. For this reason, its price is critical to the global economy. In addition, the price of machines that operate using oil is dependent on the oil prices. These prices also influence the price of other fuels. For this reason, huge changes in prices would affect the global producers and consumers of the commodity (Peersman, & Robays, 2011).
For example, Algeria relies largely on revenue from oil and its products. The revenue generated from export of these products may account for more than 95% of the countrys total export revenue. For this economy, slight changes in price per barrel translate to huge losses in revenue annually. During this period, the declining oil revenues caused further complications given that the country was facing severe social and economic tension.
It came at a time when the country had experienced conflict with Islamic Salvation Front for six years. During the same period, the returns from exports were expected to decline significantly in Indonesia. This further complicated the situation since the country had suffered during the Asian economic crisis. In order to cope with this crisis, it was necessary to reduce the prices.
Irans economy also relies largely on revenue from oil exports. It accounts for approximately 85% of total export revenue. In 1998, Irans foreign debt obligations were estimated at $26.4 billion. Repaying the debt was difficult because the revenue obtained from exports had reduced. For Kuwait, the commodity produces 90% of the countrys revenue.
This translates to about half of its GDP. With the increase in oil prices and decrease in oil export revenues, the country decided to cut spending significantly. Libya was also greatly affected by oil prices. The country relies on oil exports to generate about 95% of its earnings. The low oil prices affected the production of the commodity for export. In addition to this, the U.N. sanctions imposed on the country made things worse.
Changes in oil prices can also affect a country like Nigeria. This is mainly because it gets 90% of its foreign exchange earnings from exporting oil. Decreased oil prices and reduced production led to the fall in revenue by 36.0%. Following the political instability in the country in the 1990s, the short-term economic growth was greatly affected. During the same period, the United Arab Emirates had slowed down significantly. This was partly due to the decrease in oil prices that led to the fall in oil export revenues. For this reason, the government reduced its expenditure.
Recent developments in the oil markets have revived the fears surrounding the impact of oil prices. The growth and development of emerging economies has been suggested as one of the causes of increase in oil prices over the past few years. This has also raised concerns that increased prices could affect the recovery process of advanced economies and other small nations involved in oil importation. As oil prices rise, and so does the import bill. The GDP also goes up. It has been argued that increased oil prices can be associated with positive effects on the global economy.
Industries hardest hit by rising oil prices
Increase in oil prices usually affects the industries in a country. One of the hardest hit industries is the automobile industry. Currently, there is increased production in the U.S. This has also affected the rate at which vehicles are bought. The sale of vehicles generally decreases as oil prices increase. Consequently, this affects employment since the automobile industry has employed many individuals including manufacturers and dealers.
The sale of vehicles with less fuel efficiency is greatly affected as people opt to purchase vehicles with best fuel economy. The driving patterns of individuals have changed due to this effect and this can be seen in the decrease in distance traveled on highways despite the increased population (Soderbergh, Robelius, & Aleklett, 2007).
Another industry affected by oil prices is the construction industry. The contractors cost tends to increase since they require on-location travel. The cost of shipping is also expected to rise as oil prices rise. This only translates to higher costs of importing or exporting. The food production industry may also be greatly affected due to the increase in operating costs in each farm that uses oil-powered equipment. The products manufactured from petroleum are expected to cost more. For example, plastics and certain chemicals would cost more.
Role that strategic oil reserves play and their use
Strategic oil reserves are stocks of crude oil held by countries or private industries so as to be used in the event of an energy crisis. In the U.S., they are maintained by the United States Department of Energy. They are emergency storage facilities with huge capacity. With the current daily consumption of 19.5 million barrels, this reserve can sustain this appetite for over a month.
The need for the oil reserves was realized in the 1970s when oil supplies were cut off during the embargo. The reserves were meant to provide supplies in case of future temporary supply disruptions (Longwell, 2002). For this reason, U.S. imports up to 12 million barrels daily. Of the total capacity, only 4.4 million barrels can be withdrawn in a day. This means that the reserves would provide fuel for more than 160 days.
The reserve is usually located in four different sites. Each site is usually located close to a major center with oil refineries and processing plants. Oil is stored in several caverns located up to 1000 meters below the earths surface. Each cavern has the capacity to hold up to 37 million barrels. The use of caverns is advantageous since they are cheaper. They also do not leak and they maintain steady conducive temperatures. In order to create the caverns, the earths surface is drilled and the salt is dissolved with water (Weber, 2010).
Unfortunately, these oil reserves have certain limitations. These facilities only hold crude oil and not refined fuel (Weissman & Kessler, 1996). For this reason, there would be limited supplies of fuel in case of disruptions to refinery operations. A good example is the case of Hurricane Katrina whereby several refining complexes were disrupted for a while. The capacity of the available reserves of refined oil cannot be compared to those of the strategic oil reserves. However, some nations have strategic reserves of both oil and its refined products such as gasoline and jet fuel.
The stocks in the U.S. are among the largest worldwide. In Europe, the Council Directive made it mandatory for the members of the European Union to maintain strategic petroleum reserves. Several African countries have also set up Strategic Oil Reserve. In Kenya, for example, the oil is sourced by the National Oil Corporation. Malawi is considering expanding its current 5-day reserve. South Africa has a Strategic Petroleum Reserve managed by PetroSA. Saldanha Bay is the primary facility with a capacity of 45 million barrels.
Are we running out of oil?
For a long time, it has been argued that oil supply would run out in a few decades. With the current estimated quantities of oil left in the major reserves, it is estimated that oil will only last for about forty years. However, others believe that such predictions are based on ignorance. There are ongoing debates among peak oil theorists and oil companies.
Oil theorists argue that the production industry has surpassed the point of maximum production (Chapman, 2014). Production companies, on the other hand, argue that technological advancements may extend the life of oil. Therefore, it is highly unlikely that we will run out of oil. However, it is possible that the oil reserves will be overexploited and lead to scarcity of the commodity.
Fig 3: Theory of Peak oil (Brandt, 2007)
According to the peak oil theory, the rate of production would greatly decrease after the point of maximum production is reached. This predicts a rise, peak and fall of the rate of production (Brandt, 2007). Over time, it is suspected that the aggregate production would stop. However, it is also suggested that nations would start investing in alternative energy sources before the crisis. This would not require any major changes in lifestyle of the countries that rely greatly on oil. With these predictions, oil prices are expected to rise at first. However, they would drop at some point due to the use of alternatives.
The peak oil is expected to have several consequences depending on various factors. Firstly, it would depend on whether there are alternative sources available. It would also depend on the rate at which the current stocks are declining. If alternatives were not effective, it would mean that oil products would become scarce and expensive.
Conservationists also argue that oil may eventually be depleted because it is a non-renewable energy source. In addition to this, they also argue that burning of oil causes air pollution and the greenhouse effect as carbon dioxide is released into the atmosphere. For this reason, they suggest a switch to the use of renewable sources of energy such as wind energy, water and geothermal energy. They argue that this would make sense from an economic and environmental point of view. They suggest that conservation of oil reserves may be achieved through changes in individual use of the energy source.
One of the ways of conserving oil is by avoiding the use of vehicles as much as possible. One may ride a bicycle or walk instead of driving. Another way may be the use of hybrid or electric vehicles. Hybrid vehicles are powered by both electricity and petrol. This would translate to reduced consumption of oil. Electric vehicles, on the other hand, do not use gasoline. One may also opt to use public transport more often in order to reduce the consumption of oil.
The public transport system has the capacity to transport more people at the same time as compared to the use of personal vehicles. Reducing the use of plastics also helps in the journey towards oil conservation. Most plastic materials are manufactured from fossil fuels and this contributes to over exploitation of oil. The use of reusable bags may be a better alternative. Another method of reducing the use of oil is through recycling of materials. Individuals may be encouraged to use solar panels to power domestic appliances at home. This alternative may be used in heating and lighting. This would go a long way in ensuring conservation of oil.
Future possible developments on demand and supply side and impact on society
Oil is an important commodity for the global economy and it is for this reason that the Organization of the Petroleum Exporting Countries (OPEC) is working towards ensuring that the future global energy demand is met. It also ensures that the future socio-economic development of its members is secured. The two key issues addressed in the organizations long-term strategy has to do with security of demand and supply. Global energy security is an issue that has been discussed all over the world. This issue was particularly talked about during the summit talks in Moscow.
There is a relationship between security of demand and supply. The two are interrelated and one cannot be achieved without the other. The issue is not only about whether supply would meet the future demand. It is also important to know whether the demand would meet the future supply. Global energy security is reliant on the equilibrium between supply and demand. It is with this assurance that countries can develop their short-term and long-term demand and supply strategies.
The demand for oil has always been growing. Oil is expected to meet the ever-growing demand at least for several decades. However, this depends on how demand and supply would develop over the short run and long run. In the short run, demand is expected to increase slightly. In order to meet the anticipated increase, countries have been involved in more production of the commodity. This has led to the increase in oil reserves every month. Plans have been put in place to increase capacity following the anticipated increase. In the near future, therefore, supply is expected to grow in the OPEC and non-OPEC states. This increase in supply is expected to exceed its demand hence ensure security of supply.
Increase in production capacity also requires growth in global refining capacity. In the past, the refining capacity grew slowly despite the increase in demand. This could be a challenge in the coming years and could cause market instability. Several other factors would have an impact on the demand for oil in the future. For example, global economic growth and increase in usage of vehicles could be a challenge. This would cause the increase in demand for refined petroleum. Another factor is country demographics. Increase in population may also lead to increase in oil demands. Energy and environmental policies could also have an impact on the demand for oil. These policies mainly advocate for the conservation of non-renewable sources of energy such as oil in order to reduce impacts on the environment and to avoid depletion.
Global economic growth is expected to lead to future increase in demand (Sorrell, Miller, Bentley, & Speirs, 2010). This is particularly so for the developing countries. Good examples include India and China. These two countries have a combined population of about 2.5 billion. This explains the significant increase in demand for oil. In the future, the demand for the commodity is expected to rise further. Given the low number of vehicles per 1000 inhabitants in these countries, it is expected that the transportation sector will grow and lead to the increase in demand for energy. This is expected to be the case if the developing countries follow a consumption pattern similar to those taken by developed countries.
Growth in population is another major factor that is expected to affect demand. The population of the world increases by the hour. In India alone, the population rose by over 250 million within a period of fifteen years. In china, the population grew by about 160 million over the same period of time. However, changes in demographic patterns may cause dramatic fall in population growth rate as experienced in other countries. Therefore, demand for oil may change depending on changes in the population.
Increase in consumption of oil also translates to emission of greenhouse gases that cause global warming. This may greatly affect the society. It is for this reason that OPEC saw the need for its member countries to work towards ensuring environmental conservation. It has worked towards addressing climate change by welcoming the Kyoto Protocol. Emphasis has been made on the use of cleaner sources of energy. Other fossil fuel technologies are also encouraged. For example, carbon dioxide can be captured and stored in order to prevent pollution. Taxation of oil products may be a way of controlling demand for the commodity In order to address the environmental issues and prevent overexploitation.
Conclusion
Oil prices usually fluctuate depending on the demand and supply. Changes in prices affect the state of the global economy. Since many countries rely largely on revenue from oil exports, changes in oil prices greatly affect the revenue of these countries. The industries hardest hit by rising oil prices include the transport and construction industry. Strategic oil reserves were developed to secure oil reserves in case of an energy crisis. Oil sources are believed to be limited hence the need for conservation.
References
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Chapman, I. (2014). The end of peak oil? Why this topic is still relevant despite recent denials. Energy Policy, 64(64), 93-101.
Duncan, R. (2001). The peak of world oil production and the road to the Olduvai Gorge. Population and Environment, 22(5), 503-522.
Hansen, J. (2005). Earths energy imbalance: Confirmation and implications. Science, 308(5727), 1431-1435.
Longwell, H. (2002). The future of the oil and gas industry: Past approaches, new challenges. World Energy Magazine, 5(3), 100-104.
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Informal Economy in African Economic Development: Contributions and Drawbacks
Though the informal economy is introduced as a vital and large part of the overall African economies, it is still hard to find one specific definition of this concept. Researchers and policymakers suggest using such terms as shadow, gray, black, or unreported economy and the informal sector to understand its contributions and drawbacks and identify policies that may help to raise incomes in the chosen sector (International Labour Office, 2012; Medina, Jonelis, & Cangul, 2017). Regarding the examples and opinions taken from different sources, it is possible to say that the informal economy is any type of economic activity and job that cannot be taxed, monitored by the government, or included in the GDP of a country. At this moment, the informal sector of sub-Saharan Africa consists of 33% of non-agricultural employment in South Africa and 82% in Mali (International Labour Office, 2012). Many household enterprises where Africans can work remain formally unregistered. However, there are also several ways on how to keep activities unregistered even in registered organizations, and the most frequent example is the work of taxi drivers who can earn some money when their meters are not working.
Nowadays, many countries find it necessary to measure informality of the economy because of a number of evident and hidden benefits and weaknesses. Medina et al. (2017) introduce several methods with the help of which it is possible to estimate the actual size of the informal economy. For example, surveys and samples can be used to gather replies in a volunteer form and take into consideration personal experience and attitudes. Sometimes, this information may be not enough from the statistical point of view, and the decision to check auditory tax reports is made. In addition to direct approaches, several indirect methods also known as indicator approaches can bring positive results. Taking into consideration available methods and models to measure and evaluate the informal economy, African societies have to recognize its strong and weak aspects to avoid economic misunderstandings and financial challenges.
The central contributions of the informal economy in regard to African societies and economies are as follows: the possibility to decrease the unemployment rate of the region, the creation of new working places, the presence of low barriers to enter the sector, the increase of population income, and the promotion of African economic growth. Not all organizations find it profitable to register their actual incomes and pay large taxes for every worker. Therefore, they choose hidden activities and introduce simple reports to cover their expenses. As a result, people can have high salaries and earn as much as they actually can without being afraid of their work being taxed. Additionally, many customers may notice that the companies where the informal economy is supported establish low prices and promote frequent sale policies. People will never refuse an opportunity to pay less for products and services.
Another important benefit of the informal economy is a possibility to have part-time jobs. Many African women are eager to work and earn a living without an obligation to choose between work and home. Some women, in their turn, want to work full-time but can find only part-time opportunities (International Labour Office, 2012). The informal sector is the place where people are free to make decisions regarding their personal and professional needs. Finally, the establishment of fair and trustful employee-employer relationships is the benefit that cannot be ignored. Not all Africans may allow higher education and working experience at a young age. As a result, they cannot find official jobs and earn money. The informal sector opens its doors to all citizens, regardless of their age, education, experience, or social status. Every person who can work is able to earn and avoid unemployment difficulties.
At the same time, several factors that may weaken African economic development because of the presence of the informal sector should be mentioned. One of the most evident drawbacks is an evident lack of legal protection that can be offered to employees by the government. The informal economy supports many economic activities that are usually excluded from any benefits and rights (Medina et al., 2017). If informal employees want to cover their property relationships, apply for commercial licensing, or develop special labor contracts, but their employers are against such ideas, positive decisions can be hardly achieved (Medina et al., 2017). As soon as the government is not able to control all employment sources, a number of concerns and unclear situations occur. The examples include child labor, drug trade, prostitution, and the growth of unethical behavior in the workplace.
The absence of a common and properly identified tax base in African countries lead to certain negative outcomes. For example, developing countries lack a chance to compare the differences in working conditions between formal and informal sectors (Medina et al., 2017). The economies become dependent on such factors as personal capital or social capital due to poorly recognized property rights and small resources of the regulatory system (Langdon, Ritter, & Samy, 2018). In other words, everything can be perfectly organized and accepted in the informal sector till a problem, concern, or discontent is recognized, and people may be in need of social support and governmental help. Finally, it is necessary not to forget that the informal economy does not bright any public goods and social security to the countries it is supported in. Therefore, poor working conditions, unfair treatment, the absence of social benefits, and no official protection should be defined as the central weaknesses of the informal economy in African countries.
Today, African societies aim at raising incomes and promoting human development for working people even if they choose the informal sector. Before one starts developing some policies and thinking of alternatives, it is necessary to admit that informal employment is a widespread notion from the global point of view. It is hard to remove it completely. However, there is a chance to investigate different aspects of the informal economy and understand how to reduce the risks of low earnings and poor working conditions. The International Labour Office (2012) reports that many informal workers continue suffering from significant decent work deficits (p. 1). To improve the current economic situation and stabilize working condition, it is better to start with an identification of specific groups of workers who are challenged by informal employment and gathering information about peoples age, intentions, demands, and other important for work issues. These groups are domestic or home-based workers, street vendors, and waste pickers (International Labour Office, 2012). Every person should be aware of their rights and freedoms despite the sphere of employment.
Several types of policies can be effective to solve the problem of the informal economy in African countries. For example, information policies can be used to understand what methods can be used to gather information about formal and informal organizations and people who prefer the informal sector instead of receiving benefits from formal employment. Social and education policies may be offered to explain how to collect and tabulate data through technical assistance and training (International Labour Office, 2012). Even the promotion of health policies can help to raise incomes for people. As soon as they learn the opportunities offered by the formal sector, they can understand how crucial their physical and mental health can be. People should not spend their money on treatment in case damage has a manufacturing nature. In general, increased awareness of the benefits of the formal sector, statistical control of wages and employees, and active participation of the government can be rather helpful in raising incomes for the citizens of African countries where the informal economy is promoted.
Urban Bias Reduction Through National Policies
Despite the fact that many countries demonstrate considerable growth and development in political, economic, and social sectors, the question of mass poverty remains open and bothers millions of people. In sub-Saharan Africa, the process of urban expansion has already begun with its speed being hardly compared with other countries. Langdon et al. (2018) explain these changes due to high rates of natural population and migration that is observed from rural areas. The process of urbanization is explained by the necessity to reduce poverty and provide as many people with employment opportunities and development as possible.
However, in addition to a number of new changes and benefits, urbanization is also characterized by certain problems and pitfalls. For example, fast growth of African cities is challenged by poor institutions and insufficient infrastructure that is required to promote competitiveness and productivity (Foster & Briceno-Garmendia, 2010). However, one should understand that growth and speed are not the only issues to be considered. Urban bias is the term to pay special attention to because of its impact on the development of public policies towards existing rural and urban expectations.
Not many researchers and academics use the term urban bias in their works. Still, its presence and impact cannot be ignored because it helps to understand better the conditions under which economic development occurs. Urban bias is an argument that is frequently used to explain the relationships between the representatives of urban and rural areas and the possibility of urban citizens to influence economic events due to the level of pressure they may have on the government. In other words, urban bias occurs as soon as urban citizens address the government in order to protect their rights and make sure their opinions are taken into consideration despite the intentions of the citizens from rural areas. However, Foster and Briceno-Garmendia (2010) underline a mutual dependence of rural and urban development and the necessity to integrate both areas in case national growth is the goal that should be achieved. Attitudes to urban bias have been changed with time.
Personal attitudes and social relationships influenced the importance of urban bias in Africa. Several decades ago, the image of urban bias was closely connected to the fact that rural citizens were able to use more opportunities, improve their knowledge, and earn huge money. With time, this attitude has been dramatically changed because many sub-Saharan African countries depend on how well their agricultural sector is developed at the moment. Africas agricultural sector, as well as the rural economy, is central to the overall economic development (Foster & Briceno-Garmendia, 2010). The better the integration of these two concepts is, the lower poverty rating is.
At this moment, in many African countries, a variety of national policies were implemented. The goals of these policies were to charge urban bias, to promote national development, and to generate benefits for cities, even if they had high prices for other areas of countries (Langdon et al., 2018). For example, the African government made a decision to raise taxes on agricultural export in order to increase overall tax revenues. However, taking into consideration that fact that new prices were developed for international markets, only local farmers who had to produce crops and other products could feel the difference and reduce their incomes to meet new tax standards. As a result, rural development was challenged, and urban areas gained benefits.
Another example of policies that proves unfair treatment to rural areas of African countries included price control on food. On the one hand, the government believed that this step was successful in terms of fighting against inflation and protecting the citizens of cities against high prices on local rural food (Langdon et al., 2018). On the other hand, the same step lowered incomes of farmers and deprived them of an opportunity to earn high money for high-quality services they could offer.
Finally, even the intentions of the government to control and promote domestic manufacturing influenced the work of farmers in African countries during the last several decades. As soon as the independence was achieved by many African countries, the government established tariff barriers on manufacturing in rural areas so that farmers and other agricultural workers reduced their incomes, and urban citizens could use low-interest credits and tax holidays to buy cheap food (Langdon et al., 2018). All these policies and strategies provide that urban bias is an integral aspect in many African countries. It is impossible for Africa to create policies in terms of which both types of areas could gain benefits. As a rule, only urban areas were characterized by positive outcomes.
It is necessary to think about the conditions under which urban bias and regional disparities can be reduced or even eliminated in African countries. One of the main steps that should be taken by African countries is the improvement of the link between rural and urban areas (Foster & Briceno-Garmendia, 2010). Today, this link is not stable because of poor electricity in certain regions, unstable transport networks, and a lack of water provision (Langdon et al., 2018). The solution of these problems is a number one step in reducing urban bias. Infrastructure provision has to be improved. ICT services have to be developed in the same way in rural and urban areas.
Urbanization of Africa is a question of time. It is based on a number of structural transformations that include productive employment and the promotion of sufficient public goods (Adesina, Gurria, & Clark, 2016). Structural transformations are used to move available economic resources and increase productivity activities. One of the recent examples of such transformation is to support of the green revolution and the development of new city-country relationships. Agriculture and rural development should be addressed in small towns and secondary cities instead of big cities where industrialization and globalization have already demonstrated their impact. In addition, the government should pay more attention to the improvement of such fields as education, healthcare, and transportation in all regions and areas between cities and countries. Sometimes, a little portion of comfort and security is enough to neglect a lag in rural-urban development.
Lastly, the role of the government has to be discussed. There is a thought that if the African government shifts its administrative and bureaucratic functions to secondary cities in lagging regions, a chance to reduce urban bias can be achieved (Langdon et al., 2018). Decentralization of political and governmental decisions concerning economic relationships is a step to the improvement of regional balance where rural and urban areas can have access to similar services, opportunities, and goods. As soon as the leaders of African countries understand how crucial their impact on urban bias is, new results and elimination of integral economic problems can be achieved. Regarding the fact that African countries demonstrate fast and effective urbanization processes in comparison to other countries on a global arena, it is possible to admit that not much time can be required to reduce urban bias and improve rural-urban economic relationships.
Gender Equality in Economic Development: Colonial Experience of African Countries
Nowadays, the representatives of many African countries cherished a thought that the question of gender inequality in society, politics, and other spheres has already been successfully decided. People believe that considerable progress has been made to achieve this type of equality through numerous conventions and commitments (Manda & Mwakubo, 2014). Still, the analysis of recent economic reports, financial activities, and employment statistics proves that gender equality remains one of the major challenges in Africa because of the presence of the informal sector and urban bias.
The problem is that many women find it normal to have unequal rights because of existing social norms and attitudes. Modern gender considerations are closely connected to such aspects as industry and global institutions, ecological integrity, and incomes (Langdon et al., 2018). The reports of the United Nations inform that sub-Saharan Africa continues experiencing extreme poverty: about 120 million people live poorly, and women are over-represented such households (Langdon et al., 2018). Close attention is paid to the social dimensions of gender inequality in Africa. Health and education are the main determinants of equality rights. African women are limited in their intentions to ask for appropriate social services because of early age marriage, physical or emotional violence, and maternal mortality (United Nations Development Program, 2016). In some cases, women do not find it necessary to report officially, and sometimes, they just believe that everything can be changed one day.
In addition to social factors, the role of women in African economies is also characterized by considerable disparities and challenges. Despite the intentions to improve the current gender equality issue, many women face problems in the workplace and the inability to make independent economic decisions. For example, in comparison to $1 earned by a male worker, a woman can earn only 70 cents (United Nations Development Program, 2016). The government explains such solution by occupation type, education, marriage, or parenthood. Economic development in Africa depends on how well its citizens understand their roles and perform their duties. For example, one of the central ideas is that African women have to be engaged in domestic work, and men have to earn a living for their entire families. At the same time, if women are aware of the peculiarities of domestic work in their everyday life, the government believes that it is normal to provide women with an opportunity to have jobs connected to domestic affairs like cleaning, babysitting, cooking, or taking care of disabled people at home.
Such inequality and prejudice concerning what women can or have to do influence recent economic development of African countries. Women do not have a chance to try themselves in different spheres. However, the investigations of Manda and Mwakubo (2014) show that gender equality has to be regarded as a considerable implication to economic development and an instrument with the help of which economic efficiency may be enhanced. To understand the worth of female working power in African economy, the governments have to provide women with the same access to jobs as men have, remove barriers in education, health, and economic opportunities, and support female decisions to stay politically and socially active. Women are defined as significant part of African families. As soon as women are able to improve their economic status, the economic status of African families can also be improved, reducing poverty, supporting employment, and promoting human development (United Nations Development Program, 2016). Finally, Africa has to understand that it has a serious employment reserve, its women, and it is high time to use it to its full extent.
There are many reasons and explanations of why women are deprived of numerous economic, social, and employment opportunities. Langdon et al. (2018) suggest observing colonialism as one of the causes of inequalities imposed on African women. Several examples taken from different parts of Africa were used to explain why modern women do not find it necessary to resist gender inequality. At the beginning of the 1900s, many African women were involved in the cotton industry supported by the Portuguese colonialists. Due to the necessity to earn money and keep common social order, sub-Saharan African men had to leave their families and work as miners in South Africa, and women took responsibilities for cotton production without even an opportunity to resist the colonial order. Without male protection, women were exposed to the colonial authorities. They did not get money for their work, believing that their husbands had to solve all financial questions. The main fact was that women did not find it necessary to resist inequalities.
At the end of the 1900s, French colonialism influenced the work of African women as well. Husbands controlled their women in a harsh form, and even if women wanted to resist, they could not do it because of their poor formal social status. Men were able to give orders, use their social and physical power, and eliminate all womens opportunities in a short period of time. First, women did not want to change something in their lives. With time, it became impossible for them to change something because men had already gained the desired level of power.
Employment traits that were born during the colonial times are observed today. For example, when the question to earn good money rises, it goes without saying that men have to leave their families and migrate to the areas where high salaries can be earned. Women in their turn have to stay at home, cooking, taking care of children or other family members, and even working at local firms in order to buy food, drinks, and clothes. Colonialism penetrated all spheres of human life in Africa. Even if many years have already passed, human experience and attitudes cannot be changed. Gender equality cannot be achieved the way modern women want it to be, and the colonial experience of African countries in the 20th century is one of the reasons for why the government, political relationships, and local finances are under male control today.
In general, the current economic and human development proves that women are able to change something in case they take serious steps and prove the correctness of their decisions. Today, female representatives of South Africa and Tanzania have already demonstrated their abilities and promote political and social initiatives and received support from civil society organizations (Langdon et al., 2018). The result of these activities can be observed in the work of the World Bank and in statistical reports of African countries. The number of women who receive a good education, health, and labor opportunities has considerably increased. Gender-related questions are discussed at different levels, and women are free to share their opinions and attitudes. In their turn, many sub-Saharan African countries achieve positive results in employment and economic development. Rural and urban links undergo certain improvements, and family relationships are changed, reducing the number of maternal mortality and health problems. Being defined as a significant factor of economic development, gender equality turns out to be a solution to numerous social, political, environmental, and legal problems.
Manda, D.K., & Mwakubo, S. (2014). Gender and economic development in Africa: An overview. Journal of African Economies, 23(1), 4-17. Web.
Medina, L., Jonelis, A.W., & Cangul, M. (2017). The informal economy in sub-Saharan Africa: Size and determinants. International Monetary Fund. Web.
United Nations Development Program. (2016). Africa human development report 2016: Accelerating gender equality and womens empowerment in Africa. New York, NY: United Nations Development Programme. Web.
Over 30 million people in the United States experience hearing loss, but just over 7 million choose to use hearing aids. In other words, less than one-quarter of potential candidates for hearing aids use them. There are several reasons why so few people who would benefit from hearing aids do not use them, including the stigma that is sometimes attached to people who wear them. But the price of hearing aids is an important factor, too. Hearing aid prices vary but can range from $2,000 to $4,000 each. Many private health insurers do not pay for hearing aids and neither does Medicare. (Medicare is a federal medical insurance program primarily for the U.S. citizens 65 and older). Therefore, many people must pay for hearing aids out of their own pockets.
Would firms increase their revenue if they were to lower hearing aid prices? Evaluate the situation by doing a critical analysis?
A growing healthcare problem in the U.S. is the number of Americans currently suffering from various cases of hearing difficulties with a large percentage of the retired, semi-retired, and even productive citizens experiencing hearing difficulties with various studies showing that this percentage of the population will continue to increase over time. Fortunately, while there has yet to be an actual cure to prevent gradual hearing loss there are other options available for individuals that are undergoing this type of ordeal. While it is not a 100% effective solution to solving hearing problems, a hearing aid is a device that can at least lessen the burden such individuals are facing by allowing them to hear to an extent various voices and sounds in the external environment. Unfortunately, for many individuals, the use of such a device is seen as a substandard way of actually resolving their issue since unlike the use of glasses for people with eye-related problems hearing aids are notoriously inefficient and at times cannot function in the way their users need them to. This view on the sub-standard functionality of hearing aids acts as a negative selling point for the companies that make them which creates a distinct form of buyers reluctance for the people that need a hearing aid but balk at the high cost of owning one. It is due to this that a viable solution must be created to improve the sales capacity of the hearing aid industry to continue to be seen as a viable solution for people suffering from various causes of hearing difficulties.
Lowering the Price
The problem in this particular case is that even though demand for hearing aids continues to drop due to opinions regarding their supposed deficiencies their prices have continued to remain at the same level. In cases where demand has continued to decrease it is not surprising for companies to lower prices to create demand for the product. While the idea of lowering the price is a positive one in light of the possible increase in sales that it may cause there are still various other factors to take into consideration. For example, despite the lowering of prices, public opinion may still cause demand to remain largely static as such marketing plays a pivotal role in this case in changing the perception of the public towards this particular product.
Product innovation is also another factor that must be taken into consideration; the fact is companies usually attempt to innovate their products in light of consumer opinion both for and against it. As such misconceptions about its use and its price will change over time depending on the number of innovation companies employ to improve a product towards a sufficient enough level that will cause consumers to want to buy it. One factor to take note of is that when creating a specific type of product for a particular niche market the unique needs of various consumers must be taken into consideration since hearing deficiencies may vary and as such a variety of different product types may have to be created or even customized depending on each persons individual need. Lowering the prices should not be considered the best solution to create demand for a particular product. The fact is if a particular type of product is not sufficient enough to meet a customers needs then it is unlikely they will buy it no matter how low the price may be.
Apart from actually lowering prices, another method that can be utilized is to educate potential buyers on the various amenities and facets of using a hearing aid and its potential impact on their life. The fact is having a hearing aid, despite its insufficiencies, is still a far better temporary solution to their auditory problems as compared to deafly trying to understand what people are trying to say to them. One of the inherent difficulties hearing aid companies face is the inherent social stigma attached to the use and operation of various hearing aids. It has already been mentioned that the implication of social stigma is above the issue of purchase and poor market reception. The fact is most people do not want to appear as if they require hearing aids due to the social connotation that comes with their use. As such, based on the careful market analysis it can be said that manufacturers should attempt to pursue a higher standard of psycho-social research to come up with a marketing campaign that is devoted to erasing the level of social stigma for users of hearing aids. Also, the marketing campaign should take note of the need for proper public relations ethics to give potential buyers false hopes that the use of a hearing aid will fully resolve their hearing problems.
There are currently several market theories available to help resolve the issue of poor market reception of hearing aids among its target users. However, there should be a critical analysis between price indices and consideration of buyers behavior apart from the various equations and variables used in such theories. There must be a certain degree of sensitivity to the issues behind consumer reluctance in buying hearing aids and it must be determined whether they are psychological, social, or. It is only through this particular method that firms will be able to understand the factors behind consumer behavior in their particular niche market. Based on the given examples it must be noted that serious market analysis is required before it is assumed that price variability is a stand-alone solution to the predicament various hearing aid manufacturers are experiencing.
What must be taken into consideration is the fact that a regular consumer still considers product innovations, unique features, and a certain degree of efficiency as a necessity in purchases of this type. While lowering prices can be considered an attractive option especially when taking into consideration the recent economic crisis the fact remains that product innovation, assurance of quality, and effectiveness as a result of innovation remains to be the most potent market solution in any given situation.
Evaluate different possible strategies that companies could implement to gain a sound position among their competitors in this hearing aids market. Use relevant theoretical concepts discussed in chapters
The current hearing aid industry is said to be inelastic because most of the products it has for sale lack any options or features in the design of the product that they are selling. The thing is though the market percentage a particular product controls is inherently dependent on the level of innovation and change the product undertakes to modernizes itself and meet the needs of various consumers. What must be understood is that consumer buying behavior is considered to be rational, as such; they would choose to patronize a particular product depending upon its inherent usefulness for them. Consumers will not buy a product that is outdated and does not fulfill its purpose reliably. It must be noted that while price variability is considered to be one method of being competitive in the current market another method that must be taken into consideration is selectively targeting particular consumers within a general market. What must be understood is that those price indices are not the only deciding factors to be used to become competitive, rather, aspects related to targeting specific sections within the market through market segmentation and market analysis are also viable methods firms can use to carve out their market niche. This particular strategy can only be attained through a proper and accurate SWOT analysis that examines the best possible route the company can undertake.
Market Strategies
Effective strategies in increasing consumer patronage of a particular product require identifying the connection between the standard value of a particular product and its inherent capacity to attract consumers to purchase it. An examination of the current product mix in the market of hearing aids shows that while having lower prices does place a firm at an advantage it is also advantageous for the company to introduce new features and innovations to entice users and buyers to purchase their products and advertise the products as having such features thus gaining a distinct market advantage through consumer patronage. Utilizing this particular strategy will maximize the growth potential of the company and will hopefully be enough for it to attain a certain degree of leadership in the market.
What must be taken into consideration is the fact that gaining a sound and comfortable position is no easy task as it takes a lot of hard work and patience. Based on this, what must be done is to consistently analyze target consumers and determine the implications and sustainability of the product upon consumption, and to see what further improvements can be utilized to increase product acceptability and increase the companys market share. As such, in this particular case what is needed is a creative and definitive market research approach to establish a certain degree of rapport among consumers resulting in consumer-driven information improving innovations on the product itself. While lowering the price of a product is at times an effective solution to inciting market demand it is just one of the solutions that are possible however it is a strategy that is not effective in the long run given the different variables of the market and the social behavior of the target consumer.
Recommendation
For all forms of market competition, the need for proper SWOT analysis is integral in being able to make the proper production and business decisions. On the other hand, the use of focused research is in a way a method of being guided through various tried and tested steps and factors that will help a company handle all possible situations even in cases where the market remains stiff and uncontrollable. Certain principles such as those of managerial economics can also be utilized due to their various concepts about economics, tools used in understanding business concepts, and techniques in creating a definitive understanding of the various processes involved in the decision-making process. Such concepts can be seen incorporated into various theories such as the theory of the firm, the theory of consumer behavior, and the theory of market structure and pricing. It can be assumed that profit maximization for a firm will naturally follow when competing with other companies gets into the right mode of market potentiality.
What economic conditions are relevant in managerial decision-making and how they are related to the typical types of risk faced by a firm?
Economic conditions
In essence, the managerial decision-making process all boils down to what the present economic condition is and what decisions have to be made for the company to continue to operate. The decisions made by managers dictate the future of the firm and as such what managers decide on based on the relevant data gathered will result in what course of action the firm will take in light of the changes in the business conditions the firm finds itself in. Based on this it is important to take note of the various economic conditions that firms find themselves in since the type of conditions dictates the disadvantage that such companies may encounter as a result of daily business operations. Issues such as market structure, conditions of supply and demand, technology, government regulations, international dimensions, future conditions, and macroeconomic factors have to be taken into consideration when making business decisions due to their impact on how a firm is supposed to operate. Another factor to take note of is the concept of profit maximization and how it is vulnerable to certain restrictions encountered by the firm such as supply insufficiency, machinery, contractual clauses and liabilities, and laws and government policies. Business managers when planning operations have to consider several factors not only in the short-term but also in the long-term due to the various implications such decisions have on the firm itself. Such decisions often involve evaluating various external environmental factors that limit the ability of the firm to act.
On a case by case basis, managers on occasion experience situations that limit their capacity to successfully maintain the proper operations of production facilities as a result of external environmental conditions such as a distinct lack of resources or changes in market intensification. Other limitations come in the form of internal conditions such as a lack of product innovation and proper expansion of facilities which limits the choices and abilities of managers to deal with particular production requirements. Certain contractual obligations also restrict managerial decisions when it comes to daily operations, this can come in the form of labor contracts which can constrain a managers flexibility in worker scheduling and work assignment or it can come in form of contractual obligations with certain firms wherein a certain operational process must be followed when producing a certain product.
Lastly, restrictions in the form of state laws and regulations in the form of proper manufacturing processes have to be observed which further limits the flexibility of managers when it comes to making particular decisions. These particular restrictions can constrain managerial decisions when it comes to the rate and method of production and type of marketing activities associated with the company due to the possible penalties incurred should they be violated. The concept of perfect competition wherein production capacity and supply perfectly matches demand is an idealized version of the current market structure which in reality is composed of varying degrees of supply and demand where there is no such thing as being able to perfectly match supply to demand. What must be understood is that in a capitalist based system direct competition is often the norm with various competitors trying to offer the same type of supply to consumers with innovation and the ability to adapt being ranked among the most necessary abilities a company must possess. This particular system considers that the market structure is aggressive with a distinct product mix and versatility in the market. It also assumes that consumers are rational and that they would make rational choices in their buying behavior. For example, in cases where consumers are presented with the same type of product, consumers would often choose to pick the product that is considerably cheaper yet maintains the same quality due to their propensity to act on rational choices
When a good number of trade participants prevail, this follows through a significant effect on the revenue as the idea that the population of buyers or sellers cannot make such a significant effect and therefore will not hurt the price control in any given condition. Finally, resources and materials have already become a staple in most competitive business as agricultural products do. This, in conclusion, closes the arguments about having a perfect economic condition regardless of any situation.
Analyze the effects of the law of diminishing returns to a modern-day business. Why this law is considered a short-run phenomenon? Use appropriate examples
It can be stated that the law of diminishing returns has short-term successes however does result in long-term losses. In the field of analyzing consumer behavior marginal utility is described as an add-on, namely, it is the additional form of satisfaction that a consumer /hotel guest can get from the use/consumption of an added portion of a particular good or service. It must be noted though that while total utility increases with the overall level of quality, at some point due to the continuous consumption of a particular product or use of a type of service the overall yield will result in smaller and smaller levels of additional utility towards the consumption. To illustrate this point one can imagine a person buying a scoop of dark chocolate ice cream at an ice cream store due to the hot and humid weather. While initially the total utility and marginal utility are equal if the person were to go back and kept on buying the same product to stay cold the total utility would increase due to the consumption however the marginal utility would decrease over time as a result of the continuous consumption of the same product In business, it is a matter of theories between labor and capital and how things go at hand with the aspects of demand and supply. This is based on the notion that continuous consumption of the same product would eventually cause a person to get tired of consuming it thus the added value continues to decrease throughout consumption.
One good example that can be given is the problem of overproduction in the industry of cars and other automobiles. Various car manufacturers are apparently under the notion that to effectively ensure continued demand they must produce more each time the demand for cars increase. Unfortunately, this strategy does not take into account lulls in consumer buying behavior when during recessions the economic condition worsens which results in consumer reluctance to purchase vehicles. Based on this it can be stated that strategies involving production should always take into consideration outside factors before committing to a particular production strategy.
It must be noted that the theory of consumer behavior is an examination of what influences a consumers choice in a particular product or service, should a consumer be presented with the same service with both being within budget constraints and prices the choice is usually left up to consumer preference. On the other hand, if a choice is beyond budget constraints, price level and is considered to be an irrational choice preference is no longer included in the decision making process. Thus in terms of understanding consumer behavior preference should not be considered the sole deciding factor in understanding consumer behavior rather a combination of rational behavior, preference, budget constraints, and price must always be taken into consideration to understand how consumer behavior towards a particular product or service works.
It must be noted that during economic recessions it is important to establish the practicality in operations rather than a focus on diminishing returns which are not within the ideal conservative macroeconomic future that a country needs during a time of financial constraint. Based on this it can be argued that excesses in times of recession and various unscrupulous economic postulations regarding what particular practices to employ are unhealthy for the continued sustainable development of a country during a recession. On the other hand, it can be stated that given enough market analysis and putting more confidence behind product development and technological innovation, all doubts about this particular economic principle will, in turn, come out advantageous for the full recovery of the economic force. It must be noted though that the allocation of resources must be critically scrutinized in regular operations so as not to receive more losses than the expected outcomes. It must be stated that in times of economic uncertainty firms should not bank too much on economic principles that have no material and realistic basis but rather should take a conservative approach when the time calls for it and an expansive innovative approach when the time is right.
References
Amyn M. Ambani, Impact of Elasticity of Demand on Price in the Hearing Aid Market, 2007. Web.
Data computation of computer price indices is a challenging issue because different jurisdictions adopt unique methodologies when doing so. This study explores how CPI is computed in Mongolia by investigating four main issues: services in the CPI, new data sources for compiling CPI, the importance of understanding and meeting different users needs, and methodological issues in CPI Computation. Based on an assessment of these four key issues, this study demonstrates that Mongolia employs a thorough review of data analysis methods to produce monthly CPI information. These practices are based on global standards and replicate those adopted by countries that have similar social, political, and economic dynamics.
Some key areas of CPI computation that need improvement include the tracking of price movements and the adoption of new survey instruments. It is important to address these issues because the Mongolian economy has significantly transformed in the last couple of years and traditional measurement methods may fail to capture real price movements. Thus, it is essential for the country to move away from adopting conservative methods of price computation and adopt more elaborate and dynamic instruments of the same. However, the Mongolian National Statistical Office, which is responsible for computing changes in CPI, needs to be prepared to shoulder the cost of implementing new systems. A big percentage of the expenditure may be related to the cost of training employees to use the new technology and the cost of buying new equipment. Although technology costs have declined over the years because of increased efficiencies in production, this study demonstrates that the Mongolian National Statistical Office could lead the way in exploiting the benefits of new technology better than small businesses because it can easily shoulder the cost of doing so.
CPI Country Experience in Mongolia
This report covers four main areas governing the computation of consumer price index (CPI) data in Mongolia. Discussions contained in this paper aim to explore issues relating to the computation of services, the challenges and opportunities created by the use of new data sources for compiling CPI, the process of understanding and meeting new consumer needs, and the methodological issues in CPI computation. Although the paper focuses on Mongolia, references will also be made to global challenges affecting CPI data production and management. The goal is to give an in-depth insight regarding the computation of CPI data in Mongolia and to provide suggestions about how to improve the process of CPI computation in the country.
Services in the CPI
The Mongolian National Statistical Office (NSO) is responsible for computing changes in CPI. Its responsibility also stretches to tracking inflation levels and reporting on the same (International Monetary Fund, 2012). In this regard, data relating to household expenses and associated family budgets are reviewed comprehensively. Services comprise a significant portion of the overall analysis of consumer price index (CPI) by the NSO because they form a growing consumer segment in most household expenses. In fact, according to Sohail, Hina, Amina, and Asma (2014), services comprise about 50% of all household expenses.
There are significant problems associated with examining this index because they attract several computational challenges. For example, it is difficult to keep track of the associated numbers because different units often vary across multiple periods. Similarly, there are difficulties associated with choosing the right sample of the analysis. Since services also have different qualities, assessing their true value could pose significant challenges to economists because of variations in the same. Based on this concern, Sohail et al. (2014) propose that all service-centered computations should account for variations. Another problem witnessed in the assessment of service quality is the frequent bundling of its value to that of other products. This marketing strategy, which is often pursued by several service providers, often makes it difficult for analysts to distinguish the true value of the service and the product.
The difficulty in determining changes in rental prices demonstrates the problem of tracking the price of services in the CPI. Rental properties pose a unique challenge for many analysts because different people use a multitude of factors to determine this index. The use of different types of software to undertake CPI further compounds the problem because new questions arise from the implementation of these technological tools in CPI measurement. For example, some problems are associated with assessing the true value of the digital economy and the value added to conventional services if an intermediary technology is used to complement service provision.
Part of the problem associated with quantifying changes in the price of services is the human factor moderating it. In other words, services are usually people-centered. Although many people would like to believe that specific services are representative of the price they pay for them, the truth is that the quality of services may change almost spontaneously. The ability of service standards to change quickly makes it difficult to track them. This problem stems from the difficulty of regulating service standards. Indeed, unlike goods and services, which are easy to track and assess, services are difficult to quantify and regulate. Furthermore, they are subjective in nature and peoples experiences of the same thing may vary extensively. Therefore, what one person may consider as good service may be unacceptable to others.
The problem usually boils down to peoples perception of the services they receive and the kind of value they believe they are getting from it, relative to the price they are willing to pay. For example, an American citizen may have a different kind of perception of quality service from a Mongolian citizen. While on the one hand a Mongolian could deem a certain service as satisfactorily offered, the American could deem the same service as inadequate. Their difference in perception also stretches to the price they are willing to pay for the same service and their assessments of whether they are getting value for money, or not. Using the above example, typically, the Mongols would believe that he is getting value for money (by virtue of being satisfied with the services offered), while the American would possibly be feeling ripped off.
The above example shows that tracking the price of services in CPI computation poses a challenge to the Mongolian NSO. The office also experiences compounded problems stemming from the fact that one company may provide the same service differently. This statement shifts the focus away from the customer, who is the recipient, to the service provider (the supplier). Since services are products of human-to-human relationships, it is common to find people who know each other enjoying the benefits of good service, while those who do not know each other suffering from an absence of the same. Therefore, the human element in service provision and reception plays a significant role in understanding the challenges associated with tracking the price of services.
The challenge associated with the inclusion of services in the consumer price index could be best demonstrated by the complexity of tracking changes in the prices of financial products in Mongolia. Two key issues emerge in this analysis. The first one is item domain issues, while the second one is price measurement problems (Ambukege, Justo, & Mushi, 2017). An analysis of domain issues alone reveals several complexities associated with categorizing service consumption. This review means that, while it may be right to assess consumption by analyzing one kind of service, it could be misleading to believe that this service exists in isolation.
As is the case in many financial services, several categories and subcategories could be deduced from one service alone, regardless of whether they lead to consumption, or not. For example, many Mongolian households could record several transactions that may fit the description of financial services. Some of them include seeking financial advice, seeking services associated with deposit and loan facilities, obtaining services provided by life insurance companies, and currency exchange (just to mention a few). It could be argued that some of these services may be attached to some capital-intensive activity. If this probability exists, it means that they should themselves be capitalized, or at least be categorized as not fitting the category of consumption, as far as CPI computation is concerned.
Overall, services pose unique challenges to CPI computation, based on their subjective and volatile dynamics. For example, those of the telecommunications sector is different from web-based services and similarly, those of the insurance industry are different from the challenges in the health sector. These issues could have a significant impact on the overall quality of the CPI index for Mongolia. However, it is important to point out that the challenges identified above are not unique to the East Asian country. In fact, different studies around the world have highlighted them as a global issue with little or no variance.
New Data Sources for Compiling CPI
New data for compiling the CPI could have several benefits, including a reduced response burden and efficiency gains. Other benefits associated with the same include better official price statistics and increased depth of information relating to CPI calculations. However, as is the case with the expansion of data, methodological, and practical measurement problems suffice. One type of information that has emerged as a new source of data for the Mongolian NSO is scanner data. De Haan, Willenborg, and Chessa (2016) alludes that different companies today recognize its importance and have accorded it the same value as other types of traditional information. The use of scanner data in CPI computations creates different issues for Mongolian economists, including computation (calculation) problems, which stem from the merger between traditional data sources and new pieces of information. Nonetheless, some selected countries have already included scanner data as one of their sources of information for CPI computation (De Haan et al., 2016).
The use of scanner data in compiling CPI measures creates selected benefits for economists. For example, an article by De Haan et al. (2016) specifies that this type of data poses three categories of benefits to statisticians, which include more data (which would lead to less variance), improved quality of data collected (less bias) and better methods of data collection. An analysis of the first category of benefits could be contextualized to the collection of CPI information for supermarkets. Deutsch (2016) has done the research, where he said that in most developed countries, the review of scanner data in supermarkets is based on three criteria: items, outlets, and weeks. This type of data exceeds the traditional ratio of 1,000 to 1.
To demonstrate this fact, Deutsch (2016) uses an example of a supermarket in Mongolia, where CPI data for cereals are based on 675 individual price considerations. This figure implies that authorities make one observation per month for multiple items in every store. The observation would typically involve a sample of about 300 outlets. As opposed to the two or three observations per month completed using the traditional data collection technique, scanner data would allow the NSO to make up to six observations per month. In the above example, this finding would mean that over 200 cereal items per store would be subject to the observations and the sample would expand to about 3,000 outlets as opposed to the previous 300. If the scanner data are limited to about 21 days of operation, the NSO could make 1.8 million price observations. This analysis means that scanner data is rich in information and significantly provides analysts with more data for evaluation.
Although the benefits of using scanner data in CPI are well documented, there is a need to harmonize laws governing the process because several economists have noted disparities in the legal framework governing their implementation. For example, Deutsch (2016) advocated for the harmonization of the European Union (EU) rules governing the same because there is a high possibility that different countries would make different interpretations of the same data. Nonetheless, many observers agree that before such harmonization occurs, it is essential to exploit the benefits of scanner data because traditional data manual collection techniques are prone to massive errors and inefficiencies (International Monetary Fund, 2012).
Many people have welcomed the benefits of using scanner data (highlighted above), but a review of the experiences of retailers when implementing the technology reveals that the organizations willing to use them need to be prepared to shoulder the cost of implementing such a system. A big percentage of this expenditure involves the cost of training employees to use the new technology and the price of buying new equipment. Although these costs have declined over the years because of the increased availability of scanner data technology in Mongolia, experts say large organizations could exploit its benefits better because they can easily shoulder the cost of new technology compared to smaller businesses.
Nonetheless, some issues associated with the use of scanner data have emerged because studies that have investigated the use of big data in the CPI computation in Mongolia reveal that the development could bring methodological and practical issues in implementation (International Monetary Fund, 2012). For example, traditional data analysis techniques are unable to cope with the sheer volume of information generated from the use of scanner data. Therefore, there is a need to deploy advanced analysis techniques to manage such data. In other words, there is a need to use advanced software in the analysis of scanned data. Therefore, economists may need to review calculation formulas for the regular CPIs as organizations reorient their processes to align with the technological requirements of big data use. This view is highlighted in several studies, including those of the International Monetary Fund (2012) and the International Monetary Fund (2013).
Understanding and Meeting Different User Needs
Experts have traditionally used CPI evaluation to analyze the cost of living and to determine the compensation that affected people could be subject to receive. However, CPI has recently transformed and the index serves a greater purpose, which is characterized by the expansion of its need scope. An assessment of inflation levels is one of many new uses of CPI today. The Mongolian experience is similar because authorities have used CPI to examine inflation levels and evaluate the countrys economic performance. Since the government pays keen interest in the welfare of its people, it has used the CPI for purposes of indexing money (International Monetary Fund, 2012). The goal has been to understand if the citizens are able to maintain their purchasing power through varied economic environments. At the same time, the government has used different measures of the CPI to review how large monetary reserves could help improve the welfare of the citizens. For example, part of the monetary indexation strategy has been to use the CPI to index wages and social programs.
This strategy has also included the indexation of interests and rents. The goal has often been to regulate contractual payments involving the citizens. Through this process, the government has been striving to maintain the standards of living for its people. These reviews show that the CPI has not only influenced the fiscal policy needs of Mongolias economy, but also the monetary policy requirements as well. The use of CPI data for fiscal and monetary purposes in Mongolia is partly demonstrated by the fact that the government has used it as an instrument to deflate the economy during times of hyperactivity and index specific contracts, which have a significant impact on peoples economic welfare (International Monetary Fund, 2012). The use of the CPI to meet the needs of Mongolians augurs well with common practices regarding the use of the same concept because studies by Deutsch (2016) and Ambukege et al. (2017) have shown that CPIs are often used for compensation purposes, indexation of wages, and managing social transfers and pensions.
Although the CPI is useful for different types of users, there are selected implications when using the index to serve different segments of the Mongolian population. For example, CPI calculations could influence how users interpret the findings. In some countries, CPI is calculated monthly, while in others, such calculations happen annually. The monthly calculations would provide a more in-depth and accurate picture of the index compared to the annual review. Most publications of CPI in Mongolia are done monthly. This system means that data users should be aware of the benefits and limitations of such a system and account for the same in their use of the data. For example, fiscal policy experts are always aware of this fact and only compare this type of data with other countries or regions that share the same methodology for calculation (Deutsch, 2016).
Methodological issues would also stretch into determining the number of samples used to come up with final CPI numbers. For example, America develops its CPI figures by basing its calculations on 23,000 retail and service companies (International Monetary Fund, 2012). Mongolia uses a different approach because it is a relatively smaller economy and does not have a robust service sector market as America does. Therefore, its CPI calculations hinge on a lower sample of retail outlets. At the same time, the countrys calculations predominantly focus on the commodity sector because the agriculture and mining sectors are its most vibrant economic subcategories (International Monetary Fund, 2013).
The CPI calculation is not the only feature, which would influence how people interpret data because the methods used by authorities to communicate CPI outcomes would have a similar effect. Notably, timely communication is essential for all users of CPI data because the data contained is often time-sensitive. Therefore, if not communicated well, the information could be useless. For example, inflation statistics relating to the Mongolian economy in the year 2000 are irrelevant to an economist in the year 2017 because the data used today are different from the past.
Proper communication is also useful in making sure that user needs are effectively met because people may make assumptions about such data if they are not fully furnished with information relating to the methodological processes adopted. For example, it would be useful for authors of such data to state the associated limitations of data collection to allow users to act on them accordingly. Basing such interactions on proper and comprehensive communication networks would also give users an opportunity to give their views regarding the index and how best to improve their usefulness. When these issues are analyzed in the Mongolian context, they are likely to have an effect on peoples household experience. The probability that they would improve the accuracy of economists and analysts who rely on such data is also high because relevant authorities would be more aware of the needs of each user group. They would also understand that it is in their best interest to communicate well with the users because CPI data is supposed to benefit them the most.
Methodological Issues in CPI Computation
Multiple researchers such as Sohail et al. (2014) and Deutsch (2016) have explored methodological issues in CPI computation and said the two main questions characterize them. The first one is determining the main set of prices to use when making computations and the second one is establishing the most appropriate way to average price movements (Sohail et al., 2014; Deutsch, 2016). Many statistical methods capture the gist of the two issues by providing the experiences of different countries. In Mongolia, the diversity in approach is one of the main contributors to methodological issues in CPI computation. A broader assessment of issues affecting the CPI computation reveals that other problems include weighting issues, sampling problems, and the calculation of elementary and high-level price indexes (International Monetary Fund, 2012). Affiliated problems include adjusting for quality changes, treatment of seasonal products, and the process of accounting for missing observations (International Monetary Fund, 2012).
The National Statistics Office (NSO) disseminates Mongolias annual GDP based on current prices. At the same time, it disseminates the countrys expenditure based on the gross national product (GNP). Nonetheless, the organization does not reveal certain types of information, such as the sequence of accounts it uses to compute data, and the annual supply and quarterly GDP used for similar purposes (International Monetary Fund, 2013). This action means that Mongolia keeps certain aspects of its CPI computational processes private. While doing so, the organization still makes sure its processes align with international standards of CPI computation (especially with regards to the computation of goods and services).
An analysis of methodological issues relating to the basis for recording reveals the same pattern because the recording of transactions follows international best practice as well. In line with this provision, Mongolia uses market-based pricing of goods and services to undertake its computational processes (International Monetary Fund, 2013). All transactions undertaken in the country are also documented on an accrual basis, except for situations where they involve government projects. In line with the recommendations of the 1993 SNA, the NSO records inter-firm transactions net as opposed to gross.
The Mongolian NSO conducts a family budget survey every five years, but it publishes data relating to CPI monthly. Urban dwellers complete most of these surveys (International Monetary Fund, 2013). Although the NSO conducts these assessments by following international standards on the same, the process still has several problems. The first one is the biased collection of price data mostly from urban areas and a few from rural ones. The second problem is the failure to disclose the survey instruments and data used across several levels of computation (International Monetary Fund, 2013). This challenge makes it difficult to review the quality and reliability of the information provided by the NSO.
A detailed review of the accuracy and reliability of information obtained by the Mongolian NSO reveals that the main source of data for CPI computations is the integrated housing and income expenditure survey (HIES) (International Monetary Fund, 2013). The weights used today are also based on this survey. Here, it is important to note that, rarely do they update the weights based on price changes; instead, they align the computations with the price base period (International Monetary Fund, 2013). Generally, few outlets are excluded from the price assessment. At the same time, the NSO applies few imputations for houses that are occupied by their rightful owners.
An assessment of the source data for CPI computations in Mongolia reveals that they do not account for sampling errors in the HIES (International Monetary Fund, 2013). Furthermore, consumption expenditure relating to alcohol and tobacco use is not compared with supply data coming from the main retail outlets that sell these products. Lastly, a review of the statistical techniques used in CPI computation reveals that the NSO often carries forward prices for temporarily missing goods and seasonal products on their books, regardless of the implicitness or explicitness of quality adjustments techniques to be followed when computing for items that have been rendered obsolete or unavailable.
Relative to the above assertions, one of the recent methodological issues under review in Mongolia is how to compute price changes. Some researchers have highlighted this problem by saying it is prevalent in instances where inflation needs to be determined (International Monetary Fund, 2013). In some cases, the countrys central bank experts admit that although there have been low inflation rates in the country, they are not sure whether the numbers represent changes in the cost of living or a mere change in the prices of goods and services within a small category basket. These kinds of questions emerge in different ways and in multiple kinds of dilemmas. For example, Deutsch (2016) presents a methodological dilemma that often plagues economists. He ponders on how the country should compute CPI when there is a change in the quality of a specific product, while the price remains constant. This example could be simulated through an evaluation of changes in the price of telecommunications services because there are cases where calling prices decline, while the quality of services remains the same. Similarly, there are cases where calling rates increase, while the quality of services declines.
Another problem associated with the computation of CPI data in Mongolia is an attitude problem among some of the economists and experts mandated to do this task. For example, the lack of diversity in the staff makes it difficult for the NSO to cope with changes in the environment. This problem is a limitation for the country because it has specific regulations that limit transactions involving the housing market and how much businesses should pay their employees. Notably, many changes in the economy seem to have occurred within the transition period from a communist-based economy to a market-based economy. One notable case that has been recently realized is the involvement of the government in the housing sector and its quest to regulate what should be done to property owners and tenants whenever the rent exceeds the stipulated amount (International Monetary Fund, 2013). Since the future may accommodate further deregulation of the economy, it is pertinent for the methodological approaches adopted by Mongolia to reflect these changes.
A comprehensive review of the methodological soundness of Mongolias CPI framework reveals that the countrys processes align with international concepts and definitions on the same. Particularly, they align with the concepts and definitions of the 1993 systems of accounts (SNA) (International Monetary Fund, 2013). A review of the scope used to compute CPI data reveals that the country does not cover several accounts and tables as recommended by the Intersecretariat Working Group on National Accounts. The groups mandate is necessary for the implementation of the 1993 SNA.
Summary
Although Mongolia experiences different issues surrounding how they compute their CPI numbers, it is important to point out that the CPI data they produce on a monthly basis are the products of a thorough review of the numbers. The employees working at the national bureau office are also doing a good job by following the questionnaire, as should be the case. Similar to many countries with the same political, social, and economic dynamics of Mongolia, the methodological choice of CPI computation is largely borrowed from international best practices. A deeper investigation into the same practices reveals that most of the methodological processes in the country are borrowed from the International Labor Organization (ILO), and specific western nations, such as Italy and the US (International Monetary Fund, 2013).
Generally, some of the main issues that currently need attention in the East Asian nation include the obsession by some of the experts to measure price movements strictly and accurately. They should realize that the focus of CPI is not to get the most accurate price, but to track price changes using the best way. This diversion of focus may be detrimental to users who want to understand CPI changes in the first place. Similarly, there is a weakness among some of the economists in the country to embrace new types of surveys. This limitation makes it difficult for them to account for the changing dynamics and realities of measuring CPI. It is essential to review this problem because rapid changes in the Mongolian economy have rendered some of the traditional measures of assessment obsolete. The current problem presents a situation where the country computes CPI in a conservative way. This way, they fail to understand the root causes of price changes.
References
Ambukege, G., Justo, G., & Mushi, J. (2017). Neuro fuzzy modeling for prediction of consumer price index. International Journal of Artificial Intelligence and Applications, 8(5), 33-44.
Deutsch, T. (2016). Statistical capacity building of official statisticians in practice: Case of the consumer price index. Journal of Official Statistics, 32(4), 827-848.
International Monetary Fund. (2012). Mongolia: 2012 Article IV consultation and third post-program monitoring. Washington, DC: International Monetary Fund.
International Monetary Fund. (2013). Mongolia: Report on the observance of standards and codes: Data module, response by the authorities, and detailed assessment using the data quality assessment framework (DQAF). Washington, DC: International Monetary Fund.
Sohail, M., Hina, N., Amina, M., & Asma, S. (2014). Issues in the measurement and construction of the consumer price index in Pakistan. Washington, DC: Intl Food Policy Res Inst.
Aggregate demand is normally understood in the context of the total value of goods and services demanded by a given group of consumers at a given period and a given price (Brux 2007, p. 375). In other words, aggregate demand essentially refers to the value of goods and services consumers are willing to purchase at various price levels. In certain economic literature, the aggregate demand is often referred to as the effective demand but it bears a close similarity to the gross domestic product of a given country when the inventory does not change (Murad 1962). The following graph best represents this relationship.
An increase or decrease in aggregate demand is brought about by several factors but the most common is the increase or decrease in investments and equal measure, the increase or decrease in consumers disposable income (Baumol 2009, p. 606). Aggregate demand shares a strong relationship with basic functional areas of the economy because economics is more or less defined by the demand and supply of goods and services (among other factors).
However, this study seeks to establish the relationship between aggregate demand and unemployment, inflation, the balance of payment (BOP), and the economic growth of an economy. This analysis will therefore constitute the overall overview of how aggregate demand interacts with basic macroeconomic factors.
Unemployment
Unemployment is normally represented as a state in the economy where the number of people willing and can work fail to find employment positions (Kheir-El-D 2008, p. 141). For computation purposes, unemployment is normally expressed as a percentage of the total number of the workforce a nation has but its correct ascertainment is usually a variation of several factors in the economy such as the aggregate demand.
The aggregate demand has a unique relationship with unemployment. The relationship is however not evident to the naked eye because it is rather indirect. Through the business cycle, it should be understood that during periods of contraction, unemployment is at its highest point but aggregate demand is low. However, during periods of expansion and peak, unemployment is at its lowest but the aggregate demand is at its highest.
Aggregate demand is a function of the supply and demand of goods and services while the supply or demand of goods and services are also independent variables that affect unemployment in the long run and short-run (Wessels 2006, p. 123). This relationship can be best explained by the fact that for employment to be evidenced there ought to be a high demand for goods and services (a situation that enables production firms to have a higher capacity of employing more people). The following diagram exposes this relationship:
Aggregate demand is in fact in the middle of the entire equation because if the aggregate demand is high, the supply and demand of goods and services in the economy will essentially be high as well. This is caused by the fact that many consumers will have a higher disposable income when aggregate demand is high and this situation also has the potential of increasing the total gross national output as well.
The above relationship between aggregate demand and consumer disposal is brought about by the fact that there is a positive relationship between disposable income and aggregate demand which is best encompassed in the consumption function described by the Keynesian cross (Heijdra 2009, p. 25). This means that the economy will be robust and goods and services will be produced in mass. It is only when such conditions are evident that employment takes place. Many people will therefore be employed to sustain the high demand for goods and services while many more people will be employed to support the increasingly long supply chain.
This concept is best explained through the Keynesian theory which Kling (2011) summarizes that When aggregate demand goes up in the economy, employment goes up and unemployment goes down. This makes sense because as firms strive to meet the need for more output, they have to hire more workers (p. 12).
It is also important to note that unemployment does not occur when the aggregate demand is high because during times of high aggregate demand, there are more opportunities for job creation and this eventually leads to a decrease in unemployment. In this type of situation, it is even easy to sustain low levels of unemployment even when people leave their jobs because of termination, lay-offs, resignations, and the likes because they can easily switch one job to another without experiencing long periods of unemployment.
This was the situation experienced in the United States (US) during the 1990s period where the countrys major media corporations were extensively laying off their workers but interestingly, at the same time, the country was experiencing declining unemployment rates (Kling 2011). Needless to say, the aggregate demand for goods and services at this time was high. However, it is important to note that when aggregate demand is high and unemployment rates are low, there is a high likelihood that inflation will set in because many people will have a high disposable income, thereby leading to an increase in the prices of goods and services.
Inflation
Inflation is normally referred to as the persistent increase in the price of goods and services in an economy (Jain 2011, p. 245). It is normally caused by several factors but the most common factor is the increase in the supply of money in the economy. This variable (inflation) is normally ascertained through the consumer price index and the producer price index; both of which are normally relied on by many international economists. Inflation, therefore, implies that the number of goods or services a pound, euro, or dollar would buy at a given time will probably be less as time goes by.
Aggregate demand has a positive relation with inflation because of the simple fact that when aggregate demand is high the inflation rate is equally high (Tucker 2008, p. 291). This situation is normally evidenced both in the short run and long run. Aggregate demand, as noted earlier, is brought about by an increase in consumer disposable income or if there is a high degree of investments in the economy.
When focusing on the rate of investments we should understand that high rates of investments are normally determined by the credit lending rates in the economy. For instance, in periods where there is a high investment, there is a low-interest rate in the economy and it is widely acknowledged that in periods where there are low-interest rates, inflation rates are normally high (Tucker 2008, p. 291).
This relationship is evidenced because interest rates have a positive correlation with inflation rates. Through the business cycle, it should be understood that during periods of contraction, inflation is at its lowest points and aggregate demand is low as well. However, during periods of expansion and peak, inflation is at its highest and so is the aggregate demand.
However, it should be understood that there are two types of inflation: demand-pull inflation and cost-push inflation. The demand-pull inflation occurs when the aggregate demand is more than the aggregate supply and it occurs when the GDP is rising and the overall rate of unemployment decreases. In this type of scenario, normally, there is too much money in the economy and there are not enough goods to satisfy the demand. The following graph best explains this situation
The cost-push inflation, on the other hand, occurs when the aggregate cost of goods and services rises in the economy and there are no alternative commodities to buy (for example oil). The graph below represents this relationship
In periods of high investments, therefore, there is the probability of high aggregate demand to mean that there is too much money circulating in the economy. In such a scenario, the prices of goods and services are likely to increase, thereby leading to a significant increase in inflation rates. The same scenario is also true in instances where there is a high disposable income among consumers which amounts to high aggregate demand. When consumers have a high disposable income, it means that there will be a high demand for goods and services which also implies that the prices of goods and services will significantly increase, thereby leading to inflation.
Economic Growth
Economic growth is normally referred to in economic circles as the increase in per capita income of the gross domestic product or a corresponding economic measure of a given country (Barro 2004, p. 6). Economic growth is often spurred by an increase in the production capacity of a given economy where more goods and services will be produced within a given economy using the existing factors of production. However, it is important to note that economic growth is normally perceived in economic terms within the context of the long run as opposed to the short run.
When analyzing aggregate demand in terms of economic growth we can establish that aggregate demand has a positive relationship with economic growth in the long run but in the short run, it amounts to nothing more than a business cycle (Carré 1975, p. 225). This diagram best represents the motions of aggregate demand in the business cycle:
In the long run, aggregate demand would essentially lead to increased economic growth because there would be a sustained increase in goods and services that eventually leads companies to expand, by increasing their production capacity. In the short run, aggregate demand would not have the same impact because investors or producers would not undertake significant production changes like purchasing new plants or equipment if aggregate demand is not sustainable for long. This would therefore mean that the production capacity of an economy would not proportionately increase with an increase in aggregate demand.
Balance of Payment
A balance of payment normally occurs when there is a difference in the amount of money spent on imports viz a viz exports (Riesenhuber 2001, p. 285). The balance of payment is normally portrayed either favorably or unfavorably. A favorable balance of payment implies that the exports are more than the imports and an unfavorable balance of payment means that there is more money spent on imports as opposed to exports. Aggregate demand has a unique relationship with these dynamics. This relationship is represented by the following graph:
When the above diagram is seen through the motions of the business cycle, economic depression amounts to periods of contraction and is symbolic of the lower point of the business cycle (trough). This period shows an unfavorable balance of payment and as will be seen in subsequent paragraphs of this study, it represents the short-run situation of aggregate demand. Periods of surplus are represented by expansion and peak in the business cycle and they can be equated to the long-run relationship between aggregate demand and balance of payment.
If the aggregate demand is high, this means that more goods are likely to be imported to satisfy the demand. This situation is especially noted in the short run because the aggregate demand would overwhelm the production and supply of goods and services mostly. After all, the existing production firms would be caught off-guard. This would therefore mean that in the short run, an unfavorable balance of payment would be experienced because there would be more money spent on imports to satisfy the surge in demand (Stern 2007, p. 8). This would surpass the amount of money received from exports (receipts).
However, if the aggregate demand persists and the situation is analyzed in the long run, a favorable balance of payment would be evidenced because the production capacity of the economy would have been increased and the aggregate demand satisfied. This implies that the amount of money spent on imports would be significantly reduced because the local production capacity would be in a position to satisfy the local demand.
Conclusion
This study establishes that aggregate demand either has a positive or negative correlation with inflation, unemployment, economic growth, and balance of payment. Comprehensively, we can see that aggregate demand has a positive relationship with inflation (both in the short run and the long run) and economic growth (in the long run). On the contrary, aggregate demand has a negative correlation with unemployment (in the long run and short-run).
With regard to the balance of payment, we can see that in the short run, aggregate demand will lead to an unfavorable balance of payment while in the long run; it leads to a favorable balance of payment. These dynamics best conceptualize the relationship aggregate demand has with macroeconomic factors
References
Barro, R. (2004) Economic Growth. New York, MIT Press.
Baumol, W. (2009) Economics: Principles and Policy. London, Cengage Learning.
Brux, J. (2007) Economic Issues & Policy. London, Cengage Learning.
Carré, J. (1975) French Economic Growth. Stanford, Stanford University Press.
Heijdra, B. (2009) Foundations of Modern Macroeconomics. Oxford, Oxford University Press.
Jain, T. (2011) Macroeconomics and Elementary Statistics. New York, FK Publications.
Kheir-El-D, H. (2008) The Egyptian Economy: Current Challenges And Future Prospects. Cairo, American Univ in Cairo Press.
Transporting is a critical part of modern life that enables people to travel both long and short distances. Thus, this industry is distinctly vital for humankind. Businesses working in this field provide services connected to the movement of people or things from one place to the other. Railroads are a significant part of the transportation economics because their development requires substantial resources, both financial and time, and cooperation of the state. This paper aims at examining transportation economics using the example of railroads and their impact on the US economy.
The Importance of Transportation and its Economic Value
Transportation and economic development have a significant connection because the former provides an ability to sell products to a more substantial number of individuals. According to Prentice and Propok, transportation is considered to be the largest industry in the world (10). The authors refer to it as an invisible sector of economics because most individuals globally are dependent on transportation in their daily lives, including errands of personal and professional nature that can be accomplished due to the modern transport. From a state-level perspective, the effective transportation system is crucial for competitiveness within the foreign trade (Prentice & Propok 10). It is because logistics can be considered as a factor of production. Thus, countries with better infrastructure can manufacture goods more efficiently.
The changes in the transportation industry over the last centuries were revolutionary and significantly impacted the speed at which humans can travel. Bogart states that cliometrics is an approach that describes research into the measurement and economics of transportation (1). This allows determining the specific elements that affect this industry and estimate the financial benefit that companies within it are capable of receiving. Bogart concludes that market integration and urbanization were impacted by this sector of the economy (26). Thus, transportation economics is a crucial component of a countrys development.
Railroads
Railroads became an essential part of US economics in the 19th century when the country underwent a large-scale development of this transportation mean. It was predominantly used to transport goods, which had a significant impact on the businesses in the country. Thus, one can argue that railroads were indispensable to the United States economy (Donaldson & Hornbeck 799). While they affected the internal market by allowing vendors to transport goods within the US more easily, international trade was impacted as well. It is because the development of the railroad infrastructure in the US made it both easier and cheaper for businesses to deliver their products to ports.
Railroads remain to be an essential part of the transportation industry in the modern era, despite the invention and widespread use of more advanced means of commuting, for instance, airplanes. Donaldson and Hornbeck state that expansion of the railroad network may have affected all counties directly or indirectly (800). The importance of the states contribution cannot be overlooked in this regard since the development of railways was dependent on the government. Additionally, the policies that determine the specifics of railroad transportation were essential to this industry as well.
The Importance of Railroads to the US Economics
In the 1890s the agricultural sector was heavily dependent on railroads as its primary mean of transporting products. It is due to the increase of the land market value and market access that correlates with the railroad expansion (Donaldson & Hornbeck 800). The authors hypothesized that the removal of railroads in 1980 would have resulted in the depreciation of the agricultural land within the US by at least 60%. This is because the transportation of products using rivers was not as efficient and could not deliver a similar capacity.
Other industries in the 19th century were not as dependent on this transportation method either because they were typically situated near ports or because transportation costs were not high. However, for the agricultural industry in the US the railroads were crucial due to the fact that they could not have been substituted by the extension of the canal network or road infrastructure (Donaldson & Hornbeck 800). The importance of the railroads to the US economy is not limited to the improvement of country land value because manufacturers were also able to benefit from this development. More specifically, the ability to sell products to more people helped advanced many industries in the US (Donaldson & Hornbeck 800). Therefore, transportation economics has a direct impact on the growth of revenue in other economic sectors.
Currently, railroads remain to be a critical logistics industry that helps other businesses transport their products within the US. Qiao et al. calculated that on average short railroads in Texas allow companies to save at least 7,5% of the payment for transportation due to lower costs when compared to using trucks. Moreover, maintenance, safety, and emissions costs are significantly lower when compared to transportation by road. In general, Qiao et al. conclude that at state-level, the operation of short line railroads in Texas contributes approximately 1,476 jobs, $113,769,627 in labor compensation, and $354,443,588 in economic output . Therefore, railroads continue to be a vital element of US transportation economics.
It should be noted, however, that currently, the US government is not in the list of the most prominent railroad operators based on yearly earnings. In 2018 the German company Deutsche Bahn was able to obtain revenue of over $50 billion ( The Worlds Biggest Railway Operators in 2018 ). This was possible due to the countrys focus on improving the performance of its transportation industry, including investing in infrastructure and innovation. It should be noted that current Deutsche Bahns revenue from commercial logistics continues to decrease while the sector of passenger transportation increases. This data provides valuable information regarding the prospects of development for the US railroads.
Future of the Railroad Industry
In the contemporary world, technological advancements allow industries to modify their business models and become more cost and resource efficient. This applies to the railroads as well since novel approaches to manufacturing trains and the integration of artificial intelligence can help enhance the efficiency of processes. One of the examples is companies that are testing positive train control systems (PTCS) that allow monitor and control trains remotely (Wyman). Additionally, various systems aimed at optimizing fuel consumption were recently introduced that help cut costs and improve revenue. The speed of delivery is essential to the railroad industry and may become a significant competitive advantage for it.
However, these new developments also result in the emergence of competitors that are capable of delivering goods and people as well. For instance, an example of innovational trucks that do not require drivers can cause significant damage to the railroad industry (Wyman). This approach is a valid alternative to railroad transportation because companies will be able to deliver goods in different locations without regard for railroads in a specific area. In addition to this, the use of electric motors can result in enhanced cost efficiency, making these trucks much cheaper than railroads.
It should be noted that the improvements of railroads that will enable their competitiveness when compared to self-driving trucks can be made only with additional funding from the state. It is due to the fact that small railroad operators do not possess the funds that would allow them to make substantial alterations in the current infrastructure. Additionally, the existing railroad businesses can be compromised by developments such as Hyperloop or new train development by the China Aerospace Science and Industry Corporation. According to Palmer, the latter is a high-speed train that can develop the speed ten times higher than the current fastest train in the world. These crucial innovations present both a stimulus for the railroad industry to continually improve its infrastructure and a threat due to the emergence of more efficient means of transportation.
Conclusion
Overall, the railroad industry played a significant role in the development of the US economy and continues to contribute to the countrys development. The most significant impact of this transportation industry was in the 1890s due to its contribution to the agricultural sector. In the modern day, railroads have a number of competitors such as driverless trucks, Hyperloop, and ultra-fast trains that can instruct businesses in the industry from growing. Regardless, railroads and train transportation will continue to be an essential component of US transportation economics.
Works Cited
Bogart, Dan. Clio on Speed. Handbook of Cliometrics, 2018, pp. 126.
Donaldson, Dave, and Richard Hornbeck. Railroads and American Economic Growth: A Market Access Approach. The Quarterly Journal of Economics, vol. 131, no. 2, 2016, pp. 799858.
Various manipulative techniques behind net income planning have become one of the most widespread causes of financial fraud in the context of economics. On the example of the provided case study, it may be seen that quite often, when it comes to the official accounting data, many company leaders are interested in showing the result. However, they should rather work with actual indicators in order to define new growth strategies.
Researchers claim that there are several reasons due to which companies CEOs are eager to manipulate journal entries. The most notorious of them is the willingness to impress the stakeholders as well as to maintain the support of investors or business partners (Akhtar, Zia, & Shezhad, 2018). Thus, Hugh Stallings quite likely was motivated by the same purposes and decided to use a working but insecure method.
The idea of journal entries changes, in fact, easy to execute and shows results almost immediately. The major difference between prepaid rent and rent expense lies in the fact that the latter deals with expenses made during the current year while the previous entry concerns the following years expenses. Since the net income is the entitys income, excluding several types of expenses, including rent and taxes, the result of the entries shift will be quite visible. Consequently, such an approach visibly increases the financial indicators of a company in the year-end, as well as potentially improves its position on the market.
When it comes to the methods benefits, it should be mentioned that it is one of the fastest ways to increase net income. The companys top management gains an advantage of remaining relevant on the market while the stakeholders lose the opportunity of an appropriate financial investment. Hence, the implications it may bring are rather vague. According to the researchers, nowadays, there are various verification models which are designed to define the slightest modifications in accounting reports (Chen & Yang, 2018). Thus, once a companys financial manipulations are detected, it is at risk of being immediately abandoned by investors and other individuals somehow affected by the entity.
References
Akhtar, M., Zia, M. H., & Shezhad, F. (2018). True and fair view of financial reporting practices: Accountants perspective. Journal of Islamic Business and Management, 8(S), 301-319.
Chen, S., & Yang, A. (2018). An effective financial statements fraud detection model. DEStech Transactions on Engineering and Technology Research, 1-4.
How an equilibrium price is set in the supply and demand market
Many factors, among them price, population, and income, affect consumer demand for products and services sold in a market. Demand is satisfied either by local producers or importers. The demand curve is downward-sloping, which means that an inverse relationship exists between demand and price. The supply of products and services is also affected by various factors, including price, demand, and availability of resources. The supply curve is upward-sloping, indicating an inverse relationship between demand and price. Arguably, because of limited resources, it is not possible to fully satisfy the demand for products or services.
However, in economic terms, when the supply of a specific product or service completely fulfills its demand, an equilibrium level is achieved (Mankiw, 2016). To be specific, the equilibrium level is reached when the demand for a product or service is equal to its supply at a specific price. Figure 1 graphically represents this concept.
Figure 1. Equilibrium Level.
How a reduction in oil production will affect the supply and demand curve
As shown, the equilibrium level E is achieved at the point where demand is equal to supply. However, changes in the factors that affect demand or supply can alter this equilibrium level, and the market will react and find a new level. This phenomenon can be exemplified in terms of a decrease in oil production. A reduction in oil production will shift the supply inward on the graph. However, as Figure 2 shows, no shift in the demand curve is evident.
Figure 2. Equilibrium Level.
Thus, it is clear that the previous equilibrium level will no longer be suitable for the market when oil production decreases. The inward shift of the supply curve will force the market to locate a new equilibrium level at a new price level, P2, and quantity level, Q2. In this situation, the price of oil will be higher than before. The suppliers will achieve higher total revenue by charging a higher price for the oil demanded by the market. On the other hand, the quantity demanded and supplied will be less (Arnold, 2015).
Conclusion
The market always strives to find an equilibrium between the demand and the supply of products and services. However, market dynamics are continuously changing, which makes finding equilibrium a challenging process.
References
Arnold, R. A. (2015). Economics (12th ed). Mason, OH: Cengage Learning.
Mankiw, N. G. (2016). Principles of microeconomics (8th ed.). Mason, OH: Cengage Learning.
Global stratification is an inevitable process that has both positive and negative impacts on the local cultures. One of the key benefits of globalization is providing citizens with career opportunities. By creating jobs for the people, especially for those living in Third World Countries, multinational corporations establish a competitive job market for the citizens. Not only do foreign companies contribute to the local economy; but domestic companies also create jobs with the support of the local government. The government passes the protectionist legislation, paying the bailout to the companies to maintain job opportunities for its citizens (Harris, 2012). Since lowering the unemployment level is a vital task of the government, increasing both domestic and foreign companies presence on the market is crucial for a healthy economy.
Citizens are not concerned about the national identity of the company they work for but rather about the number of career options available to them. With the introduction of foreign business, many jobs are being opened. When South Koreas Kia assembly plant was opened in the Alabama-Georgia borderline, some forty-three thousand jobs were opened (Harris, 2012). In the age of globalization, multinational companies contribute as much to the domestic economy as the local ones do. By opening thousands of jobs and directly investing millions of dollars in the US economy, multinational companies like Honda and Toyota make a significant contribution to the economy of foreign countries.
Global stratification can also hurt the local economy. In the United States. stratification is done by wealth and power, which ultimately led to an influx of immigrants. Many jobs, especially menial ones, are being taken by the immigrants. Secondly, big multinational corporations force smaller companies off the market. With the dominance of companies like Ford, General Motors, Nike, smaller competition is being overtaken or made bankrupt with the presence of huge corporations. A negative impact on small and medium-sized businesses ultimately leads to a gradual decline of the local economy.
It is important, though, that in a global economy local remains an important aspect. In his research, Herod (2012) mentions two cases where local disruption causes a halt at production. One of them is the fact that when General Motors tried implementing a Just-in-time technology, a strike at one of the plants caused the full stop of production and tremendous losses. Previously, companies used to stockpile the necessary parts at the warehouses. At some point, managers decided that they were losing capital on these idle parts and decided to turn to another model of the supply chain. Just-in-time meant the delivery of parts just before the production at the assembly starts. In June 1998, the United Auto Workers (UAW) demanded better conditions for workers at the plant. When they were denied that, some 3400 workers walked off the job, stopping the entire production of GM (Herod, 2001). This ultimately led to a loss of $2.3 billion for the second and third quarters, 1998.
Increasing the global presence of a company leads to the profitability of the business effectively raising the revenue and profits. The government increases the number of job openings employing its citizens and lowering the unemployment rate. Citizens get better conditions within the competitive job market. By creating jobs and raising the companys presence in a foreign country, everyone is a winner within this system if it is properly regulated.
References
Harris, J. (2012). The World economic crisis and transnational corporations. Perspectives on Global Development and Technology, 11(1), 168-181.
Herod, A. (2001). Labor internationalism and the contradictions of globalization: Or, why the local is sometimes still important in a global economy. Antipode, 33(3), 407-426.
