Some economic reports claim that the overall GDP growth rate has increased over the past few years, but my personal situation is much worse than it was at the time. Financial pressures are much higher now than they were in 2008. Additionally, prospects for improvement of the standard of living seem grimmer now than they were four years go.
The situation
An analyst known as Blodget (2) carried out an analysis of the economic situation in the country and found that, unlike 2008 where the economic growth rate was negative, the past three years have witnessed a drastic increase in gross domestic product. This rate has even been compared to the Bush era. Unemployment rates are at an all time low, so they are much lower than they were four years ago.
Nonetheless, the analyst still maintains that the rate of increase has diminished even though it is still higher now than it was then. Blodget (8) also explains that the number of jobs in the country is increasing with time; he places greater emphasis on the positive growth rates in the private sector. He asserts that jobs are increasing at a rate of 100,000 jobs per month this year (2012), yet the country lost three quarters of a million jobs per month in 2008.
Once again, he compares these growth rates to the ones that existed during the Bush era. The report shows that government expenditure has increased; although this has not increased at a rate that was as fast as Bushs spending rates. Lastly, the analyst admits that the budget deficit is out of control now than it was four years ago (Friedman 9). He warns that if the government does not address it, then the country could enter into a crisis.
Although the above mentioned statistics make it appear as though the standard of living is much better now than it was in 2008, the reality of my experience and many other people sharply contradicts these findings. Four years ago, it was possible to indulge in a few luxuries such as foreign trips.
However, this is no longer possible today. The cost of ordinary items such as gas and household items has increased dramatically. It is now necessary to squeeze ones budget in order to afford these basic necessities. The situation was not as severe as it was four years. These high expenses are indicative of the high rate of inflation in 2012. Four years ago, it seemed like a distant idea, but it appears to apply to more people now than it did then ( Public sector pensions par 6).
Health insurance is yet another problem that appears to have worsened now than in 2008. At the time, ones employer was responsible for these payments. However, this is no longer true for me today. It is now necessary to cut down on daily expenses in order to reduce ones health costs. Only the most serious conditions warrant attention now. Furthermore, insurance premiums have almost doubled over the past four years so it is difficult to maintain that 2012 is much better than 2008 (Darling 14).
The job situation is not any better because downsizing has been going on in various sectors of the economy. Consequently, people who are still at work have little confidence in the economy because they are not secure about their jobs. Several executives are cutting down on their workforce in an effort to minimize operating expenditure. Several firms are outsourcing their manufacturing and production needs to cheaper economies such as China and India.
Employers dismiss American workers as overqualified and too expensive to maintain. The field of manufacturing is particularly notorious for this practice. Consequently, those workers who are still in employment worry about their future in their organizations. This lack of confidence in the system has hampered my productivity and many others like me. Those who are still in employment have undergone salary cuts that make their living expenses even more difficult to handle.
It is becoming more difficult to make savings as am currently using my earnings to handle basic expenses such as food and transport. Four years ago, it was possible to make savings and use them for investments. However, currently, people use most of their savings for regular household needs and medical expenses not covered under insurance. Possibilities of securing ones future are quite slim in 2012.
However, these grim realities are mostly true for middle class people like me. Top earners are only getting more in terms of their investments as their corporate profits are increasing as well as their overall return on investment. In fact, it is this category of people who mostly benefit from the unfavorable conditions faced by ordinary workers. Issues of inequality are rife in the country as majority of the country keeps suffering while the select few are enjoying immense profits (Jackson 16).
Conclusion
Some economic figures may paint an optimistic picture of the present, but personal experience illustrates that this is far from the truth. The cost of household goods has increased; health insurance has become inadequate. Further, confidence in the countrys employment sector has reduced. It is now more difficult to save, and cases of inequality are also rife. Consequently, 2012 is much worse than 2008.
Works Cited
Blodget, Henry. Are we better off than 4 years ago? Lets go to the charts. 2012. Web.
Darling, Bryan. The truth about President Obamas skyrocketing spending. Heritage Foundation, 2012: 14. Print.
The United States dollar has acted as the worlds reserve currency for more than sixty years. According to Carbaugh (2009, p. 519), the US dollar emerged as the world reserve currency after World War II. The United States was not adversely affected by war. In addition, the US experienced an increment in the inflow of gold and during 1930s and 1940s. The resultant effect is that the dollar became the reserve currency.
Over the past decades, the dollar has been considered to be the almighty (Robinson, 2009, p.148). Most governments have over the years considered the US dollar to be an efficient mode of holding currency as illustrated in figure 1. One of the reasons which explain why the dollar has continued to be the worlds reserve currency relates to trade.
Today, most governments reserve the dollar in their central banks so as to purchase goods in the foreign market. The US dollar was generally accepted as the reserve currency because the US firms produced high quality goods at low cost.
As a world reserve currency, the US dollars role was to enhance the level of confidence in trade and investment. In addition, the US dollar has over the years been used by most countries which do not have a gold standard to back their currencies.
As a result, the dollar enhances the level of confidence in investors. In most cases, emerging economies have discretion with regard to the reserves they wish to hold. However, they have to hold a currency which instills a high level of confidence on their local currency. This explains why China has liked its Yuan on the dollar.
Secondly, the US dollar cautioned countries against balance of payment deficits. Over the past few decades, the US dollar has been relatively stable compared to other currencies. According to Epstein and Graham (1993, p.74), a reserve currency must have a relatively high and stable value.
These characteristics make the reserve currency to be an attractive asset and also instill confidence amongst investors. As a world reserve currency, the dollar ensured that countries do not experience balance of payment deficits.
From figure 1, it is evident that there was an increment in the volume of dollars accumulated by governments from 1997. One of the reasons for this relates to the occurrence of the 1997 Asian financial crisis. The crisis led to countries such as Indonesia, Thailand and South Korea experiencing balance of payment deficits. As a result, there was an increment in demand for dollars.
The first reason for the increased calls for a new reserve currency is the existence of increased global financial instability. For a period of 13 years, the US dollar was considered as the world reserve currency. However, there was a decline in the degree at which the dollar is considered as the reserve currency from 2000 onwards.
A report by Peterson Institute for International Economics (PIIE) revealed a decline in the dollars share with regard to foreign exchange reserve with a margin of 4.3%. By 2009, the US dollar comprised approximately 60% of the total world reserves. The euro, the yen and pound followed as accounting for less than 30% as illustrated by the graph (Chu, 2010, para. 2).
One of the reasons which explain the decline in the prominence of the dollar is the fact that the US is experiencing a budget deficit. The resultant effect is that US has increased its dependence on borrowing to finance its economic. The occurrence of the 2008/2009 global financial crisis illustrates the weakness inherent in the existing international monetary system.
Those arguing for introduction of a new reserve currency system cite the need to develop financial stability. The instability of the dollar has led to increased calls for a new international monetary system to be introduced especially by emerging economies such as China and Brazil.
According to Hill (2009, p.54), emerging economies mainly depend on the international trade in order to stimulate their economic growth and development. However, the current reserve system does not offer efficient international liquidity. The resultant effect is that most of these economies were affected by spillovers of global shocks.
The emerging economies were adversely affected by the intensity and severity of the resulting financial shock spillovers. Despite the fact that these economies had accumulated a substantial amount of foreign reserves, the shortage of the dollar was a test on the effectiveness of the financial system.
The crisis also limited these countries from accessing the international interbank markets in addition to increasing the cost of borrowing foreign currency (dollar). This culminated into a significant decline in these countries rate of economic growth.
The second main reason for calls of a new reserve system relates to the Triffin dilemma. Most of the proponents for a new reserve system argue that dependence of a currency of a dominant country as the worlds reserve currency can lead to emergence of the Triffin dilemma (Lee, 2010, p.1).
According to Reinert, Rajan, Glass and Davis (2008, p.1143), the most successful developing countries are achieving their success by borrowing financial capital from the international market. The resultant effect is that the lending country experiences a balance of payment deficit. The debt may rise to high levels.
This may culminate into a decline in the level of confidence on the value of their reserved assets. Katz and Holmes (2008, p.69), are of the opinion that decline in level of confidence means that individuals would not consider the dollar the worlds reserve currency.
On the other hand, the borrowing country continues to accumulate foreign reserves. Currently, there is no system to force the reserve-issuer or the supply country to undertake adjustments so as to fix the imbalance. In turn, this would negatively affect the fixed exchange system culminating into global economic instability (Lee, 2010, p.1).
In order to deal with these issues, the International Monetary Fund resolved to introduce a new reserve asset referred to as the Special Drawing Rights (SDRs) in 1969. The main objective was to enhance the fixed exchange regime. ActionAid (2009, p.4), defines SDR to include a form of money which the IMF can develop by crediting accounts of the members.
This is done at an exchange rate which is determined by a number of major currencies. The main currencies considered in the SDR include the US dollar, Japanese yen, the euro and the pound sterling.
SDR is determined b y calculating the average of the four major currencies using a weighted formula which is re-evaluated after 5 years to ensure relevance of the currencies (ActionAid, 2009, p.4). The aim of the SDRs is to improve international liquidity.
In November 2010, the IMF decided to review the SDR by adjusting the weights of the respective currencies on the bases f the volume of exports and amount of reserves which are denominated by the currency held by member countries (International Monetary Fund, 2011, para. 7).
According to Reinert Rajan, Glass and Davis (2008, p.1020), this new international currency system will enable countries to attain diversification in their reserve holdings. In addition, it is possible to hold SDR at a relatively low cost compared to holding major currencies.
Reference List
ActionAid. 2009. Special Drawing Rights (SDRs) and the global reserve system. Web.
Carbaugh, R., 2009. International economics. Mason, Ohio: South-Western Cengage Learning.
Chu, D., 2010. Chinese Yuan versus the US dollar : in the case of global reserve currency. Web.
Epstein, G., 1993. Creating a new world economy: forces of change and plans for action. Philadelphia: Temple University.
Hill, C., 2009. Global business today. New York: McGraw-Hill.
International Monetary Fund. 1996. Annual report. New York: International Monetary Fund.
International Monetary Fund. 2011. Poverty reduction and growth facility. Web.
Katz, J. & Holmes, F., 2008. The goldwatcher: demystifying gold investing. Hoboken, NJ: John Wiley.
Reinert, K., Rajan, R., Glass, A. & Davis, L., 2008. The Princeton encyclopedia of the world economy. New York: Princeton.
Robinson, J., 2009. Bankruptcy of our nation: 12 key strategies for protecting your finances in these uncertain times. Green Forest, AR: New Leaf Press.
The ability to motivate consumers throughout their buying experience demands up to date user-generated content which may be enhanced through recommendations obtained from online opinion experts and regular feedbacks from customers. As such, it is prudent for company managers to play active roles in designing beauty products, advertising and brand promotion in addition to retailing the needs of orient customers.
These aspects will motivate customers who purchase beauty products in terms of confident shopping based on the parameters of value and quality. Therefore, the philosophy of retailing beauty products on online markets need to be changed from self-reference criterion to lifestyle and value perceptions driven by social-cultural and peer forces (Park et al., 2007, p.99).
Owing to the increasing number of beauty products, managers can opt to either assist customers in making decisions by putting in place price-value relationship that will result into affirming customers intentions (Adam, 2003, p.78).
Therefore, it is important for businesses to demonstrate price-value relationship via online stimulators. The beauty product sellers can equally attract clients by using channels like e-bays, catalogues and socio-media tools.
According to Terblanche and Boshoff (2005, p.77), online marketing of beauty products further provides customers with faster product search, price, promotion, comparative data, and availability of services to the customers in addition to building their motivation. Therefore, it is important for beauty products marketers to take advantage of existing positive linkage between beauty search behaviour and the design features of a website.
They can achieve this by tracking down the expectations of customers. Most importantly, managers of beauty products should put into consideration the fact that the shopping behaviour of customers is influenced by aspects such as shopping motivations, referral and credit incentives.
Most online opinion experts recommendations will also enhance brand recognition of various beauty products (Peterson & Merino, 2003, p.34) bearing in mind that it assists in connecting shopping interests with a number of customer groups. This is important in building strength and influencing customers intentions positively towards beauty products, celebrities and beauty product stores.
Anderson and Fornell (2000, p.122) posit that with the development of information and communication technology, beauty product consumers can easily add theirs on forms of contents. They can do this via blogs or weblogs, videos or pictures. Thus, beauty product consumers have the freedom of giving their own opinion on a product.
Furthermore, the comments can influence the purchase intentions of other customers when they share their views, experiences and beliefs with others. Terblanche and Boshoff (2005, p.78) suggest that user-generated content is a replacement of traditional forms of marketing since the content of beauty products are generated by customers and not the marketers.
Hence, media tools such as twitter and facebook, among others are a clear indication that consumers are more informed about beauty products. This has been illustrated by the fact that consumers can easily find information, articles, and comments in addition to inviting others to join and comment on the advertised product.
Adam (2003, p.67) further suggests that advertisement of beauty products through websites by use of tools like blogs, chat rooms and message boards does not only influence the purchase intentions of current consumers but also future ones.
Furthermore, the provisions of blogs or forums that capture customers comments allow marketers and producers of beauty products to get genuine feedback about the products. Additionally, they provide them with an opportunity to reassurance their consumers.
Finally, in the marketing of beauty products, the internet is an essential source of information for consumers. For example, in America and United Kingdom, most beauty product consumers make use of information superhighway to search information (Adam, 2003, p.45).
Therefore, user-generated content related to beauty products can be posted on particular websites. This is due to the fact that the content reflects the experience of customers with certain beauty products and this impact on their purchase intentions.
References
Adam, R. 2003. www.advertising: Advertising and Marketing on the World Wide Web. New York: Watson-Guptill Publications.
Anderson, E. & Fornell, C. 2000. Foundations of the American customer satisfaction index, Total Quality Management 11(7), 869-883.
Park, D. et al. 2007. The Effect of Online Consumer Reviews on Consumer Purchase Intention: The Moderating Role of Involvement. International Journal of Electronic Commerce, 11 (4), 125-148.
Peterson, R. A. & Merino, M.C. 2003, Consumer information search behavior and the internet, Psychology and Marketing 20(2), 99-121.
Terblanche, N. & Boshoff, C. 2005. The in-store shopping experience and customer retention: a study of clothing store customers, Business Review, 4 (1), 118125.
Many transactions use money because it is the most acknowledged medium of exchange. The purposes incorporate a store of value and universal acceptability. Paying money enables people and institutions to acquire goods and services. It is notable that money facilitates exchange-trading activities (McEachern, 2009). It is also noteworthy that money plays a significant role in measuring value. This makes it possible for people to use it in deciding the rate of exchange on diverse purchases. The fact that money is acknowledged universally enables it to function as a store of value.
It is non perishable, thus making it store the value of any property (McEachern, 2009). Money also functions as a standard for future payments. This enables people to undertake future transactions based on the value money holds. The transfer of value of the property and other assets also takes place based on money. This makes it possible for individuals and institutions to transfer property from one person or institution to another and vice versa (McEachern, 2009).
How the Central Bank Manages a Nations Monetary System
The central bank plays a critical role in managing a countrys monetary system. The bank implements the chosen monetary laws and regulations in every nation. For example, the Federal Reserve is charged with the responsibility of implementing the chosen policy associated with monetary systems (McEachern, 2009). The Fed alters the interest rates charged on money given to financial institutions. It is notable that higher rates make money exorbitant. Lending institutions shy away from borrowing money from the central bank (McEachern, 2009). Conversely, setting lower interest rates on money the Fed lends to financial institutions creates a good business opportunity for banks. The banks rush to the Fed to borrow money for business activities such as loaning (McEachern, 2009). The central banks also determine reserve requirements. This entails the maximum value of money that financial institutions can keep based on their loans.
Stated Direction of Recent Monetary Policy
The recent monetary policy was prepared based on how the economy expanded in the year 2012. The Federal Open Market Committee (FOMC) noted that the rate of joblessness remained high, and other people engaged in part-time work (Board of Governors of the Federal Reserve System, 2013). The committee noted that keeping suitable monetary accommodation would promote the economic escalation towards maximum job availability and price constancy. The FOMC offered more monetary accommodation as a way of promoting its goals.
The committee strengthened its forward control of federal funds and sanctioning more asset purchases (Board of Governors of the Federal Reserve System, 2013). FOMC pronounced that it would carry on its program to lengthen the average development of its treasury assets. Furthermore, it would start buying more agencies assured mortgage-backed securities. The committee planned to buy more assets as well as use other policy tools in a suitable manner. This would continue until the period when the position of the labor market is attaining price stability sustainability (Board of Governors of the Federal Reserve System, 2013).
Policy Action that the Federal Reserve Has Taken to Confirm that Direction
The Fed implemented the FOMC recommendations initiating a policy for the acquisition of assets. The Fed assets escalated to $3,097 billion. This was as of 20 February 2013. The purchasing policy enabled the asset holdings escalation (Board of Governors of the Federal Reserve System, 2013). Furthermore, it reflects the expansion of the Feds value of Treasury securities as well as organizational mortgage-backed securities. The expansion also originated from other previous decisions, which quickly escalated average maturity. These activities have enabled inflation to stabilize (Board of Governors of the Federal Reserve System, 2013). It has also enabled monetary accommodation, thus escalating the opportunities associated with employment and consumer prices in the country.
The Effects of Monetary Policies on the Economys Production and Employment
Monetary policies have multifaceted effects on the economy. Particularly, monetary policies have a direct impact on the ability of the economy to produce and provide job opportunities (Federal Reserve, 2011). The Feds role in implementing monetary policies associated with interest control affects the demand for market exchange. The effect of monetary policies on production and employment takes place as a process. The process originates from the fact that monetary policies alter interest rates (Federal Reserve, 2011). Consequently, interest rates also affect the demand for market exchange activities. This eventually affects output and job opportunities.
It is noteworthy that loose monetary policies minimize interest rates. This encourages lending institutions to obtain money from the Fed, thus enabling more money to exist within the economy. Therefore, more investors will initiate production activities aimed at manufacturing goods (Federal Reserve, 2011). High investment rates escalate employment opportunities. Furthermore, tight monetary policies reflect high-interest values set by the Fed. This presents a challenging moment in the marketplace for more people, and institutions will shy away from taking loans (Federal Reserve, 2011).
It is notable that this leads to a low circulation of money within the market. This affects market expansion through investment and the creation of companies. There will be a minimal expansion in the marketplace (Federal Reserve, 2011). Production will reduce drastically, thus negatively affecting the economy. The situations also hinder job creation.
Public budgeting primarily involves the allocation of resources, with the main objective of achieving the governments goals and objectivities within a particular period of time. It serves to reflect the financial plan of the revenues and expenditures of the various levels of government, which are federal, state and local governments (Bovaird & Loffler, 2000).
This means that public budgeting centers on the prediction of government expenditure, establishing the link that exists between the financial and human resources with the primary objective of realizing the goals, representing the governmental activities in monetary terms and recording the results of the struggle at the expense of political preferences.
The main objective of this paper is to analyze the breadth, depth and application of revenue estimation among the various forms of budgets deployed in public budgeting (Epstein & Thomas, 2000). The paper offers a description of each of the budgets, the differences and similarities of each budget and what accounts for the major sources of revenue for each of the state, local and federal budgets.
In addition, the paper discusses how the revenues are expected to change in future, how the budget fits with the mission of each domain and the ways through which the budget can be improved and revenue estimation at each level can be accurate.
Basic description of each budget
The collection of taxes and expenditure of the funds is one of the core functions of the government. This implies that the government requires a plan for the collection of revenue and subsequent spending on the public initiatives (Tax Policy Center, 2011).
The government budget can take various forms at different levels of government such as operating, capital, proposed and departmental government budgets (Epstein & Thomas, 2000).
The united stated federal government usually splits its budget into discretionary and non-discretionary expenditure, with each of the form of the budget having a particular role to play in the realization of the governments goals and objectives during the implementation of public programs (Guillermo & Rodrigo, 2008).
The operating budgets at the state and local governments usually govern the plan of approach regarding the expenses and revenues. For instance, a budget for a city can take charge of the salaries and benefits for the employees and other expenses such as law enforcement and so on (Tax Policy Center, 2011).
Separate budgets are created for utilities that the public pay to use such as water and sewer; this is mainly because such revenue is not generated from the collection of taxes.
Similarly, operating budgets at the state level usually take charge of expenditures like appropriations in public educations, part operations at the state, government operations at the state appropriations for operations associated with economic development at the state level (Epstein & Thomas, 2000). The duration of state budgets usually vary depending on the state laws regarding budgeting.
Capital budgets are somewhat different from the operational budgets since they are used in financing long-term projects associated with infrastructure innovation and construction. Such projects usually cost a significant amount of money and are a potential source of financial burdens for the government at the state level (Smith & Lynch, 2003).
Tax increases in such a context are usually avoided through the maintenance of separate capital budgets by the state and local government and the various quasi-governmental agencies with the principal objective of financing long terms construction and renovation projects. Capital budgets are not deployed in the federal budget (Guillermo & Rodrigo, 2008).
With regard to proposed budgets, the United States president in conjunction with Office of Management Budgets has the responsibility of creating a proposed budget and puts it forward to the US Congress (Tax Policy Center, 2011). The state governors work together with the state budget officers to develop their own budget proposals that are applicable at the state level.
The propose budget at the local level is created by either the mayor or the officials who have been appointed to undertake the process of budgeting to be applicable within the local level of government.
Despite the fact that federal, state and local governments pass different proposed budgets, the power to develop a proposed budget is usually considered as a vital agenda-setting power, implying that budgetary allocations usually prioritize the urgency at that particular level rather than the national directives (Tax Policy Center, 2011).
With regard to department budgets, the various levels of government have different departments that are charged with providing the public with different services. The various departments at the federal, state and local governments usually work in collaboration with the budgeting executives to develop a budget proposal that outlines the revenues and expenditures to use in the final proposed budget (Tax Policy Center, 2011).
The legislative bodies, which includes the Congress, the state legislatures and the city councils reviews and analyzes the budget, after which the department has to create a budget in accordance with fund appropriations allocated to it.
The United States federal budget makes use of both discretionary and mandatory expenditures. There are various laws that predispose the government to finance entitlement programs such as social security, welfare programs, Medicare and Medicaid, and the interests that have been accrued on public debt.
Discretionary spending usually entails the expenditures that the government has the option of cutting (Tax Policy Center, 2011).
Differences between federal, state and local governments with respect to budgeting
The federal government has a responsibility for the mint, implying that it has the capability of printing currency. Therefore, the federal government, through its budget can monitor the circulation of currency using the Federal Reserve. On the other hand, state and local governments cannot monitor the circulation of money using their budgetary allocations and capabilities (Baumol & Alan, 2006).
The federal government also regulates the national economy through the use of interest rates in order to keep check of inflation and stimulate the economy during cases of stagnation. The state and local governments cannot make use of their budgetary tools to control and monitor the interest rates, meaning that their budgets cannot have a direct impact on the economy compared to the federal budget (Epstein & Thomas, 2000).
Owing to the fact that the federal budget can be deployed to control and monitor the national economy, there is a possibility that it could make a fuss of deficit expenditure to realize eider economic goals and microeconomic policies. During recession, the federal budget can make use of increased expenditure irrespective of reduced sources of government income to stimulate the economy (Epstein & Thomas, 2000).
During economic surplus, the federal budget can make use of reduced expenditure in order to maintain the surplus; this is a theoretical model of the Keynesian economics (Epstein & Thomas, 2000). The significant challenge is that the government deficit in the federal budget has increased irrespective of the surplus duration imposed by the internet boom.
The difference is that state and local governments can make use of the concept of budget deficit to influence the economy. With respect towards the scope of applicability, federal budget is applicable with matters of national defense, the state and local budgets on the other hand are applied on a smaller scope revolving around state and local issues respectively (Epstein & Thomas, 2000).
Major sources of revenue for the federal, state and local budget
The sources of revenue vary in accordance with the level of the government. Despite the fact that federal government collects the largest amount of tax, the government at the state and local level has various options concerning their taxing approaches (Baumol & Alan, 2006).
Sources of revenue for Federal budget
The federal budget relies mostly on the federal taxes, which comprises of individual and corporate taxes, excise taxes, social security taxes, inheritance and estate taxes and capital gains tax (Bovaird & Loffler, 2000). Individual income taxes and payroll taxes are the primary source of revenue for the federal budget.
It is approximated that individual and payroll taxes contribute USD 4 out of USD 5 of the federal revenue (Tax Policy Center, 2011). The corporate taxes comprise of approximately 12 percent of the federal revenue. The balance is filled by the excise taxes, estate and inheritance taxes, custom duties and capital tax. There has been a significant change regarding contributions towards the federal tax revenue.
The fractions of the payroll taxes have been growing while the contributions by corporate, income and excise taxes diminishing with respect to the share of the full amount of federal tax revenue. The amount contributed by the individual income tax has been somewhat constant.
The following shows the federal tax contributions for the federal budget revenue for the year 2011. Other sources of revenue for federal budget include government borrowings such as treasury bonds and user charges (Tax Policy Center, 2011).
Source: Tax Policy Center, 2011.
The tax policy is defined by the tax descriptions and tax expenditures. It is notable that the United States federal income tax is usually progressive, implying that marginal tax rate that is high results to higher ranges of the government revenue.
For instance, during the 2010 fiscal year, the tax rate applicable to the initial USD 17000 with respect to taxable income for joint couples was approximately 10 percent (Tax Policy Center, 2011). The tax rate applicable to income above USD 379150 was approximately 35 percent. There has been a significant reduction in the top marginal tax rate since the year 1980.
The tax rate reduced from 70 per cent to 28 percent during 1980-1988 (Guillermo & Rodrigo, 2008). The recent tax cuts implemented the Bush administration, were further reduced by the Obama administration to 35 percent. The federal payroll tax is a considered as a flat tax, which is mainly used in financing social security and Medicare (Tax Policy Center, 2011).
The social security fund has a capping at the USD 106800, implying that any income that is more than this amount is not liable to tax.
The employers are supposed to pay the Medicare funds and it has no capping, and the payroll is usually viewed as a social insurance instead of tax because of the potential benefits accrued the individuals who have qualified to participate in this program. The employee payroll tax was significantly reduced to 4.2 percent with the aim of stimulating the economy (Tax Policy Center, 2011).
Sources of Revenue for State budget
The description, analysis and evaluation of the expenditures at state and local level are mainly centered around the issue of the establishment of the relationship that exists between the present and long term requirements on a manner that is satisfactory.
The composition of the revenue for the state and local budgets plays an important role in determining the relationship connecting the long term requirements and short term goals (Guillermo & Rodrigo, 2008).
State and local governments are usually under high pressures to increase their source of revenues, which is mainly implemented through the use of taxes, which in turn affects the material status the members of the public who are supposed to pay for using public utilities.
The revenues for the state and local budgets can be categorized into 3 main classifications; including revenue collected using their sources, grants from federal and state governments and loans (Tax Policy Center, 2011).
The primary source of revenue for the state governments include intergovernmental transfers, state taxes, licenses, lottery and borrowing such as state bonds. State taxes includes individual and corporate taxes, sales taxes, fuel taxes, inheritance and estate taxes and special taxes that are imposed on particular commodities such as alcohol and tobacco (Smith & Lynch, 2003).
During the year 2008, states in the US collected approximately USD 1.5 trillion, with 28 percent of the revenues coming from inter-governmental transfers from the federal government and a small percentage from the local government. The remaining revenue comprised of the state taxes, miscellaneous receipts and fees.
A breakdown of the revenue estimates for 2008 fiscal year reveals that state earned approximately USD 446 billion from intergovernmental transfers, which contributed to approximately 29 percent of the revenues for the state budget (Guillermo & Rodrigo, 2008).
The taxes associated with sales and gross receipts contributed the largest amount in the category of state taxes during 2008, which comprised of USD 360 billion, making approximately 25 per cent of the total state revenues. Individual income and corporate taxes contributed approximately 20 percent of the revenue for the state budget during 2008 (Tax Policy Center, 2011).
The individual income taxes totaled approximately USD 280 billion, while the corporate income taxes contributed approximately USD 50 billion. The miscellaneous taxes, state receipts, charges and fees were approximately USD 380 billion, which is approximately 25 percent of the state budget revenues (Epstein & Thomas, 2000). The following chart shows the revenue contributions for the state budgets.
Source: Tax Policy Center, 2011.
Sources of revenue for the local government
The local government primarily relies on intergovernmental transfers, local taxes such as property and sales taxes, special assessments, user charges and borrowings. During the 2008 fiscal year, the local government collected revenues of approximately USD1.4 trillion. About 40 percent of this amount came from intergovernmental transfers from the federal and state governments (Tax Policy Center, 2011).
The remaining percentage was collected from the local taxes, fees and various receipts deployed at the local level. A breakdown analysis of the revenue for local budget reveals that intergovernmental transfers contributed USD 525 billion, which was about 37 percent of the total revenues for the local budget.
Property taxes contributed the largest amount of the local taxes, which totaled to USD 400 billion, making up 28 percent of the total revenues for local budget. Charges and other receipts deployed by the local government contributed to approximately 23 percent of the total revenues for local government budget (Tax Policy Center, 2011).
Taxes from sales and gross receipts, individual income taxes and miscellaneous revenue made up 12 percent of the total revenue for the local governments budget. The following figure shows the contributions by the various sources of revenue for the local government budget (Smith & Lynch, 2003).
Breakdown of the federal, state and local revenue and how the budget fit within each of their domain
Federal revenue usually contributes the largest portion of the total national revenue. For the 2007 fiscal budget, the Tax Policy Center reports that federal revenue comprised 50 cent of the total national revenue, state contributed approximately 30 percent while the local government contributed the remaining 20 percent.
The transfers between federal government and the state and local government can be reviewed in three perspectives (Epstein & Thomas, 2000). Firstly, the inter-governmental transfers from the federal government to the state and local government comprised of approximately 20 percent of the federal revenue, making up 10 percent of the total national revenue.
Secondly, a significant percentage of intergovernmental transfers were directed towards state governments, which was equivalent to 110 percent of the revenue collected by the local governments. Thirdly, the state retained about 29 percent of the revenue while the local government budget benefited from the intergovernmental transfers from both the state and the federal government (Guillermo & Rodrigo, 2008).
The different levels of budget have different objectives and different scopes of applicability. This is mainly because they deploy different financial tools in achieving their goals and objectives. The federal budget can be adjusted in order to meet the macroeconomic policies adopted at the national level.
In addition, it is primarily concerned with mandatory expenditure and entitlements at the national level. Mandatory expenditures are usually financed by means of permanent appropriations in the federal budget and they include social security, Medicare and Medicaid (Tax Policy Center, 2011).
The federal budget meets its mission at the national level through deployment of financial and economic tools that can have an effect on the entire US economy (Guillermo & Rodrigo, 2008). This is usually done through varying the government expenditure and revenue in order to maintain a surplus or combat a deficit (Guillermo & Rodrigo, 2008).
Fiscal policy significantly depends on government revenue and taxation. Changes in this variables of fiscal policies usually affect various variables of the economy such as aggregate demand, resource allocation pattern and income distribution. The principal objective of fiscal policy is to make use of the government budget to control the economy of a country (Tax Policy Center, 2011).
This scope of applicability cannot be deployed in state and local budgets because they are not allowed to operate under deficits, that is, they are supposed to balance, and potential shortfalls are funded appropriately (Epstein & Thomas, 2000).
The fiscal policy is one of the most effective strategies deployed by governments to chase their economic goals and objectives. This implies that the impact of governments in stimulating the economy is noticeable in the nature of fiscal policies deployed.
In the short term, the fiscal policy can be used by governments to attain short-term economic stability, while in the long-run, fiscal policy provides a framework for realization of economic growth and development. Fundamentally, the fiscal policy can be used to manipulate the Gross Domestic product, inflation rates and the rates of economic growth and development through balancing government taxation and expenditure.
There are three potential positions of fiscal policy, which are neutral, expansionary and contractionary stances. A fiscal policy that is neutral is characterized by a balanced economy (Epstein & Thomas, 2000). The outcome of this is a large tax income, whereby the funding of the government expenditure is from the tax income. The outcome of the government budget normally has a neutral effect with respect to economic stimulation.
An expansionary fiscal policy is characterized by the government expenditure exceeding the tax income, while a contractionary fiscal policy is characterized by the government fiscal policy being lesser than the tax income from tax. The fiscal stance can be defined as the government expenses divided by the tax ratio, which represents the revenue of Gross Domestic Product (Epstein & Thomas, 2000).
Changes in government revenue in future
The sustainability of government revenue is a significant concern for most of the rich countries; this is primarily because of the increasing debt burden due to the financial crisis and the global recession.
The issue is further worsened by the fact that costs of healthcare are increasing and at the same time, the aging population is also increasing. In the context of the US, this is likely to be a significant challenge to federal, state and local governments (Epstein & Thomas, 2000).
A reduction of the tax revenues, global recession and financial crisis have had negative implications on state and local budgets, which has compelled the states and local governments to deploy strict measures in order to maintain their budgets.
Despite the fact that the financial crisis and global recession has significantly reduced tax revenues collected by the state and local governments, the loans and grants from the federal government has played a significant role in maintaining the revenue levels for the state and local government budgets (Guillermo & Rodrigo, 2008). After the end of recession, taxes associated with receipts began tom increase.
In addition, other classifications of revenue from taxes such as individual income and corporate income tax, sales tax and property tax have been increasing steadily (Epstein & Thomas, 2000). The situation is likely to continue this way in case there is no looming financial crisis in future. The basic implication is that government revenue is projected to increase on condition that financial crisis do not occur in future.
The budget appropriations under the federal government have also been increasing at a modest rate; an increase in the federal revenue also means an increase in the revenue for the state and local government budget (Bovaird & Loffler, 2000).
In cases where the federal aid has proved inadequate to help in stabilizing the revenue for state and local budgets, governments at this level are deploying strict policies in order to meet their financial goals and objectives. It is arguably evident from the tax raises by most of the state and local governments. The National Association of State Budget Officers reports that 23 states have raised their tax rates during the 2011 fiscal year.
It is anticipated that this will increase the tax receipts by approximately USD 6.2 billion. Same tax rises were implemented during the 2010 fiscal year, which increased the state tax revenues by approximately USD 23.9 billion (Tax Policy Center, 2011).
The nature of the fiscal policies deployed by the state and local governments will also determine the changes in the revenue for the state, federal and local budgets. It is anticipated that federal aid for the state and local governments is likely to drop significantly during 2010.
Deficits and shortfalls in the state, federal and local budgets cannot only be attributed to economic crisis, but also structural causation factors. For instance, some states opted to reduce their tax rates without a prior analysis of the underlying effects of recession, in the sense that it would sharply reduce the tax base, resulting to a reduction in revenue accrued from taxes (Guillermo & Rodrigo, 2008).
Additionally, tax rules that are restrictive impose significant constraints when implementing corrective strategies to combat structural failures. In addition, some states make use of an outdated tax collection system resulting significant inefficiencies in tax collection. This has the potential of reducing tax revenues in future if these issues are not addressed appropriately.
Other structural failures include tax imposed on commodities and not on services. This poses the need for tax reforms in such situations in order to ensure that tax systems are efficient and effective in order to improve the total government revenue (Smith & Lynch, 2003).
It is projected that taxes are bound to increase in future depending on the policy scenarios that will be implemented by the coming governments.
In case the policy of tax cuts adopted by the Bush administration is subject to expiry and that more American citizens that are from the middle-class are compelled to pay out the Alternative Minimum Tax (AMT), then there is a probability that the tax revenues will increase to first-time high levels. The issue of the tax burden is likely to increase even if the policy of tax breaks is subject to extension (Smith & Lynch, 2003).
According to the President Obamas budget, which aims at reducing the tax rates for other taxes while also increasing others, it is evident that this will increase the tax burden on American citizens, which translates to increased government revenue in form of individual income taxes.
The following graph shows high the tax burden is likely to increase in the United States given the current state of policies that have been implemented by the government (Epstein & Thomas, 2000).
A general theory is that tax cuts can generate extra taxable income, resulting to higher revenue compared to the collection of tax at higher rates. The long-term macroeconomic effects of tax cuts are impulsive; this is because it depends on the various ways that the taxpayers spend the extra revenue, and how the government copes with reduced levels of revenue.
There are two perspectives to view the role of tax cuts in reviving the economy; they are the Keynesian economic theory and the supply-side view (Guillermo & Rodrigo, 2008). According to the Keynesian view, as the revenue grows, there will be an increase in the tax revenue and the incentive to increase earnings.
This implies that a reduction in taxes from high tax rates translates to a higher economic stimulation than if tax rates reduced by the same amount from lower tax rates. The basic argument is that as the government reduces the tax rates, there will be more money for people to spend, implying that there will be an incline in the aggregate demand, which in turn results to an increase in the Gross Domestic Product.
This approach is an effective strategy in reviving the economy. According to the supply-side perspective, lower tax rates serve to fuel aggregate supply (Epstein & Thomas, 2000). The reasoning here is that if people save more of their income, they tend to work more, and companies can use this opportunity to produce more. This serves to increase the aggregate supply.
This can be effectively implemented during cases of economic recession or during times where there is a small economic activity with the main objective of establishing a tool for economic expansion. A theoretical approach to this reveals that such deficits will be countered by the increasing economic expansion that is anticipated to follow (Guillermo & Rodrigo, 2008).
Governments can effectively make use of the surplus during budgeting to regulate the pace a fast growing economy and stabilization of prices in cases whereby inflation rates are high. However, economists have different views regarding the effectiveness of the fiscal policy in economic stabilization (Guillermo & Rodrigo, 2008).
References
Baumol, W., & Alan, B. (2006). Macroeconomics: Principles and Policy. New York: Thomson South-Western.
Bovaird, T., & Loffler, E. (2000). Public management and governance. Oxon: Routledge.
Epstein, G., & Thomas, F. (2000). Monetary Policy, Loan Liquidation and Industrial Conflict: Federal Reserve System Open Market Operations in 1932. Journal of Economic History , 44, 56-60.
Guillermo, P., & Rodrigo, L. (2008). Fiscal policy, stabilization, and growth: prudence or abstinence? Washington DC: World Bank Publications.
Smith, R., & Lynch, T. (2003). Public Budgeting in America. New York: Pearson/Prentice Hall.
The central bankers of the Federal Reserve Bank of United States of America, the European Central Bank and the Bank of Japan have been included among the worlds most influential people due to their economic influence. To begin with, the federal reserve banks monetary decisions usually influence the adjustment in most of the worlds economies, because most transactions take place using U.S. Dollars.
On the same note, these economies are among the worlds top economies and any action taken by their monetary committee always has spillovers to other countries in the world (Kolb, 2010). These economies, being among the worlds top importers and exporters, usually change their money supply and interest rates which influence trade in the whole world; and this is usually done by the central bankers.
In March 2009, following the effects of the financial crisis the Federal Reserve Bank opted for an expansionary monetary policy. The FED announced its intentions to buy $300 billion longer-term securities, and increase purchases for agency debt to $200 billion and mortgage-backed securities to $1.25 trillion. The expansionary monetary policy meant that there was an increase in money supply, which increased the amount of money that people were holding.
In this regard, many people had money they were willing to deposit in banks while banks held a lot of money they were willing to lend (Kolb, 2010). Therefore, interest rates were reduced to discourage people from depositing money and encourage them to borrow from banks. On the other hand, due to reduced interest rates, exchange rates also depreciated in relation to other currencies (Hall & Lieberman, 2012).
The decrease in interest rates discouraged banks from passing on the credit to consumers because the return to the money was low. However, the banks had a lot of money in their possession and consequently relaxed their lending rules, to increase the chances of getting borrowers (Hall & Lieberman, 2012).
On the same note, the decrease in exchange rates and increased money supply increased consumption of local commodities, thus increasing market for local businesses. Similarly, lower exchange rates discouraged imports because they became relatively expensive while encouraging exports. Therefore, as far as international trade is concerned the monetary policy increased net exports (Kolb, 2010).
Monetary policy is very influential in any economy. As such, it is my opinion that it would be convenient for the FED to use a policy mix, applying both the Keynesian and the monetary theory.
Keynesian theory states that prices are not flexible downwards while this was disapproved during the 2007 financial crisis, when the prices of houses crashed. Nevertheless, it was discovered that monetary policy alone cannot stimulate the economy, because government spending was vital in stimulating economic growth after the financial crisis (Hall & Lieberman, 2012).
References
Hall, R. E., & Lieberman, M. (2012). Economics: Principles & Applications. Stanford: Cengage Learning.
Kolb, R. (2010). Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future. Hoboken: John Wiley & Sons.
Among the most difficult decisions to make as regards international business, is whether to price the commodities in the local currency or in United States dollars. While other companies may prefer to price their goods in the local currency to identify themselves with the local people, others will want to be secure from exchange rate fluctuations and thus price their goods in U.S. Dollars.
Pricing goods in U. S. dollars in a foreign country sends an impression to the locals that the goods might be somewhat expensive compared to local products (Langley, 2002). On the same note, people usually prefer using their local currency when buying or selling commodities. Therefore, it will be a bit difficult for people to have U.S. dollars with them during shopping.
Consequently, this might reduce the demand for the commodities due to lack of money to use (Clarke, 2004). At the same time, pricing goods in American Dollars will require people to calculate the cost of the goods in local currency which might discourage many people. However, this decision protects exporters from exchange fluctuations hence ensuring that their income is relatively stable.
On the other hand, pricing commodities in the local currency gives an exporter a competitive advantage as it identifies the firm with the locals. On the same note, demand for the firms commodities will increase because it will be easy for even the unlearned to determine the actual cost of the commodity (Langley, 2002). Unfortunately, due to uncertainty surrounding the exchange rates, the exporters are not able to know their income upfront because the income keeps on varying depending on the exchange rate.
To avoid the exchange rate risk that arises from international trade, the exchange parity theory is usually applied. The theory states that if there is no arbitrage, then the difference in interest rates of two currencies will be depicted on the premium or discount for forward exchange rate of the foreign currency (Madura, 2009). According to rate parity theory, foreign and domestic assets are believed to be perfect substitutes of each other while capital can easily be moved between the countries.
The theory can be applied in two scenarios: when the exchange rate risk is unaccounted for (uncovered interest rate parity), and when the exchange rate risk in taken into account using forward contract. A combination of the uncovered rate parity and purchasing power parity depicts the real interest rate parity. Through the real interest rate parity, economists are able to get expected interest rates which are used to focus the predictable future exchange rates (Clark, 2004).
Furthermore, forward foreign exchange contract can be used to cushion firms against foreign exchange fluctuations. Forward foreign exchange contract refers to an agreement reached between two parties that allows for the purchase of one currency at a particular rate on or before a given date.
No matter what the changes may be in the exchange rates, the buyer will buy at the agreed rate until the specified date. The contract enables firms to plan confidently for the future since the cost of transaction is specific, and the agreement has no other fee except the exchange rate. However, this can lead to a loss incase of depreciation in exchange rate since the agreement cannot be bypassed.
The forward exchange rate between United States of America can be determined by using the formulae:
F=S (1+i$) / (1+ic)
Where: F is the forward exchange rate
S is the current sport exchange rate
i$ is the United States interest rate
ic is the Egyptian exchange rate
Taking S to be 6.10 Egyptian pounds
i$ to be 0.25%, and
ic to be 9.25%.
Then F= 6.10 (1+0.25) / (1+9.25)
F= 0.74 Egyptian pounds.
It should be noted that the monetary policy of a country can highly influence interest rates and exchange rates. To begin with, assume that an expansionary monetary policy is implemented by the central bank. Other factors held constant, this will increase disposable income and people will have more to spend.
As a result, more people will be willing to deposit their money in banks. At the same time, banks will be having excess liquidity which they would be more than willing to offload by way of loans to people. Unfortunately, people will be unwilling to take loans because of excess liquidity. Under this scenario, money supply will exceed money demand and interest rates will be high.
Consequently banks will be forced to reduce interest rates to stimulate demand for loans. It is important to note here that as interest rates reduce, demand for loans from banks will be triggered and continue rising until a state of equilibrium between interest rates and demand for money is reached (Langley, 2002). Therefore, monetary policy either decreases or increases interest rates depending on whether it is expansionary or contractionary.
On the same note, there is a very strong relationship between interest rates and exchange rates. Increase in interest rates leads to increase in the rate of return on foreign currency assets. All other factors held constant, the increase in rate of return causes depreciation in the exchange rate (Madura, 2009). The opposite is true when expansionary monetary policy is implemented instead of the contractionary monetary policy.
However, apart from the monetary policy and interest rates there are other factors that influence exchange rate fluctuations. First and foremost, there is inflation rate which determines the prices of commodities. When inflation rate is higher the commodities of a country become relatively expensive and exports decline.
Consequently, fewer people will need the currency of that country which will lead to depreciation of the exchange rate. Secondly, current account deficit implies that the countrys demand for foreign currency is more than it supplies. In other instances, to reduce the deficit some governments depreciate their currency. Similarly, large public debt requires servicing either through borrowing or through other means. In some cases this will lead to increased inflation and hence depreciation in exchange rates (Langley, 2002).
On the other hand, if speculators think that the value of a currency will increase in future, demand for the currency will increase hence the exchange rate will rise. Moreover, political instability highly influences the confidence of investors and their willingness to invest; and by extension the exchange rate. In some instances, governments can also interfere directly with the exchange rate when they want to fix the exchange rate at a specific rate.
Though all of these factors might not be applicable in Egypt, some will definitely be applicable. Political stability in Egypt is not guaranteed if what was experienced recently is anything to go by. Though the regime people were fighting against was toppled, the economy has not fully recovered from the effects of the riots.
On the same note, Egypt operates on a current account deficit year in year out and this is something to take note of. Moreover, inflation is not very predictable when it comes to Egypt and this can influence the exchange rate. Nevertheless, Egypt pegs its exchange rate on the U.S. dollar and this can reduce the exchange rate fluctuations.
References
Clark, P. B. (2004). A New Look at Exchange Volatility and Trade Flows. Washington: International Monetary Fund.
Langley, V. S. (2002). Exchange Rate Volatility and International Agricultural Trade. Ontario: Captus Press.
Madura, J. (2009). International Financial Management. Stanford: Cengage Learning.
Small and medium scale enterprises (SMEs) have become play an integral determinant in the growth and development of the economies of many nations. In this paper, the impact that SMEs have on individuals, nations and the world at large have been discussed. The paper has also focused on the theory and research that is available to SMEs. It has also focused on the models that have been advanced to support the operations SMEs.
A critique of the available literature was also conducted. From this analysis, it was found that the government plays a critical role in the incorporation and sustainability of SMEs in the short run and in the long run by providing financial, technical and technological assistance. Thus, with its findings, this paper clearly highlights the importance of SMEs in the process of economic development and the role played by the government in achieving this goal.
Introduction
The goal of any business entity, organization or government is to ensure that its operations are sustainable in the short run and in the long run. To achieve this, scholars have come up with different strategies and plans. China for example, is a nation that has been exhibiting positive economic growth for the last several decades (Kameyama and Kobayashi, 2010).
The country is renowned by the key role that it plays in technological development. However, to ensure that its economy is sustainable in the long run, the Chinese government has put a lot of emphasis from the beginning of the 21st century with the establishment of small and medium enterprises (SMEs) by its citizens and foreign investors as well (Kameyama and Kobayashi, 2010).
The Chinese government views SMEs as economic investments that not only enable their economies to grow and become sustainable but as means through which their nations can increase the rate of employment as well as productivity. It is as a result of this that several studies have been undertaken to determine the effectiveness of SMEs in economic development.
This paper will therefore focus on literature that surrounds SMEs. It will expound on the theories, models and research that surround the incorporation and management of SMEs. The paper will take a further step and critically analyse several articles that expound on the theories and models that it presented. This will create a deeper understanding of operation and management of SMEs in China and the world at large.
Theories and Research on SME Development
According to Berry, (2009), the main aim of SMEs is to achieve a given objective in the economy of a given nation. It is due to this fact that the burden of developing and sustaining SMEs lies in the hands of the government. The modern world is experiencing many challenges.
Unemployment, increased in demand for goods and services, increased production costs and the fluctuation in the world economy are but some of the challenges that the world is facing. To overcome these challenges, scholars have come up with different strategies, SMEs being one of them.
The Chinese regards SMEs as a basis in which an industry can be developed from (Kameyama and Kobayashi, 2010). However, it is essential to note that most of the governments that use or have used SMEs as avenues of developing industries are based developing nations.
China is a nation that has highly benefited from this concept. In terms of industrial development, China can be regarded as a latecomer. However, the progress that it has made is highly tremendous. The nation has become one of the leading manufacturers and exporters in the world.
However, these industries have developed from humble backgrounds as SMEs. However, due to the effective reforms that the nation had on public policies and development, these SMEs actually grew to become leading industries in the nation, Asia and the world at large (Haan, 2004). As a leading industrial nation, most of the manufacturing firms and industry in China were state owned several decades ago (Haan, 2004).
However, with the emergence and application of the SME concept, private industries slowly started to grow. Currently, the level of privatization in the Chinese industrial sector is quite high. This has highly attracted foreign investment in the nation. Privatization is an essential step towards achieving economic sustainability. Thus, in China, SMEs have played critical role in the industrial success that the nation is currently enjoying.
Through privatization, SMEs have always been regarded as avenues through which the industrialization reformation process can be based upon. This process has been essential, as it has increased the level of innovation and efficiency in the Chinese economy and industrial sector (Kameyama and Kobayashi, 2010).
As a result of privatization, the level of production in almost all segments of the economy has highly increased. Consequently, the private owned firms have increased the level of employment as well as the living standards of its employees. These factors play a critical role in the growth of the GDP of China and any other nation that uses this strategy.
SME Development Model
However, most of the private owned firms have grown into large-scale firms. As a result, these firms require highly skilled and qualified personnel to run their organizations. Therefore, the staff retention rates in such firms are quite high. This phenomenon has resulted in an increase in unemployment especially for the unskilled individuals as well as the members of the upcoming generations. Thus, to solve this problem, most government use SMEs to absorb the unemployment pressure that they might be facing.
However, to achieve these goals and to ensure that SMEs are sustainable in the short run and in the long run, it is of the essence that the Chinese government supports these projects with effective tools (Kameyama and Kobayashi, 2010). As Kameyama and Kobayashi (2010) asserted, these tools are essential for the growth and development of SMEs in any economy. These tools are always regarded as incentives that enable SMEs to achieve their set goals and objectives as well as the economic goals of a given nation.
For instance, the economy of Japan is driven by SMEs as they account for 99% of the registered companies in the nation and employ over 78% of the labour force. However, to ensure that the operations of SMEs are sustainable in the short run and in the long run, the government through its Ministry of Economy and Industry has been developing incentive plans that will ensure the sustainability of SMEs in the nation in the short run and in the long run (Kameyama and Kobayashi, 2010).
Most SMEs require financial support to start up. However, the individuals who start up these ventures usually do not have access to the capital that is required to start up such businesses. To overcome this challenge, the Japanese government has proved entrepreneurs with funds in the form of direct investments as well as indirect investments (Kameyama and Kobayashi, 2010).
The Chinese government prefers to provide indirect forms of investments to prospective entrepreneurs. The government has lending scheme that are supported by local as well as international banks and financial trusts. These schemes provide investors with the funds they might require to start up their businesses.
However, the access to these funds has not always been guaranteed. This is due to the tight qualifications and measures that have to be achieved for an individual to qualify for such a loan. Consequently, there has been a lot of biasness in determining the individuals who access these loans. Although many laws and legislations have been passed to ensure that there is equity in the disbursement of loans and capitals to commence businesses, these non-discriminatory policies have failed to be implemented fully in China.
Therefore, women find it difficult to source for funds to commence businesses unlike men. As a result, Chinese women use approximately one third of the capital that men use to commence their businesses (Nelson, 2006). However, women have ended being more successful in these businesses as compared to men.
Having capital to start up a business is a critical step in the process of developing a new venture into becoming successful. However, for such a venture to achieve maximum efficiency, it needs to be operated and managed in an effective and efficient manner (Nelson, 2006). A lot of studies have been conducted on managerial techniques that can be used to ensure that the operations of companies are effective, efficient and sustainable.
However, these practices have not been fruitful in the management of SMEs. Most of the individuals who manage large companies are highly skilled and qualified while the ones who run SMEs are not. Therefore, if such individuals apply rudimentary management techniques, the chances of such an investment being sustainable and profitable are minimal. Due to this fact, the Chinese government has come up with measures and techniques of overcoming these challenges.
In China for instance, the government assists the entrepreneurs in the SME industry by providing them with technical and financial assistance (Kameyama and Kobayashi, 2010). This is essential in setting up the business venture. At the same time, the government offers them with business creation assistance.
This scheme provides the entrepreneurs with the information and skills that they require to effectively run their businesses in regards to the industry in which they are operating in. Finally, the government offers the entrepreneurs with technological assistance. Currently, technology is effective in the running and management of any business entity. Therefore, with this information, entrepreneurs not only become successful in their businesses but also increase their expertise and skills are managers.
Other models have been developed by scholars to ensure that SMEs operate in an effective and efficient manner hence enabling them to achieve their set goals and objectives. In their paper (Kameyama and Kobayashi, 2010) advocated for the SD model. The aim of this model is to ensure that SMEs operate effectively regardless of the political, economic and social challenges that it might encounter. To achieve, the model is divided into two sub-models; the micro model and the macro model.
The micro model focuses on improving the overall management of an organization. Given the fact that most SMEs obtain their capital either from direct investments or indirect investments, this model focused on effective cash management. To achieve this, the model put a lot of consideration on cash flow and the effects it has in recruitment and training, manufacturing, marketing, financing and technological development.
The macro model on the other hand focused on the impact that SMEs have on the socioeconomic status of a given nation (Kameyama and Kobayashi, 2010). To achieve this, the model expounded on the effects that a given SME has on the industry in which it is operating in and the overall impacts that SMEs have in capital accumulation and on the GDP.
Critical Analysis
The literature that has been presented in this paper has laid a lot of emphasis on the importance of technology in the running and management of SMEs. For instance, most SMEs in China use e-commerce as their main method of marketing the goods and services that they produce. As Berry (2009) asserts, e-commerce is a term that is used to refer to the process of selling and purchasing goods and services over a variety of electronic systems (p. 237).
Examples of these electronic systems include the internet, computer networks and any other telecommunication network. This technological advancement has come about as a result of the massive advancements that are being experienced in the field of Information Communication and Technology (ICT). These advancements have made the manner in which individuals, organizations, societies, nations and the world at large operate.
Many firms all around the world use the e-commerce strategy to gain a competitive edge over their rivals in the respective industries that they operate in. It is due to this fact that firms should adopt and implement this change and innovation. This will not only enable them to gain a competitive advantage over their rivals but it will ensure that the organization is run in an effective and efficient manner (Boone and Kurtz, 2011).
In general, several barriers that have hindered the total application of e-commerce in SMEs. Some of these factors include resistance to change, the high costs that are required to adopt, set, and maintain the service, unavailability of relevant resources to support this system and the unsuitability of the concept in small businesses.
Due to the above factors, owners and managers of SMEs have always developed negative attitudes and perceptions towards the adoption of e-commerce in their businesses. This has greatly led to bigger business entities enjoying much of the benefits that accrue from e-commerce. Thus, more women are found in SMEs than in large business entities. Therefore, it is the men who benefit much more from e-commerce than their female counterparts.
Financial acquisition has also been an issue that was covered in the literature. Due to the fact that sourcing for funds to supporting SMEs has always been an issue, the Chinese government has come up with models that have played a critical role in the development and sustainability of SMEs.
These models have acted as incentives that motivate entrepreneurs to invest more in the economies of respective nations. However, the provision of financial support has always been met with several challenges. For instance, it has always been argued that it is always much easier for men to get access to financial assistance facilities as compared to their female counterparts. This is mainly due to the discrimination, especially on the lines of gender that is present in the world.
As it has been argued, men always have the preference of operating in large enterprises. Consequently, they have higher chances of securing financial support while operating SMEs. As a result of the gender discrimination that is present in the society, women have always viewed SMEs as one of the ways in which they can earn a living and gain social recognition.
A lot of studies have been conducted on the reasons that influence women to participate in the running and management of small businesses. In Australia, for instance, many women are involved in small businesses as a means of circumnavigating the glass ceiling that has always acted as a barrier in the growth and development of their careers (MacGregor and Vrazalic, 2008).
In the Asia, most women are involved in trading activities as a means of after working either public or private sector before incorporating their own businesses (Haan, 2004). Most of these women posses basic business, entrepreneurship and management skills from local and international colleges and universities.
Given the strong background of knowledge and skills that they posses, women enterprises have been relatively successful as compared to those that are managed by their male counterparts in the UAE. In Australia, the same trends have also been reported. In their paper, MacGregor and Vrazalic (2008) went on further to state that the proportion of women who have been successful in operating small businesses in Australia is four times that of the men.
Therefore, to overcome these challenges, the Chinese government needs to improve the accessibility of loans and other forms of financial assistance (International Finance Corporation, 2011). It has been identified that the lack of financial backing has led to the development of the perception that individuals, especially female entrepreneurs cannot adopt and implement IT and ICT in the running and operations of their businesses.
Financing is an essential component in ensuring the growth and development of any business entity. Many women in China, for example, have been unable to implement e-commerce due to this fact. The government should therefore formulate new legislations and amend the existing ones to ensure that Chinese women can easily access loans from banks and other financial institutions such as women groups, societies and cooperative organizations.
For convenience, these loans should have low interest rates, require simple formalities and most importantly, they should be eligible to all the women. This will guarantee that entrepreneurs are able to pursue the economic opportunities that are available. This will create a more a favourable environment where individuals and the government can benefit a lot from SMEs.
Cumulative Findings
Considering the literature that has been presented in this paper, it is evident that for an individual to start a foreign SME in China, several considerations need to be put in place. First, one needs to have a clear understanding of the business that he/she i setting up in china.
This knowledge is essential as it determines the vision, mission, goals and objectives of the business. It is also important for the business to adhere to the rules and regulations of the state. For instance, setting up an SME in china requires an investor to follow several rules and regulations such as registering the entity, licensing and so on.
In some industries, pre-approval of a business entity is necessary. Finally, one needs to understand the market trends and commercial considerations in China. To achieve this, it is essential to have a business plan that will be used to determine the financing of the entity, plan its capital investments and cash repatriation schemes. Thus, such an entity will be able to react to the changing market situation, regulatory requirements and the overall operating environment.
References
Berry, L 2009, Relationship marketing of services, growing interest and emerging perspectives, Journal of the Academy of Marketing Science, vol. 23 no. 2, pp. 236245.
Boone, L. and Kurtz, D 2011, Contemporary marketing, Cengage Learning, New York.
Haan, H 2004, Small enterprises: Women entrepreneurs, Labour Market Study vol. 1 no. 19, pp. 1-52.
Kameyama, S. and Kobayashi, H 2010, Model for SME development. Web.
MacGregor, R. and Vrazalic, L. 2008, The role of gender in the perception of barriers to e-commerce adoption in SMEs, IBIMA, vol. 4 no. 2, pp. 121-147.
Taxes are necessary evils in the economy. They are harmful to growth and business sustainability. On the other hand, governments are not charitable organizations and therefore, they need taxes to enable them to provide essential services such as infrastructure, education and health services. Citizens pay most of the taxes directly or indirectly such as the income tax, sales tax, and FICA tax. There are other taxes such as the property tax and corporate taxes Nightingale (2002).
Factors to consider when imposing taxes on
Small Business
Type of taxes you will be paying small businesses pay various taxes such as self-employment taxes, sales tax, payroll tax, and income taxes. One needs to know which taxes to pay and when to pay them.
The profitability of the businesses one should consider the proportion of the businesses profit he wants to be distributed to him and the percentage he wants to be reinvested in the business so that he can decide the amount of money to pay in terms of taxes.
Type of employee hired one needs to know the classification of his employees from the beginning. Contract employees cut the tax burden while permanent staff increases the tax burden.
The industry of the small business some industries attract higher taxes while others attract fewer taxes, such as small businesses in the Export-Processing Zone enjoy tax subsidy and pay taxes at a rate lower Nightingale (2002).
Taxes imposed
Licenses levee charged by the local government.
General tax sales tax charged on specified goods such as medicine and foods.
Gross receipts sales taxes charged on all gross receipts, goods, and services.
Property owners
Tax charged on property held such as real property (land and structures) and personal property (bank accounts, automobiles, bonds, boats).
The market value of property additions done on the property increases the market value of the property. Property appreciates in value overtime therefore; one should consider how long the property owner has held the asset.
One should consider the value of other property in the locality. This is because, if the property in the locality increases or decreases in value, taxes on that property will also change.
The property tax by the state may also change. The legislature applies a general property tax to the recreational, commercial, and industrial class of properties.
Taxes imposed
General property tax This is a tax charged by the local government. The tax is imposed at a single rate based on the class of the property.
Special property taxes charged on a select property such as gas and oil properties, intangibles, and house trailers.
Taxes charged based on the income generated by the property (Nightingale 2002).
Individuals
The status of the person resident or non resident.
Source of income.
Whether or not there is a connection between the businesses (Greenstein, 1998).
Taxation of residents
Taxation of citizens is on their worldwide income. Citizens with foreign tax can apply to exclude the income earned up to $80,000 from their taxable income. Generally, all income is subject to income tax.
Non-residents
If the non-residents do not carry on business and their sole source of income can be determined on an annual basis, or it is a periodical income (FDPI) like rent, interest, or loyalties, FDPI is chargeable at a rate of 30%, held at the source.
If the non-residents conduct business, they file a tax return, Form 1040NR. The income connected to the business is subjected to progressive taxes similar to those charged to residents.
The income level of people determines their taxation. Higher tax is chargeable on high-income earners and lower tax charged on low-income earners (Greenstein, 2012).
Taxes imposed
They include personal taxes, Value Added Tax, imposed by the federal government and excise duty, customs duty and stamp duty imposed by the local government (Greenstein, 2012).
Foreign direct Investment (FDI) is the investment the company makes to acquire long term interest in a foreign country. If the US company builds a new plant in Egypt at a cost of $50 million, this would represent the US foreign direct investment to Egypt. Foreign direct investment would include acquisition in full or in part of a foreign enterprise, or when a company makes additional capital in the existing foreign subsidiary (Krugman, Obstfeld, & Melitz, 2010).
Foreign direct investment is a strategy of foreign market entry, for instance, the Content Cow Dairy may decide to buy or enter into partnership with the already existing dairy company in Egypt, which provides an easy way of entering into the market.
Direct investment enables the company to penetrate the market because of the already existing customers (Dixit, 2011). Cost reduction is the key benefit the company enjoys especially if the investment is in Least Developed countries (LDC), and this would represent the best return on investment.
Cheap raw materials would be readily available, further reducing operational costs and enhancing profits. Foreign direct investment allows better strategic control where intellectual property rights and technological knowledge can be kept within the company (Krugman, et al., 2010).
The company is able to enjoy economies of scale because of the reduced costs, and easy coordination because of integrated supply chain. Direct investment offers the company access to a bigger market in the host country and tapping of local talents, which allows the company to pursue its growth goals (Yalcin & Sala, 2010).
There are risks associated with DFI, which includes political uncertainties in the hosting country, which can change instantly, and the new regime can expropriate the assets of the company. There is also the case of cultural differences between countries which may result in misunderstanding and even business failure (Moran, 2011).
There is also a risk in the loss of company identity because there will be interference from the affiliated companies in the foreign country, who may not understand the history and the culture of the company (Dixit, 2011).
Swanson needs to consider direct investment over exporting because foreign direct investment offers better opportunities for growth especially if they can find a strategic partner. Since the raw materials are available locally and the processing done locally, they can price their products more competitively and compete with other producers selling in the country (Krugman et al., 2010).
In the short run, exporting may appear cheap but, ultimately, it will be expensive to take advantage of future growth and to compete effectively; the company needs to make direct investment.
Krugman, P. R., Obstfeld, M. & Melitz, M. (2010). International economics. (9th ed.) Washington, DC: Pearson.
Moran, T. H. (2011). Foreign direct investment and development: launching a second generation of policy research: Avoiding the mistakes of the first, re-evaluating policies for developed and developing countries. London: Peterson Institute.
Yalcin, E., & Sala, D. (2010). Uncertain productivity growth and the choice between FDI and export. Web.
