The government has to plan annually for its expenditures as well as revenues. This forecast initiative is referred to as the governments budget. The year in consideration is normally termed as the fiscal period. Imperatively, it should be noted that a fiscal year must necessarily coincide with the normal calendar year. In the U.S, the president proposes the budget to the congress. The congress consequently engage it its discussion. Finally, rational decisions concerning the priority areas and funding of the fiscal year are arrived at.
How and Where Revenues Are Derived
The federal government mainly gets its revenues through taxation. The government taxes individuals, businesses and the local authorities. The aim is to obtain the resources to finance various activities. These may include transportation improvements, provision of public utilities and sponsoring of major government agencies. The revenue also originates from income taxes. An example includes the ones chargeable on social security.
The congress also has power to impose taxes on imports and charge duties to raise revenue for the government. There are four major sources of government revenues within the U.S. These include the intergovernmental revenues and sales tax.
Employee contributions as well as the income tax also include other sources (Baumol & Blinder, 2012). The intergovernmental revenue is the largest contributor to the government revenue. It funds education, health and welfare among others. The sales tax is usually chargeable on goods and services that people purchase.
Governmental, Proprietary and Fiduciary Funds
The revenue collected by the government is meant for diverse purposes. Governmental funds generally refer to those that are obtained through taxation and levying of fees. They are also used for provision of services (Ruppel, 2010). They are normally categorized into general funds and special revenue funds.
Other categories include capital funds as well as the debt service funds. The general funds are for activities for which how the use of the money will not be accounted for. The special revenue funds are obtained from specific sources. The capital funds are for acquisition of capital goods. Finally, debt service funds are meant for acquiring resources for the repayment of long-term loans.
The government usually uses the proprietary funds to finance its activities that are of business nature. The proprietary funds are of two types, namely, the enterprise funds and the internal services funds. Accounting principles applicable in businesses within the private sector are also used when dealing with the proprietary funds.
The government usually holds funds in trust for the members of the public. These funds are the fiduciary funds. Some examples include pension for the employees that provide retirees with benefits (Gans, 2003). The fiduciary funds are categorized into agency and trust funds with the distinguishing feature being the period of existence of the fund.
Restrictions Placed on These Revenues
There are eminent restrictions normally placed on the use of the governmental, proprietary as well as the fiduciary funds. Restrictions are usually placed on governmental funds when there are certain rules placed on their use. The rules on their use can either be placed by external agents such as creditors, contributors or regulations that other governments have put (Ruppel, 2010).
The constraints on their use can also be put in place by law through provisions in the constitution. An example of such restrictions can be one that has been put in place by the constitution of the state. Restrictions can also be placed on proprietary funds by foreign parties or through provisions in the constitution. The composition of the difference between assets and the liabilities of proprietary funds can have restrictions placed on them. An example of this is assets being restricted for debt retirement.
How Public Policy Decisions Affect the Receipt of Revenues
Public policy decisions have various effects on the amount of revenue that is collected. The policy that any government adopts is either likely to increase or reduce the amount of revenue that it collects. If the government adopts a policy that aims at increasing the amount of money supply, it may decide to lower the tax rate (Baumol & Blinder, 2012).
This will have the effect of lowering the amount of revenue that it will collect. On the other hand, if the government policy aims to reduce the amount of money in circulation, it may decide to increase the tax rate. This will have the effect of increasing the amount of revenue that it will collect. Therefore, this shows that the policies that the government adopts may affect the amount of revenue that it collects.
Economic Conditions That Affect Revenue Projections
High gross domestic product (GDP) growth can enable the government to collect high revenue. However, increasing inflation usually has negative effect on demand and thus has negative effect on the GDP. This, therefore, means that an increase in inflation and slow growth rate can adversely affect the government revenue projections.
Negative economic conditions such as rising unemployment, rise in general price levels and declining consumer confidence have the combined effect of creating uncertainty (Baumol & Blinder, 2012). The government, when faced with economic uncertainty, cannot be able to make accurate projections on the amount of revenue it will collect.
References
Baumol, W. J., & Blinder, A. S. (2012). Macroeconomics: Principles & policy. Mason, OH: South Western, Cengage Learning.
Gans, J. (2003). Principles of economics. Southbank, Vic: Thomson Learning.
Ruppel, W. (2010). Governmental accounting made easy. Hoboken, N.J: Wiley
Globalisation is a common phenomenon in the contemporary world. Business competition has stiffened, and thus many organisations are using globalisation as a competitive advantage. The concept of globalisation cuts across numerous attributes in the modern-day society, thus contributing to unifying cultural practices in economic and business areas (Markus 2005). Globalisation can be defined as a practice of unifying business and economic practices across nations boundaries in search of new opportunities. This trend has greatly contributed to the growth of world markets. In the modern world, large business corporations are expanding at a high rate across their nations boundaries in search of new business opportunities in regions seemed to have unexploited potentials (Steger 2009).
Consequently, business globalisation and technology transfer have fostered the creation of harmonised world economies, thus easing the expansion of large businesses to international markets due to uniform trade treaties made by various nations across different parts of the world.
Drivers of Globalisation in the Production of Goods and Services Sector
Globalisation is driven by various factors, but the four main aspects that have had a major impact on the twenty-first century include technological advancements, competition, the convergence of global consumerism patterns and markets, and government policies. In the contemporary world, technology is an essential component of economic growth and development in any country. Technology is a globally universal component that is adopted in most parts of the world, thus making it easy for globalisation of other factors of business such as labour and markets (Soros 2002).
Technology is very important for the progression of a business production as it helps in lowering production costs coupled with enhancing the quality of products. The ultimate goal of all businesses is to maximise profits and thus anything that lowers production costs is highly preferable to business players in a bid to attain the set profit goals. Traditionally, businesses required many workers in different departments, which then made it hard for management to oversee the business production in a human crowded environment (Friedman 1999).
Many employees are a risk to the business success and growth as it is often very difficult for managers to come up with policies that suit the interests of every stakeholder, which then leads to endless complaints and grievances in the workplace. Technological advancement assists businesses to reduce the human labour in operations, which is a great milestone in cutting down the cost of production in terms of labour and reducing risks posed by larger workforce in the business premises.
In mid-nineteenth century, technology had not fully been adopted in a majority of world countries, and thus many businesses operated on traditional methods of production. Traditional methods of production consumed more power as compared to the modern technological advanced methods of production (Helliwell 2000). In addition, traditional forms of production also required more time to produce quality products as compared to the modern methods due to low technological applications. Hence, businesses incurred high production costs, which were deterrents towards achieving the ultimate goal of profit maximisation. Surprisingly, technological advancement in the modern-day world uses less time and power to produce high quality products, which enables businesses to produce large volumes within a short period, thus enabling profits maximisation.
Technology is a major driver of globalisation as it is universal and it is traded internationally. Developed countries are the major source of technology whereas the middle income and developing nations are the buyers of that technology. Technology advancements lead to unified production across the world whereby goods and services produced under the same technology advancement are standardized in quality and branding irrespective of the place of production. This aspect increases global market for the same products by giving international traders an opportunity to choose from different buyers in the international level, and hence contributing to the globalisation of trade.
Technological advancement is a major factor of production in todays world as it reduces cost production and increases efficiency whenever installed irrespective of the location. For instance, the adoption of computerised working systems in offices has increased rapidly in the twenty first century across the world. Businesses and large organisations have been in a position to centralise their operations into a single centre across the world, hence saving high costs that would be incurred in hiring the requisite human resources to carry out work, which is equally performed by the technological installed systems. Hence, the desire by businesses and profit-making organisations to cut down cost and increase profit has played a major role in contributing to globalisation as centralised managerial functions pool people of different origins and cultures from various parts of the world.
Secondly, competition is a major factor and driver of globalisation in the world today. Competition is the major threat to business growth and development. Every businessperson wishes to exist in a monopolistic environment with many buyers, but one seller. The existence of competitors in a business environment contributes to globalisation of business operations, as it seems to be a competitive advantage and a competitive strategy. Competition has its benefits to the business players as it threatens their survival if competitive advantage strategies are not taken into account, thus leading to business expansion and globalisation.
Most large businesses and large profit making organisations have expanded to regions that are far beyond the boundaries of their countries of origin as the local market is never satisfactory for them due to competition. The world trade has grown to unprecedented levels in the contemporary world as large businesses and especially those operating in manufacturing and technology industries, survive under global competitive conditions. For instance, a carmaker in the United States cannot solely rely on the American market for profit making due to other competitive carmakers in the country. In addition, every carmaker in the world is fighting for an opportunity to enter the US market, as it seems potential and promising. Hence, the carmaker would opt to expand to other markets across the world in order to have a diverse market, and thus a competitive advantage (Scholte 2005).
In addition, competition has forced some businesses to merge with other global business partners as a competitive strategy over other competitors. A small business enterprise is always ambitious to outdo an existing large business that then makes it easy for a competitive large business to merge with the small business in order to outdo the already existing large firms by applying new operational strategies. Hence, the effort by business players to garner competitive advantage leads to globalisation of business operations (Dicken 2011).
Thirdly, market and convergence of global consumerism patterns is also a major driver of globalisation in the contemporary world of business. The global market is ever available for business products, but the main challenge to the business players is the application of strategies that will enable them to exploit such markets. Apparently, the twenty first century is an era of high consumerism due to advanced technology and dynamism in consumption patterns, thus leading to the development of newly attractive products regularly. Consumerism is a dangerous social behaviour that lowers financial intelligence in the consumers minds as they compete in acquiring new and most attractive products that exist in the market. Additionally, consumerism is common amongst the middle class and the youth.
For instance, the technology has enabled carmakers to produce attractive car models regularly on yearly or half-yearly basis, which are meant to target the youthful celebrities and middle-income earners (Arndt & Kierzkowski 2001). Hence, the attention is not on the location of the market place, but rather the social status and age group of the potential customers at the global phenomenon.
The idea of viewing the world as a global village has led to change in mentality and attitudes in the business environment. There have been advancements in transport systems that enable a customer to transport goods and services to various parts of the world conveniently. In addition, some businesses are virtually global since they target the wide global market through online marketing and shopping mechanisms, hence enabling customers to acquire goods conveniently from various places across the world (Anderson & Svensson 2009). These business trends have contributed to gradual changes on the world cultures, thus leading to universal consumerism patterns. For instance, a youthful Kenyan dresses the same way as a youthful American as they buy clothes made by the same fashion designer based on a particular place in the world. In addition, the two will mostly use the same mobile and computer gadgets as they share a common consumerism taste and preferences (Guest 2012).
Notably, business players are prudent and they acquire strategies that will increase their survival and ability to increase profits as soon as the need arises. Hence, the universal consumerism pattern has led to a majority of global businesses to invest heavily on goods and services that match what consumers need in the modern world. Hence, the American businesses are operating in the same way as Italian businesses as they target the same customers with the same preferences. Hence, it is easier for a business to change location to another country and continue with operations without the need to change the products (Levitt 2013).
Fourthly, government policies have also contributed highly as drivers of globalisation of production of goods and services across the world. Every government endeavours to see its economy growing, and thus actions that will fuel economic growth are essential in making government policies. In different regions of the world, governments have contributed to globalisation by introducing trade policies that attract foreign investors in an economy.
For instance, developing countries rely heavily on the agricultural and tourism sector for economic growth and development, as they do not have the ability to invest on industrial and technological sectors due to high capital requirements (Wild & Wild 2007). In addition, the majority of developing countries have high population that hampers the ability to invest in high capital-intensive ventures due to budget constraints. These challenges force governments to introduce policies that will attract foreign investments in the local economy. In some cases, more than two developing countries form a trading block where they allow free trade and reduce trade barriers amongst them in order to attract foreign investments. The policies by governments to attract foreign investors open doors to globalisation whereby foreign businesses enter an economy for investments.
In some cases, government officials are sent to foreign countries to seek for markets of local products. The effort to seek market in foreign countries often leads to the signing of trade agreements whereby the foreign buyers seek favourable trade policies for investing in a certain country and in most cases, such requirements are granted. Hence, foreign traders get opportunities to invest in another country under disembroiled government policies. In addition, the majority of developing countries seek foreign expertise in the implementation of major economic projects such as construction of huge transport infrastructures due to experience and efficiency, hence leading to globalisation.
Impacts of Globalisation in Production of Goods and Services Sector
The production of goods and services sector is the backbone of the worlds trade, and thus globalisation has had a major impact on the sector in the twenty first century. The two main impacts of globalisation on this sector include an increase in the market of goods and services and improved quality of goods and services. The aspect of globalisation has forced a majority of businesses to increase their market coverage across various parts of the world as customers have uniform consumerism tastes and preferences.
In addition, the stiff competition in the global phenomenon has led to withdrawal of some business players in the sector due to failure to adopt efficient competitive mechanisms, hence increasing the market potential of the few left in operation. In addition, the idea of universal global consumerism has enabled large business organisations to merge with smaller businesses operating in the same business line in foreign countries in order to increase the global market coverage in foreign countries at lower costs than they would incur if they chose to open subsidiary branches.
In addition, globalisation has led to increased quality of production of goods and services in the world (Graham 2009). The existing business players have already set high quality production benchmarks for new entrants, which has enabled global customers to enjoy high quality products and services. The universal global consumerism has played a major role in the improvement of production as producers try to please their potential clients in the market. Producers are at the risk losing their market share if they make substandard goods and services, courtesy of competition and the ever-increasing consumerism in the global market. For instance, for a long time, the Chinese products have been considered as inferior to other brands in various parts of the world and especially in the western countries. However, the Chinese have tried to merge with western producers in order to convince the potential clients that their goods and services are of high quality. Hence, globalisation has played a major role in the improvement of quality production of goods and services in the world markets.
Personal reflection
Globalisation is essential for the development of world economies as well as social development of the worlds population. The majority of worlds developments are results of globalisation, which pool people of different cultures and origins to a common environment for social or business reasons. Globalisation has led to the establishment of notable world events such as sporting activities where people of different cultural heritages are made to understand that they share some similarities. Sporting and tourism activities are the major historical drivers of globalisation in the world apart from war and colonisation as visitors get time to exchange ideas with the locals.
In addition, the visitors carry with them some ideas to their countries of origin, which often bear them economic values. In the contemporary world, sporting and tourism activities are a global culture and it has opened doors for trade expos where traders exhibit their products to foreigners with an intention of securing global markets. Hence, globalisation is a norm for every successful tradesman in the modern world of business.
In the education system, globalisation has led to various developments in the sector in an effort to make it relevant when compared with other systems across the world. In the higher learning institutions, the presence of e-learning systems enable students to participate in lectures, while physically away and this aspect has resulted in globalised technological advancements in the education sector. In addition, the majority of learning materials are products of foreign producers who have a good reputation of producing high quality products such as stationers and other learning materials. Hence, globalisation has had a major impact on students by availing relevant learning materials.
Globalisation has also contributed to the personal growth of fashion consciousness across the world. It is good for both the consumer and producer to be aware of the trending fashions in order to remain at par with customers needs and preferences. Traditionally, only the cloth wear industry was fashion conscious, but the technological advancements in todays world have led to other sectors acknowledging fashion consciousness. For instance, a mobile producer would be required to produce a mobile phone that is equal to or above the current trending mobile fashion in order to garner sizeable market coverage in the global arena.
Moreover, as a buyer, I would be required to be aware of the trending fashions and models of goods and services that I deal with in order to remain updated in the social phenomenon. In addition, globalisation has contributed highly to the price determination of products in the world markets due to stiff competition in the market place. Economically, foreign traders are believed to bring in higher and more affordable goods and services into the market as compared to local traders. Hence, local traders fear competition from the foreign traders, and thus they tend to produce higher quality products and sell them at considerable prices. Hence, globalisation determines the price of products in a given market.
Conclusion
Globalisation is essential for the development of world economies as it opens doors for large market coverage to producers who come up high quality products and sell them at considerable prices. In addition, globalisation has led to growth and development of unified world cultures due to the convergence of global consumerism. In education sectors, globalisation has played an equally important role as explicated in this paper. Hence, globalisation has enabled customers to acquire high quality goods and services from various traders, due to the wide choice availed by the many competitors in the world markets.
Reference List
Anderson, S & Svensson, G 2009, Global Marketing: think globally and act locally, Studentlitteratur AB, Sweden. Web.
Arndt, W & Kierzkowski, H 2001, Fragmentation: new production patterns in the world economy, Oxford University Press, New York. Web.
Dicken, P 2011, Global Shift, Sage, London. Web.
Friedman, W 1999, The Lexus and the Olive Tree, Understanding Globalisation, International Publishers, Cairo. Web.
Graham, T 2009, No Way to Run an Economy, Pluto Press, London. Web.
Guest, R 2012, Borderless Economics: Chinese Sea Turtles, Indian fridges and the new fruits of global capitalism, Palgrave Macmillan, New York. Web.
Helliwell, J 2000, Globalisation: Myths, facts, and consequences, C.D. Howe Institute, Ontario. Web.
Levitt, T 2013,The globalisation of markets, Harvard Business Review, vol. 61 no. 3, pp. 92-102. Web.
Markus, B 2005, Drivers of Globalisation: Integration of Theories and Models, GRIN Publishing, Munich. Web.
Scholte, J 2005, Globalisation: A Critical Introduction, Palgrave, Basingstoke. Web.
Soros, G 2002, George Soros on globalisation, Public Affairs, New York. Web.
Steger, M 2009, Globalisation: A Very Short Introduction, Oxford University Press, New York. Web.
Wild, J & Wild, K 2007, International Business: The Challenges of Globalisation, Pentice Hall, London. Web.
Deep financial centres exhibit high liquidity of capital. All types of currencies are usually available in such markets. The variety of currencies enables investors to obtain capital easily. Financial centres such as New York have a widely used currency, which is the American dollar.
Other currencies, however, are also available. On the other hand, emerging financial centres may have plenty of one currency, but other types of currency may be scarce. Movement of capital may be impaired by this scarcity leading to low rate of investment.
Deep financial centres are characterised by utilisation of modern technology. Thus, in these centres there is a high level of education among workers such that skilled labour is always available. Constant demand for skilled labour has led to the development of a pool of skilled workers ready for hire.
In emerging financial centres, skilled labour may be scarce. There may be an imbalance because one type of skilled labour is available while another type of labour is scarce. This may prevent investors who require the scarce type of skilled labour from operating in the financial centre.
Since broad financial centres host investors from many countries, they develop a regulatory system that creates a good legal environment for all investors to operate. Legal barriers are usually minimal due to years of compromise for the sake of the increased business activity. The nature of the tax system in the financial centre is also highly flexible to allow the greatest number of investors.
In the emerging financial centres, the tax system may effectively bar some investors from investing in the financial centre. It takes some time for a financial centre to modify laws and tax regimes to create a favourable environment for investment.
Having experience in the political and economic fields for many years, Ian Bremmer can be considered to have strong evidence in his extensive research on global economy. In this book, he tries to address the current economic crisis by answering questions such as; can state capitalist compete with free market? Does capitalism still exist or is it going to extinct? Are we still in an economic cold war? His key players are the Men and women who govern Russia, China, Arab, and the United States (Bremmer IV).
About the book
In the first half, the writer is devoted to explain what capitalism is. He describes the birth of capitalism as a replacement of fallen communism regimes of China and Russia. He discusses how today this model has become an attractive package to countries such as China, Russia, US, Saudi Arabia, Algeria, Ukraine, India, and the United Arab Emirates.
The second half gives a detailed support and effects of state capitalism on market economies. Although he really convinces the reader that he is not against state capitalism, he actually cautions about it. According to Bremmer, the power in politics controls this type of economy. Instead of formulation of policies that are based on the needs of the people, the decisions are approved and implemented politically.
Recommendations
Overall, Bremmers engagement is excellent. He is clear on his advantages and disadvantages of state capitalism and creates a good understanding of world politics. From a review, the test rating and analysis of this book can be addressed by the following recommendations.
The book can be highly recommendable to even persons without knowledge about economies .Ians coverage is realistic, simple, broad, lucid, and well judged. The book does not leave behind any unanswered questions on globalization. Its briefing is excellent and narrates the sequence of events from the rise and fall of communism to the effects of capitalism.
According to Bremmer, capitalism is a disguised monster in the free markets whose goal is to have political gain. He argues that the cause of all these selfish gains is globalization that acts as a catalyst to international politics and markets. He notes that capitalization has different forms distinguished by their own interests and the degree of government support.
First, he talks about the free market capitalism (Bremmer 13). In this type of economy, involved parties use wealth to build more wealth. The state enables generation of wealth through enacting contracts that are limited to moral weaknesses. In contrast, he talks about the state capitalist economies. This type of regime is dominated by politics and the choice of the principal consumer.
Book report
With the fall of the soviets in the nineties, political and economic analyst proclaimed victory over communism to create a new free market economy. However, Bremmer admits that no liberation has followed yet. It is just that the system has incanted. Capitalism is not new in the world as admitted by Bremmer and traces its root back to 1896.He references this year from the speech made by Wilhelm Liebknecht, the leader of the social democratic party in Germany.
He looks upon the state capitalism as an extremely huge threat to the economy of the United States. This is one point that we can all agree on. Notably, there is a huge similarity between what the writer tries to explain as state capitalism and the history of the US economy.
Nevertheless, does it mean the US government grew out of selfishness and greed? Many tend to oppose this but it is what Bremmer is trying to explain. Countries that used state capitalism take up the larger section of the pie in the global market. Among them are the European Union and the US. According to Bremmers report, they actively applied state capitalism during their development.
The approach is a real threat to the global economy since it is really making the extinction of free market policies (Bremmer 54). However, the political greed of these governments has left the citizens of the countries at the mercy of international investors. Bremmer goes ahead to show how wide capitalism is. All that makes it take different forms is the degree of government involvement. Other forms include the free market capitalism, mixed economy, and the social market economy.
To expound on his research, Ian points out Adam smith who is the man behind the development of capitalism in the world. According to Adams, in pure capitalism, everyone does what is best for him or her.The government too minds its own business and never enforces laws. He compares it with a football game that has no referee or a game with players playing with no specific goal.
Adams creates the theory of the invisible hand to explain the balancing force in economies. In reference to the theory, the hand is operational. No interference from the government and leaves it to the market to take its own decisions in the free market system. Bremmer sees this as a potential threat not just to his government but also to the world. However, his exceptions to this threat are given for India, China, and Russia (Bremmer 103).
However much Bremmer confesses not to be against state capitalism, his opinions about this kind of economy is very negative through out the chapters. He reflects this type of economy as a project whose goal is to have selfish gains. Here the invisible hand is the government and takes control of all economic activities and only few returns are made. Bremmer describes it as various types of state owned companies are incorporated by the government to manage the resources, create, and maintain jobs.
However, the secret behind this selection is that the chosen companies are privately owned companies. These privately owned companies dominate the economic sectors. In all the above situations, the state uses markets to deliver wealth to the political officials. Moreover, their mission is not seen as to maximize growth, but to use state crown jewels to maximize power and chances of survival in the leadership positions that they take.
We could comment that this book is carefully written in an effort to inform us on the existence of another category of communism that is evolving in the third category. Despite the effects of cold war being experienced 20 years ago, Bremmer still thinks that we are unfortunate when we face the same, but in a manner that very few can feel or witness. He goes ahead to put down quotes such as the Wen Jiabao quote from a CNN interview.
Wen illustrates that the formulation of economic policies can only be derived by having a fair and full play to the forces that control the market. Moreover, government regulation and macroeconomic guidance should act as the key players in resource allocation. On the contrary, the main agenda for most of the state controls is to create political power through exploitation of economic resources.
However, do not misjudge the author of this book; his main agenda is not to oppose state capitalism. For instance, he commends China and Russia for presenting their policies in a transparent manner. All that Bremmer wants is simply to show the weaknesses and strengths of this type of economy and its effects on us.
He warns on embracing imported elements of the economy saying that capitalism is unique and ought to be governed by the particular resources and needs of the specific country. The workforce in China is well developed. On the contrary, Russia is rich in natural resource, which gives it an added advantage. The Middle East is really blessed with oil though the country is challenged by demographics.
Bremmer has a major concern over China as he continually mentions of its economic status. This book makes sense to Chinas economy and the dominance of state capitalism. For instance, it is not until you go over the book that you realize that Exxon Mobil is the 15th in revenues.
Top multinationals account for just 3% of reserves and 10% of the global revenue, the rest is driven by the state. The China-US trade has drastically increased from 2.4 billion USD to 400 billion USD in the year 2008 alone. This was the year that China had more than 200 billion dollars in form of investments under the sovereign funds. This is depicted in an interview with Chinas finance president, Gao Xiqing. He portrays China and Russia as the leading practitioners having abandoned communism.
He commends China by depicting how powerful it is and capable of controlling the worlds economy. This is because they repaired what was in the state capitalism in accordance with the new era. However, their failure is only in the usage of money. They earn very much on exports compared to the US, but put very little in economic development. Much is returned back to the US in form of purchases of sovereign funds. China would be far much ahead if it focused on economic development rather than investment if they wanted to.
However, what would happen to the US if China stopped these investments? Infusion of earnings in exports would lead to inflation, the reason why China has to balance its markets and income. Bremmer gives an example of Greece financial crises. He adds that these China policies were intelligently selected since the purchase of these sovereign wealth funds acts as an economic back up in times of crisis. China does not have to apply for the monetary funds.
Diverting from state capitalism is the mercantilism. People tend to confuse this type of economy with state capitalism. However, Bremmer argues that it is completely different from the rest. Their policies tend to rhyme, but what differs is the financial interest. Mercantilism protects its citizens from international exploitation by controlling imports. The interest of this type of economy is to make riches and rule the world.
China would be a mercantilist country if it were selfish in sharing its surplus finance with other economies. If all these finances went to the improvement of the economy, China would be today a mercantilist country. However, China does not do that. In spite of being ranked as the top in terms of economic status, it has an average of about 5,000 USD as compared to the US, which has over 40,000 USD in terms of employee salary.
It is very ironical for a US citizen to think of living in an economy that resembles state capitalism and that they are putting to an end the free market economy. However, this is the major concern of mister Bremmer. As the title suggest, the writer thinks that the free market is ending.
In a report revealed by Bremmer in 2005 alone, corporations were the largest forms of economies, taking top 51. The report had General Motor of Denmark taking on the lead and Mitsubishi dominating over in Indonesia. Here comes China with its purchase of sovereign wealth funds and owning corporations in large-numbers. There is the emergence of multinationals, which exploit citizens. The chain continues to a point where a foreign country can own almost up to half of another in terms of investment.
This is how easy a state can dominate the whole world and many thought that they were joking when they commented that they were taking over the world. The writer completely disagrees with these corporations. His reasons are that they have a hidden agenda, which is greed and ruthlessness. They tend to widen the gap between the poor and the rich, drive infant industries into extinction and give room for exploitation by limiting competition.
Bremmer talks of immigration and its effects. He comments that this is what has made some of the countries rich. They draw knowledge from American to levels as high as PhD, utilize the American resources, and take back to their countries. However, this idea is not that much convincing because if we took the example of China, US still needs cheap China goods whereas China needs the US for educational resources.
What if we have a mixture of state capitalism and free market economy? It can be practically applicable only in situations where private owners own free corporations while the government is in control. The invisible hand would balance everything automatically and bring out a balanced economy.
Throat competition among countries and corporations would be cut down .Exports and imports would be balanced without any underflow or overflow. This system appears ideal, but may be this is what Bremmer believed and would want to see. Other recommendations that Bremmer gives are; be friendly to foreign workers, choose the right fights, keep markets open, and investment in hard power.
Conclusion
In conclusion, we can say that this book is a professional guidebook that leaves the reader informed about real economic facts. The writer presents a wide history on capitalism and its influence on the free market, offering examples from different regimes in the world. His chapters are supported by strong evidence revealing the negativity of regulated free markets in the name of state capitalism.
There are also clear economic procedures and solutions in which the United States can live in harmony with the rest of the world and still defend its future competitive advantage. However, it is important to recommend capitalism because this has been the root of development in most countries. This just how brief the book is though not very exciting to read, one can easily connect ideas.
Works Cited
Bremmer Ian. The End of the Free Market: Who Wins the War Between States and Corporations? New York, NY: Penguin Books Limited, 2011. Print.
This paper analyzes the problem of commodity price volatility in Canada. It also discuses various policy proposals that can be adopted by the government of Canada to reduce price volatility. Commodity price volatility refers to the variations in the prices of various commodities over a given period of time. Such variations are least harmful if they are a true reflection of the market fundamentals.
However, large and persistent fluctuations in commodity prices have severe consequences on economic growth. They particularly result into a slow economic growth, high unemployment rate, reduced investment rates and low profits (Barro, 2008, p 123). The significance of commodity price volatility in Canada is based on the fact that the country is a major producer and exporter of primary commodities.
Thus fluctuations in the prices of such commodities have direct negative impacts on its economic performance. In Canada, the volatility is mainly driven by supply and demand shocks emanating from the international commodity market, rise in demand for commodities in emerging market economies and the actions of speculators (Murray, 2011).
The strategies recommended for combating the volatility include supply management, market-based mechanism, stabilization fund and diversification. The government should also strengthen social safety nets and enhance transparency and sharing of information concerning market conditions.
Introduction
Volatility simply means variations in economic variables (Barro, 2008, p 122). Thus commodity price volatility refers to the variations in the prices of various commodities over time in particular markets. Variations in prices are not problematic if they follow a smooth trend. This is because such variations are a reflection of market fundamentals.
However, large and unpredictable price variations are problematic since they create uncertainties in the market. The risks faced by producers, consumers and even the government increase as the level of uncertainty about the prices increases. Large price variations can also lead to incorrect or sub-optimal decisions (Mankiw, G. 2002, p. 104).
It is for this reason that policy authorities strive to ensure stable commodity prices in the economy. This paper focuses on commodity price volatility that is currently being experienced in Canada. Various policy recommendations on how the volatility can be addressed will be presented alongside their pros and cons.
Causes of Volatility in Canada
Since 2002, Canada has witnessed episodes of high commodity prices followed by sharp falls in the prices. Thus predicting the magnitude and timing of variations in commodity prices has been very difficult. Shifts in demand and supply for commodities at the global level are the main causes of price volatility in Canada (Murray, 2011). This is attributed to the fact that Canada is a major exporter of various commodities.
Thus supply and demand shocks in the international market have a direct effect on its domestic prices (Mankiw, G. 2002, p. 107). The increase in demand for commodities in emerging market economies (EMEs) has also made significant contributions to the upsurge in commodity prices. The EMEs have particularly contributed to the rise in prices of foodstuffs and household products.
Finally, the volatility in commodity prices has been caused by the actions of speculators. The speculators normally hold stocks of various commodities as they wait for the prices to increase. However, such acts lead to artificial shortages which result into large variations in prices (Mankiw, G. 2002, p. 110). Commodities whose prices have experienced severe fluctuations include copper, cattle and oil.
The Significance of Commodity Price Volatility in Canada
Unlike other developed countries, Canada is a major producer of primary commodities. It is the leading exporter of primary commodities among the G7 member countries (Murray, 2011). The commodity sector is very important in the country since it accounts for 11 percent of its GDP (Murray, 2011).
Thus the sector is a major source of revenue and employment in Canada. Besides, it promotes growth in other sectors of the economy such as manufacturing by supplying them with raw materials as well as creating demand for goods produced in other sectors. The resource sector for instance is a major source of income and also enhances induced investment.
The primary commodities are also important to the country since they account for one third of its exports. Volatility in commodity prices has thus had adverse effects on Canadas economy. It has particularly worsened the countrys terms of trade and slowed the growth of its GDP (Murray, 2011). It has equally led to high levels of unemployment and poverty as production slumps while consumers purchasing power declines.
The benefits of high commodity prices such as high revenues received by producers are normally offset by the subsequent reduction in aggregate demand. Due to the negative effects of the price volatility on the performance of Canadas economy and the decline in the quality of life, it is important to stabilize the prices.
Rationale for Action
Tackling the problem of commodity price volatility in Canada is important due to the following reasons. First, the profitability of firms involved in the production and sale of commodities will increase if variations in prices reflect market fundamentals (Krugman, 2009, p. 91). Stable and predictable incomes enhance induced investments.
Second, more job opportunities will be created as firms continue to invest thereby reducing the level of unemployment. Third, the quality of life will improve if consumers are able to realize smooth consumption patterns through stable commodity prices (Krugman, 2009, p. 94). Finally, stabilizing the commodity prices will stimulate economic activity. This will translate into high growth in gross domestic product.
Strategy for Combating Commodity Price Volatility
Volatility in commodity prices is normally caused by several factors which could be related or unrelated. Thus formulating a policy for combating volatility in commodity prices calls for an in-depth analysis of the causes of the volatility. A variety of policies should then be formulated and implemented to stabilize the prices. The government of Canada can thus consider the following measures as responses to the volatility.
Supply Management
One of the major causes of commodity price volatility is the fluctuations in the quantities of such commodities supplied in the market. When the supply exceeds demand, the prices tend to fall below the equilibrium level (Krugman, 2009, p. 78). Thus producers lose by receiving low prices. However, when supply is less then demand the prices tend to increase above the equilibrium level.
Stabilizing the prices towards the equilibrium level can be achieved by financing buffer stocks. This means that the government can provide financial incentives to enable the producers to hold emergency stocks of the various commodities. Besides, compensatory financing facilities such as insurance should be provided to compensate for the shortfall in producers incomes due to short term price shocks.
This strategy is justified by the fact that it facilitates consistent supply of commodities which leads to price stability especially in the short run. Its main strength is that both the government and the private sector can mobilize resources to implement it (Minh, 2011, pp. 956-965).
For example, the government can provide subsidies to producers to encourage holding of emergency stock while the private sector can provide the insurance services. The disadvantage of this strategy is that speculators might hold stocks for too long which leads to artificial shortages and high prices (Minh, 2011, pp. 956-965). Besides, increase in cost of production can lead to higher prices in the long-run.
Market-Based Mechanism
This involves the use of financial instruments such as price hedging. In this case, the buyers and sellers sign forward contracts. Such contracts specify in advance the price at which a particular commodity will be bought over a certain period of time (Pindyck, 2004, pp. 1029-1047). For example, most producers usually hedge the price of oil in order to shield themselves from the effects of oil price fluctuations.
The justification of this strategy is based on the fact that the buyer is able to benefit from predictable prices in the short run. The seller on the other hand will benefit from predictable and stable revenues in the short run (Pindyck, 2004, pp. 1029-1047). The challenge in using the market-based mechanism is mainly attributed to the complexity of the financial facilities.
Most government officials and even the traders are not familiar with facilities such as forward contracts and futures (Pindyck, 2004, pp. 1029-1047). Thus the government should focus on stakeholder education before implementing this strategy. Besides, internal control measures should be put in place to prevent speculative transactions.
Stabilization Fund
Volatility in commodity prices usually has a negative effect on government revenues. Thus fluctuations in budgetary revenue can be reduced by establishing a stabilization fund (Deepeshree and Agarwal, 2006, p. 76). Implementing the strategy involves channeling revenue to the fund during the boom periods. It is advisable to set a specific amount of money to be raised during the boom period.
Transfer is then made from the fund to finance the budget during recessions. The justification for this strategy is attributed to the fact that it helps in stabilizing the business cycle, thereby stabilizing prices (Deepeshree and Agarwal, 2006, p. 77).
The main advantage of this strategy is that it not only stabilizes the prices but also ensures stable and consistent economic growth over time. A stable business cycle promotes investment and employment in the economy. The strategy also results into an improvement in the quality of life (Varali, and Gabriel, 2009, pp. 67-72).
This is due to the fact that the money accumulated by the fund can be used to provide basic services such as health care and education during recessions.
The challenges associated with the strategy include the following. First, the rules governing the operation of the fund can be easily changed. Thus the fund can be used to finance inappropriate projects. Second, it is often difficult to predict revenue streams as well as the magnitude and duration of price shocks (Verma and Hertel, 2009, pp. 405-415). This makes it difficult to implement the appropriate counter cyclical policies.
In response to these weaknesses, the government should establish a legal framework that will prevent misappropriation of the fund. The government should also focus on monitoring macroeconomic variables in order to correctly predict its revenue streams and price fluctuations.
Diversification
Diversification involves reducing over dependence on primary commodities by encouraging growth in other sectors such as manufacturing (Moledina, Roe and Shane, 2008, pp. 798-812). Price fluctuations normally occur when the government tries to promote production of primary commodities in order to meet its revenue requirements.
Such initiatives can result into over production which leads to low prices especially when the international market is saturated. The producers and the government will thus have stable revenues through diversification. Diversification can be implemented in two forms which are as follows.
First, the government can adopt a horizontal diversification strategy by encouraging the production of alternative commodities whose prices seem to be stable in both domestic and international market (Moledina, Roe and Shane, 2008, pp. 798-812).
Second, it can focus on horizontal diversification by promoting the production of primary commodities as well as improving the value chain. In this case, value addition is enhanced in order to improve the competitiveness of the commodities.
Diversification is justified by the fact that it will enable the government of Canada to avoid a huge shortfall in its revenue when the prices of primary commodities fall. Besides, it will enable the government to develop other sectors of the economy which might be ignored as it concentrates on the production of primary commodities (Moledina, Roe and Shane, 2008, pp. 798-812).
Diversification is however, associated with two weaknesses. Its implementation can be slowed by structural barriers such as trade tariffs. It also requires a lot of resources to invest in the production of alternative goods.
In order to overcome these weaknesses, the government should negotiate trade agreements with its trading partners. Such agreements will help in eliminating trade barriers such as high tariffs which distort the prices of commodities (Maslen, 2011, pp. 34-46).
It is also important to finance the production of various commodities based on the revenues that they generate. Priority should be given to commodities that generate high and stable revenues.
Transparency and Sharing of Information
In most cases, the functioning of the commodity market is limited by lack of timely and comprehensive information about market conditions. The government should promote transparency and timely sharing of information about the supply and demand for commodities.
The regulators of the industries for various commodities can be given the responsibility of finding and making available information concerning market conditions such as prices, demand and supply. As the market moves towards equilibrium due to the availability of information, the prices will tend to be more stable and predictable (Boyes and Melvins, 2010, p. 78).
Legislation can also help in ensuring transparency in the various markets. The main advantage of this strategy is that it helps the market to move towards equilibrium which translates into stable prices. However, implementing this strategy requires a lot of capital to invest in modern information and communication technology.
Strengthening Social Safety Nets
Social safety nets are non-contributory transfer programs seeking to prevent vulnerable citizens from falling below a certain poverty level (Arnold, 2010, p. 90). As discussed above, commodity price volatility has the potential of increasing the level of national poverty by reducing consumers purchasing power. The government can respond to recession caused by commodity price volatility through the following programs.
It can transfer cash to the poor to enable them access basic commodities and services. The government can also subsidize the prices of basic commodities as well as production inputs (Arnold, 2010, p. 90). The justification of this strategy is that it will stimulate aggregate demand during recessions.
As the aggregate demand increases, prices are likely to rise thus improving the revenues received by producers (Arnold, 2010, p. 90). The consumers on the other hand will be able to access goods and services which they could have otherwise not been able to afford.
However, social safety nets are likely to fail if not well planned and implemented. This means that the government must correctly identify the most beneficial and cost effective strategy of providing the social safety nets.
Conclusion
Commodity price volatility refers to persistent fluctuation of the prices of various commodities over a given period. Such fluctuations have negative effects on the economic growth of a country if they are large and unpredictable. Commodity price volatility particularly causes a reduction in GDP growth rate. It also reduces the profitability of firms involved in the production and sale of various commodities.
As the profits fall, the level of investment reduces and unemployment rate increases (Arnold, 2010, p. 92). Canada has experienced large variations in the prices of its primary commodities since 2002. The variations are driven by both internal and external shocks as discussed above.
It is in the interest of the government of Canada to combat the problem of commodity price volatility since the primary commodity sector is a major source of income and investment in the country. This objective can be achieved by implementing the strategies discussed above.
References
Arnold, R. 2010. Macroeconomics. New York: Cengage Learning.
Barro, R. 2008. Macroeconomics. New York: Cengage Learning.
Boyes, W. and Melvins, M. 2010. Macroeconomics. New York: Cengage Learning.
Deepeshree, S. and Agarwal, V. 2006. Macroeconomics. New York: McGraw-Hill.
Krugman, P. 2009. Macroeconomics. New York: Worth Publishers.
Mankiw, G. 2002. Macroeconomics. Worth Publishers.
Maslen, G. 2011. In the Wake of the Boom. Economic Review, 10(1), 34-46.
Minh, V. 2011. Oil and Stock Market Volatility: A Multivariate Stochastic Volatility Perspective. Energy Economics, 33(2), pp. 956-965.
Moledina, A., Roe, T. and Shane, M. 2008. Measuring Commodity Price Volatility and the Welfare Consequence of Eliminating Volatility. Agricultural and Applied Economics, 3(2), pp. 798-812.
Murray, J. 2011. Commodity Prices: The Long and the Short of it. [Online] Web.
Pindyck, R. 2004. Volatility and Commodity Price Dynamics. Journal of Futures Markets, 24(11), pp. 1029-1047.
Varali, B. and Gabriel, P. 2009. What Explains High Commodity Price Volatility? Estimating a Unified Model of Common and Commodity-Specific Frequency Factors. Agricultural and Applied Economics, 2(1), pp. 67-72.
Verma, M. and Hertel, T. 2009. Commodity Price Volatility and Nutritional Vulnerability. Agricultural and Applied Economics, 3(1), pp. 405-415.
Sheikh Zayed Housing Program is a government-owned program that was established to offer United Arab Emirates families suitable housing facilities (Farazmand 67). The aim of the national government in coming up with this program was to find a way of ensuring that all citizens of this country have decent housing, especially those who have lower earnings and are therefore, unable to afford building their own homes. It would be important to understand the vision, mission, strategy, goals, and objectives of this organization. According to Meier (78), the vision statement of this firm states, Achieve stable housing for UAE national families through exceptional and pioneering community partnerships.
As shown in this vision statement, the focus of this organization is to offer families in United Arab Emirates housing units by facilitating community partnership. The mission statement emphasizes on the focus of this organization to offer proper housing to deserving citizens of this country by enhancing partnership with financial partners. The strategy that this organization uses is to create an environment where financial bodies would find it easy funding families to build suitable housing with coordination from the government. Given that the government is involved, financial partners would not fear funding individual families. The goal of this organization is to ensure that citizens of this country have decent housing facilities. By partnering with financial institutions, it becomes possible to get the needed resources in construction of the housing units. This would make it easy to achieve the objective of eliminating poor housing facilities, especially in major cities.
Types of Projects in the Company
In order to achieve the objectives stated above, the organization has been involved in a number of projects since its inception. In the past, this organization was engaged in a number of projects that were focused on improving the housing systems of poor families in the country in major cities. The organization was determined to ensure that every citizen of this country has access to decent housing. The project has been successful in the cities of Abu Dhabi and Dubai. Presently, the firm is focused on spreading this program to all other emirates. According to their announcement which was made at the beginning of the year, the organization is determined to ensure that all citizens of this country, especially the poor, are helped to get decent housing in the country. The organization has future plans of helping any citizen of this country access quality housing without just focusing on the poor.
How the Projects Fit Into the Companys Mission and Strategy
According to Lam (90), when designing projects, research should always be taken to ensure that the projects are in line with the mission and strategy of the company. This scholar says that success of such projects should be a step towards achieving the mission of the organization. As stated above, the mission of this organization is to offer housing facilities to deserving citizens of this country by developing a community partnership with financial institutions. The strategy of doing this has been to identify these deserving families, introduce the initiative to them, and then find financial partners who can help them in developing these housing units. The projects that this organization has been implementing are in line with this mission statement and the strategy the firm employs. The projects have formed the foundation upon which this organization has been able to achieve its vision and mission. The implementing partners have also been keen on ensuring that the projects are in line with the mission of the firm as was defined during its inception.
The Companys Enterprise Management
The world is changing due to changes brought about by environmental factors such as technology and environmental concerns. The need for efficiency when managing a project has been on the rise, and firms are forced to manage portfolio of projects concurrently instead of managing single projects. Enterprise management has therefore, been seen as an appropriate way of coordinating various projects in a firm to achieve the expected results. This organization has developed a clear program to manage, monitor, and assess the status of different projects. The projects are managed at the portfolio level by top leadership of the firm. Individual projects form the larger project portfolio. The individual project has a team of project members headed by projects manager. The projects manager is responsible for the normal running of the individual projects. The managers report to projects coordinator who manages a portfolio of projects. The projects coordinator would monitor and assess status of different projects in order to determine how effective the projects are running. The project coordinators report to the firms top management unit.
The Companys Enterprise Management System
Sheikh Zayed Housing Program has an enterprise management system that facilitates proper coordination of projects. When this program was started, it lacked a clear system that coordinates different projects within the portfolio of projects. However, this changed when the firm developed an enterprise management system. Through this system, the organization is able to monitor development of different projects in different locations. The firm is also able to ensure that the success achieved in the projects is in line with the overall mission and vision of the firm as stated during its inception. This has improved the performance of the organization to a great extent because all members understand the common goal that should be achieved, and how their individual efforts would facilitate this success.
The Strengths and Weaknesses of the Current System
According to Farazmand (67), in order to give an appropriate recommendation on the best way through which this organization can achieve its pending goals, it would be necessary to understand some of its strengths and weaknesses. One of the main strength of this organization is that it is sponsored by the government. This means that the financial partners would not feel insecure when giving out loans or grants to the families yearning to own homes but are financially challenged. This availability of finance makes it possible to accomplish activities that are planned for in this project.
The government support also means that these projects would not be subjected to lengthy process of approval that is always needed in other projects. The community partnership approach taken by this program also helps in ensuring that labor is easily available when undertaking various activities. It makes the realization of the project objectives easy. However, there are some weaknesses that should be addressed. One such weakness is lack of clear program on how those given the grant shall pay back this money. If these beneficiaries fail to pay, the government may be overburdened to an extent that it might not be able to continue with this program.
Works Cited
Farazmand, Ali. Public Enterprise Management: International Case Studies. Westport: Greenwood Press, 2009. Print.
Lam, James. Enterprise Risk Management: From Incentives to Controls. Hoboken: John Wiley & Sons, 2003. Print.
Meier, Marco. Enterprise Management with Sap Sem/business Analytics. Berlin: Springer, 2005. Print.
Since the late 1970s, China has been experiencing a tremendous growth in its economy. In 1978, the Communist Party of China commenced an economic reformation program that aimed at enhancing the economic growth and performance of China (Hudis 112).
This program aimed at enhancing the management of state owned enterprises (SOEs) as well as encouraging the development of privately owned enterprises. Thus, in addition to attaining high rates of economic growth and attracting foreign direct investments, the main aim of this economic reform was to transform the Chinese economy to a socialist market economy (Kraus 361).
The aim of this ideology was to ensure that this economy is primarily controlled by state owned corporations. With this strategy in place, it was believed that every individual in China would benefit from the results of economic development as the profits earned by SOEs would be evenly distributed within the population.
At the present moment, China is one of the nations that exhibit high economic growth rates in terms of GDP. However, from a critical angle, it is evident that the Chinese market is based on the capitalist system. It is due to this fact that Hart-Landsburg and Burkett argue that perhaps China has failed to achieve its economic reform goals that were set over four decades ago.
Thus, the measures that were put in place after the implementation of the market reforms only led to the growth of capitalism. Despite the fact that SOEs were dominant during the 1970s and the 1980s, the growth of private entrepreneurship started to flourish during the late 1980s and in the 1990s.
Consequently, the Chinese government passed several legislations that not only encouraged the privatization of SOEs, but also played a significant role in attracting foreign direct investments which led to the growth of the private sector. In 1993 for instance, the labor law was passed in China. This law eliminated the control that the government had in the selection and recruitment processes and paved way for the free labor market.
This new concept used the demand and supply mechanism to determine the availability of jobs and the remuneration of employees. As a result, China has now been regarded as one of the main sources of cheap labor. Thus, many firms have moved their operations in this nation to enjoy the low costs of production.
From this analysis, it is clear that the reformation program that was initiated by the Chinese government to rejuvenate socialism within China has failed. The results of this program have led the Chinese economy into a totally different path. The Chinese market is now based on capitalism.
Consequently, most of the market industries and segments are dominated by foreign owned companies (Hart-Landsberg & Paul 13). Furthermore, Hart-Landsburg and Burkett argued that the results of this economic reformation process were not abrupt but came about in stages.
However, the measures that were put to overcome the upcoming challenges did not achieve the desired results since they led the economy further down the capitalist lane. As a result, the contemporary Chinese market is characterized by income polarization, high levels of poverty, and increased research and explorations. Hart-Landsburg and Burkett categorise these characteristic as the indicators of a capitalism market.
Four Major Imbalances in the Chinese Economy
The financial crisis of 2007/2008 was one of the most severe economic downfalls that the world has ever experienced since the great depression of the 1930s that almost crumbled the US economy (Feurberg 2). However, during the global financial crisis of 2007/2008, the Chinese economy was experiencing a positive growth. During the 2008/2009 financial year, China had a GDP of 9.2% (Lardy 3).
Nicholas Lardy, a financial analyst stated that China managed to overcome the financial crisis due to the fiscal monetary stimulus plan that it had put in place. However, Lardy further states that this economic stimulus plan will only be effective in the short run since it does not put into consideration the structural problems and imbalances that are currently present in the Chinese economy.
Over the last eight years, the Chinese economy has been operating on a pressed financial system. Prior to 2003, the interest rate on returns in China averaged 3% (Lardy 4). However, since 2004, this rate has greatly decreased hence forcing more households to save a higher proportion of their disposable income.
To support his argument, Lardy presented a chart that showed the household savings in China between 1998 and 2008. In this chart, it is evident that the rate of saving has increased from 29% to 36%. To explain why the Chinese people tend to save when the interest rates are low, Lardy came up with a hypothesis that described the Chinese population as precautionary savers who want to attain a specific target of financial assets (Lardy 5).
To support his argument, Lardy commented on the costly healthcare system in China that required upfront payments prior to offering services to its clients. To averse this problem, Lardy recommended that the Chinese government should develop effective social safety services that would reduce the level of household savings and encourage expenditure.
Another imbalance that Lardy identified is the outsized real estate investment that is present in China. Since the beginning of the 21st century, the rise in real estate investment and the sale of residential properties have been one of the leading drivers that have led to the high rate of economic growth that is being experienced in China. Between the year 2004 and 2010, the rate of residential properties in China has been growing at an average rate of 4.6%.
This rate is higher than the bank deposit rate that has been averaging at the rate of 0.7% during the same period (Lardy 6). Consequently, the residential property investments in China comprised of 9.1% of Chinas GDP during the 2008/2009 financial year. This is higher than many nations in the world whose rate is below 5.2%. In an event of a bubble, Lardy warns that the Chinese market might suffer severe consequences than the USA during the 2007/2008 financial crisis.
The decline in interest rates charged on household savings and the consequent increase in savings by households has resulted in a repressive financial system in China (Feurberg 4). This is the third economic imbalance that Lardy identified.
To a higher extent, the commercial bank reserve levels are low hence increasing their level of borrowing and the amount of money circulating within the economy. This has greatly reduced the value of the Chinese currency. For instance, the exchange rate between 1995 and 2002 averaged 4.4%. However, this rate has stood at 0.5% since 2003. Thus, China needs to come up with policies that increase the reserve levels of commercial banks as a measure of curbing inflation.
The last imbalance that Lardy managed to identify is the subsidies that are present in the manufacturing sector, especially in the service industry. Given the repressive financial system that is present in China, households and commercial banks investors of the central bank. Thus, the government has access to low interest capital that it uses to fund state owned projects resulting in an imbalance in trade.
Financial statements are statements that are used to accurately represent a firms financial status. These statements are used by firms to show their activities to their investors, creditors and other stakeholders in an accounting period. There are four basic types of financial statements (Kline, 2007, p. 43).
A balance sheet is used to show the total assets a firm possesses and the total amount of liabilities it owes to other people and institutions.
An income statement is used to show the levels of revenue a firm has obtained after selling its products and services at a price higher than the production expense.
A statement of cash flow is used to show the inflows and outflows of cash in a firm which can help it to meet its day to day expenses.
A statement of shareholders equity shows the rise or fall in value of the shareholders stock within a specific phase.
Uses of Financial Statements
A balance sheet shows the total amount of assets and liabilities that are possessed by a firm. It shows the sum of assets, liabilities and the equity held by stockholders of a given firm within the period being reviewed. The unit of measure is usually in form of the currency that is used within the country where the firm operates. Fixed assets are long term assets and they include physical property such as land, vehicles, office furniture and equipment. Fixed assets are usually in form of tangible possessions a company has such as trucks, buildings and real estate.
Current assets are possessions that are in form of hard currency which can be sold within a short period of time. Liabilities are the debts a firm is supposed to pay back to its creditors. Current liabilities are debts that a company is supposed to repay within a short period of time (Kline, 2007, p.47). Fixed liabilities are the debts that a firm is supposed to pay within a long period of time. The stockholders equity is the quantity of investments that a firm gets from its shareholders to run its operations.
An income statement is used to show the quantity of money received and money spent by a firm within a given period. Revenue is money earned while expenses are the costs incurred during operations. Higher revenues and fewer expenses bring about profits while lower revenues and higher expenses bring about losses. Income statements are used to show how a firm has performed within a specific period of time. The final deductions that are made determine if the company has experienced a net loss or a net profit (Kline, 2007, p.56).
A statement of cash flow reports the cash that is coming in and going out of a firm. It shows the amount of cash that a firm has that can pay its expenses and run its operations smoothly. The amount of cash flow that exists in a firm is captured at the bottom of the statement. The statement looks at the money available in a firm that is necessary to run its core activities. The operating activities part shows the net income and the change in various accounts on the balance sheet. The investing activities section shows the amount of money that is set aside for investments by a firm (Kline, 2007, p. 58). The financing activities section shows the cash received and spent on a firms financial securities.
A statement of shareholders equity shows the changes that have occurred in the equity owned by shareholders of a firm. The sum of new stock together with the beginning balance is totaled to get the ending balance. The net income is totaled with retained earnings minus dividends paid out to get the ending balance (Kline, 2007, p.59).
Usefulness of Financial Statements to Internal Users
A balance sheet can help managers and employees to analyze if the company is taking a positive or negative direction. This makes them understand the financial position of a firm and the means to improve it. An income statement helps internal users come up with ways to reduce unnecessary costs to ensure revenues remain positive. A statement of cash flow makes internal users aware of the amounts of money that are coming in and going out of the firm. A statement of shareholders equity helps internal users keep track of a companys stock value within the industry in which it operates (Pratt & Anthony, 2010, pp. 67-69).
Usefulness of Financial Statements to External Users
A balance sheet helps the investors and creditors of a firm to make a good estimation on its ability to make positive returns in its future operations. An income statement makes it possible for external users to analyze the profitability of a company and its financial strength. A cash ratio statement helps external users of a firm assess if the company is in a position to sustain its operations without interruptions. A statement of shareholders equity helps external users to evaluate the value of equity a company holds within a market (Pratt & Anthony, 2010, pp.73-75). All these financial statements are important to external users because they help them understand if a firm is on the right track.
References
Kline, B. (2007). How to read and understand financial statements when you dont know what you dont know what you are looking at. Ocala, FL: Atlantic Publishing Group.
Pratt, J., & Anthony, J.H. (2010). Financial accounting in an economic context, study guide (8th ed.). New York, NY: Wiley.
The dream of every business man or organization is to see their business sustain itself and expand their operations in order to realize higher profits. Investors need to carry out periodic assessments to evaluate the rate of returns on their investments. There is the need to evaluate business performance whether the business is on track according to its mission, vision and objectives.
To achieve these goals is not an easy task especially in the modern world that is full of competitions from similar investments and challenges of inflation and insecurity (Sherman 2012). This essay analyzes the circumstances of evaluating a firms new investment proposal with marginal and historic costs of capitals.
Marginal cost of capital refers to the expense incurred while adding an extra dollar to the capital of the business. It is the cost of raising additional funds to finance various business projects in order to increase its production and sales. Security on the capital secured plays a vital role in regulating the value of marginal cost of capital.
Unsecured loans are usually expensive since the business has to meet the higher rates offered by various business institutions that offer to entice investors seeking additional capital (Baptiste 2012). Secondly, when an investor has collateral security like bonds; it is particularly necessary that the investor uses the bonds as security for securing additional capital.
Thirdly, an investor should avoid acquiring insubordinate debts since they are expensive to finance. Lastly, investors should give priorities to debts that require collateral securities than those that have high interest rates in order to cut down the expenses incurred.
Historic cost of capital refers to the initial cost of assets at the time of acquisition by a business. The balance sheet reflects these values well by showing the price of all items at the time of opening the business. Historic cost of capital comes to use when the item under evaluation does not have a high rate of depreciation or appreciation (Berkery 2007). It is necessary to consider this point since assets like land appreciate at a higher rate than buildings due to their demand on the market.
On the other hand, machines, vehicles and furniture depreciate due to wear and tear actions. This method of evaluating an investment proposal is suitable if there is a small gap between the period of acquiring the asset and the time of preparing the proposal.
Similarly, assets that do not have a high value on the market do not have high appreciation or depreciation rates and this makes their value be constant for a long time. Their acquisition value can be used in any proposal without causing considerable difficulties in implementing the project.
Foreign currencies also determine the suitability of historic cost of capital. Some business assets come from foreign countries, and this means that foreign exchange must be involved in the process (Belcher 2011). In most cases, foreign exchange rates fluctuate depending on various factors like inflation, rate of foreign investments and security.
Given the current economic climate, it is advisable for any investor seeking additional capital to use both approaches to raise additional funds for the business since there is no single approach that is cost free. All approaches discussed above have positive and negative aspects that determine their suitability. However, the marginal cost of capital seems to be a better idea compared to historic cost.
References
Baptiste, J. (2012). The Ultralight Startup: Launching a Business without Clout or Capital. New York; Portfolio Media Publishers.
Belcher, P. (2011). Money to Start a Business: How to raise all the Money Youll Ever Need to Start Your Own Business. Connecticut: Shoestring Press.
Berkery, D. (2007). Raising Venture Capital for the Serious Entrepreneur. New York: McGraw-Hill.
Sherman, A. (2012). Raising Capital: Get the Money You Need to Grow Your Business. New York: Amacom Publishers.
The inherent problem with interruptions to business is that not only does it create problems from an operational cost standpoint but it also causes problems from a labor standpoint since if the company has the same workforce yet has fewer orders this represents a gross mismanagement of human resources. When examining how a disruption will affect productivity several factors need to be taken into consideration.
The first factor is how long the company can maintain its current rate of operations before operational costs exceed profitability. A shut down of the Federal Government can last months to just a few weeks or even days and as such a company cannot just simply cease all operations only to find out that Federal Government is back a few days later.
Proposed Reduction Workforce Hours
As such one strategy that is necessary is to determine how long operations can continue under their current rate before the company needs to scale it back.
Estimates need to be done as to when would the Federal government be reopened, what size would the workforce reduction need to be, how will the company gradually divest itself of unneeded staff and what sort of strategy can be implemented in order to get the company back on track once things return to normal.
One alternative strategy that could work while maintaining some semblance of normal operational capacity is to drastically reduce the number of hours employees come to work for during the shut down period.
The advantage of this method is that while it drastically reduces labor costs it enables the company to maintain its current workforce so that once the shut down ends it can return to full operational capacity within a short period of time.
Laying off people has the distinct disadvantage of not only resulting in costs related to recruitment in the future in order to replace the lost workforce but it also entails the company having to pay significant costs in severance packages (Hollett, 2003). It is based on this that limiting the number of work hours seems to be a far better solution as compared to merely firing people en masse.
Limiting Operational Capacity
Another factor that should be taken into consideration is the possibility of discontinuing certain aspects of the companys operational capacity during the shut down. What must be understood is that certain aspects of operations entail a significant resource cost in terms of utilities, raw materials and other such factors that contribute to normal company operations.
If a shut down does occur it would be necessary to partially reduce services to these operational areas by first reducing the number of employee hours as indicated in the previous section and by slowing down operations to at least 20% of its previous operational capacity.
The reason this is done is so that at least some products can continue to be produced which can then be subsequently stored by the company and utilized at a later date once the shutdown ends.
Conclusion
Based on the given strategies presented in this paper it is likely the company will be able to come through the storm of a possible Federal government shutdown and continue to operate normally in the future. It must be noted though that this particular strategy of reducing work hours while maintaining the same amount of workers is feasible only with the short term.
A prolonged shut down will result in several workers either transferring to other companies or the company firing them due to lack of overall business. As such this particular solution cannot be considered the best possible resolution but rather a stop gap measure to maintain operations to a certain extent.
Reference
Hollett, B. (2003). Preparing for Uncertainty: Guidelines for Laying Off Workers and Creating Equitable Severance Packages. Employee Rights Quarterly, 3(3), 70. Retrieved from EBSCOhost.