Economics

Adam smith developed the labor theories of value to explain the relationship between the value attached to a commodity and the labor required to produce the item. According to Adam Smith, the value of a commodity is directly proportional to the amount of labor required to produce it.  He says that the value of any product is attached to the labor used to make it. Labor refers to the efforts that a person puts in an activity to achieve some specific results.

Adam Smith gave the first definition of value as the exchange price that a consumer gives out to obtain a certain product. The price of any commodity is related to the value. Therefore, the value of labor can be related to the price paid in exchange of the commodity. The price (value) of any item is related to how scarce that item is to obtain. Scarce items have greater value than readily available ones. Adam Smith also defined value in terms of the utility obtained from a product. Utility refers to the satisfaction that a person acquires from consuming a particular commodity. It also refers to the usefulness of a particular product to the consumer.

The nature of the conceptual problem that led Smith to revise his original labor theory of value for an advanced society was the contradiction imposed by the two definitions of value. Under close scrutiny, value has two meanings which are paradoxical the utility (value in use) of an item and the price (value in exchange) of that commodity. The commodities which have the highest value in use have small or no value in exchange. On the other hand, items which have highest value in exchange have small or no value in use. For example, water has the greatest use, but to the contrary, it has little or no exchange value. Gold has scarce value in use, but on the other hand it has the greatest value in exchange.

The second version of defining value of a commodity as postulated by Adam Smith was that the value of any commodity is equivalent to the amount of labor which enables him to buy or command. David Ricardo argued that Smiths second version was unnecessary because the value of any commodity varies with changes in distribution and technology in the labor market.  Ricardo accepted the definition that the value of labor was proportional to the exchange value of that commodity.

According to Adam Smith, the term economic growth refers to increase in the total Gross Domestic Product (GDP) of a country. The rate of change in Gross Domestic Product measures economic development in a country. It is used to refer to the amount of goods and services that a country produces and does not include the methods of production used to make the commodities. Alternatively, Gross National Product (GNP) can be used to measure Gross Domestic Product. GDP is used to estimate the purchasing power of currency in a country. GNP compares the per capita incomes of different countries. Inflation adjustment coefficients are used to compensate for inflation that may affect GDP or GNP.

Economic growth is defined in terms of the long term period. It defines the changes in the standards of living of the citizens of a nation over a certain period of time. Econometrics is a field of economics which measures the outcome of the policies made by economists. Other concepts that lie within the definition of economic growth are the rate of unemployment and inflation.

Economic growth can be classified in terms of how positively or negatively it is contributing to the economy of the country. Economic downturn as well as depression defines the negative economic growth. On the other hand, an increase in the Gross Domestic Product is associated with positive economic growth. Smith defines economic development as the change in the methods of producing goods and services. He explains that positive economic development engages introducing new efficient production technologies.

Mercantilism economic theory suggests that the economic growth and development of a country depends on the amount capital resources that it possesses. The theory suggests that the world market of international trade cannot be changed. The bullion held by a country represents the economic capital and that only a positive balance of trade can increase the bullion. Mercantilism also assumes that the capital as well as monetary resources is the same. This theory proposes that the state ought to encourage exports and discourage imports (protectionism) in order to achieve its economic growth and development goals. These goals can be achieved by the use of tariffs and subsidies. The development of mercantilism was seen to encourage several European wars and increased European imperial systems.

Adam Smith criticized mercantilism theory by suggesting that the use of the bullion system should be replaced by the system of measuring economic growth and development according to the productive capacity of a country. He argued that the tariffs discouraged trade although it contributed to a great extent to the income of the country. Adam Smith criticized mercantilism by saying that prices are directly proportional to the amount of money circulating in the country whereas mercantilism did not relate the two aspects clearly. He also said that the wealth of any nation is produced by the human capital and it is not fixed. Mercantilist never recognized the contribution of comparative as well as absolute advantage to trade. Smith never accepted the fact that balance of trade could remain constant for a long period of time as proposed by mercantilists. This is because as countries exchanged bullion, there would be imbalance in supply and demand of the bullion between the state importing and exporting. This would create instability in the balance of trade. Smith suggested that the mercantilists confused wealth and money and that bullion was just like any other commodity and did not require too much emphasis.

Employment of capital (Smith)
Employment of capital is also called capitalism and involves the control of capital by the private sector. This is an economic and social system that allows the trade of labor, goods and capital in markets. Under this system, there is distribution and investing of the profits generated from the capital assets into developing new technology and industries. Capitalism encourages economic growth due to the increase in the GDP that is realized under this system. Under the system of capitalism, there is reduced government control on the market activities.

The history of capitalism can be traced back to the 16th century in Europe. However, during the ancient times, organizations that were similar to capitalism existed.  A small amount of capitalism was experienced during the late middle ages. After the massive establishment of capitalism in Europe, it continued to extend all over the world in the 19th and 20th centuries and it is said to have contributed a lot to industrialization.

Composition of capital (Ricardo)
Capital is composed of two elements the variable capital and the constant capital. The variable capital represents the value of labor as a factor of production while the constant capital represents the value of the means of production. The variable capital is adjusted in order to decrease costs and increase profits made by the company. However, the constant capital is incurred by the company despite the amount of profits or losses made by the company.

The theory of capital composition was developed in 1830s. This was invented after economists realized that profits are not only dictated by wages, which was considered the major capital element by that time. As technology changed, the composition of capital continued to change. Economic changes also caused changes in the ratio to which capital components are made of. Adjustments must be made when the economy is favorable while during recession, the composition of capital must be reduced proportionately in order to cater for the changes.

Forces of production (Marx)
According to Karl Marx, the forces of production refer to the combination of means of labor with human labor power. The means of labor refer to the tools, machinery, infrastructure and many others. This concept includes the forces that people apply in the process of production. Karl Marx suggested that labor factors can be considered as forces of production if and only if they applied by the living human beings. Capital is considered as a force of production since it is used to buy labor. Production forces are not similar to means of production. According to Karl Marx, there are three components of production human labor, subject of labor and means of labor. The forces of production include the combination of human labor and the means if labor.

A minimum wage is the least wage that is lawfully permitted in an industry, organization and government. The main aim of coming up with minimum wage was to assure those who earn wages a living standard that is above the minimum required standard. The minimum wage has been arrived at by unions of labor through combined bargaining by negotiation, action of the board and by legislation.
The minimum wage was first introduced in New Zealand in the year 1894 through mandatory negotiation. At this moment, the minimum wage has become a fraction of the social legislation in nearly all nations. Even though the United States was the first to carry out laws of federal minimum wage, a fight that was strong conducted by organized labor for enactment terminated in the year 1938 the channel of the fair labor standards act which put .25 per hour as the wage for those who worked in interstate commerce. Industry committees were set up by the Act to calculate rates for each industry. There has been subsequent raise of the wage through the decades.

Economic aspect of minimum wage
The minimum wage tries to protect workers from exploitation. It thus gives them a chance to acquire the fundamental needs of life. The minimum wages differ depending on the country and in some cases it also fluctuates between provinces or states.

The economic aspect of laws for minimum wage is quite simple. Many employers dont pay wages that exceed the value of overtime. A raise in minimum wages results to dismissal of low productivity workers by their employers. Those with least job experience, education and maturity suffer most from this policy. As a consequence the laws for minimum wages are expected to affect teenagers as well as those with less education.

Eradication of laws of minimum wage would lead to reduction in joblessness and raise the effectiveness of markets for labor of low productivity. There are some economists who have been advocating for minimum wages that are higher. Some of them have the common ideological learning.
Economists who have a link with the Institute of Left oriented Economic policy as well as the Clinton administration have linked a normal for increases in minimum wage. As far as this economists are concerned higher wages motivate employees and thus higher work efficiency. Due to this, employees will require a minimum wage once their bosses are forced to make the payments.

If this statement was true then employers could exploit the workers who are less educated and experienced to maximize their profits. They would be willing to pay higher wages without minimum wage legislation. Besides, those economists who came up with this notion claim to have tangible evidence that supports their ideology.

There has been a publication made by economists Alan Krueger and David Card on analysis of the fast food industry. Their study reveals that minimal increases in minimum wage would only lead to minor losses in jobs and might raise employment slightly in some cases. This Krueger and Card studies indicate only that a minor increase in minimum wage might not lead to significant unemployment. The studies also overlook the fact that the present rates of minimum wages are already leading to noteworthy unemployment for many.

The aspect of economy concerning minimum wage increases has been a major concern with the public as well as professional views. A few of economists studying free market like Landsburg have approved that a raise in minimum wages do not affect employment much. Landsburg says that those who criticize laws of minimum wage insist that they lack appropriate impact on teens and blacks. He goes ahead to dismiss these claims because minimum wages have insignificant effect on unemployment. Minimum wages only eradicates fewer jobs. He insists the ancient argument that minimum wages are not good for minimum wage workers cannot be maintained.

Statistics that are real reveal that those who criticize laws for minimum wage were right all along. A part from the fact that minimum wages do not lead to higher levels of unemployment, they have an adverse effect on ethnic minorities and teenagers. As far as Bureau of Labor Statistics is concerned the rate of unemployment for each individual above sixteen years was 5.5 percent in the year 2005. For those who fell in the age bracket of 16-19 years had an unemployment rate of 17.2 percent.

The unemployment rate for those aged 16-17 years was 19.6 percent while it was15.7 percent for those aged between 18 and 19 years. The ethnic minorities are the ones who are affected most by minimum wage as compared to others. The rate of unemployment for white teens in the age bracket of 16-17 years was17.2 percent in the year 2005. While their Hispanic and Black colleagues had unemployment rates of 24.9 percent and 40.8 percent respectively.

These figures of course reduce for older minorities. Blacks who fall in the age bracket of18-19 and 20-24 years had unemployment rates of 25.6 percent and 19.8 percent respectively in the year 2005. The unemployment for Hispanics was a bit lower 17.7 percent for those aged 18-19 and 9.5 percent for those aged between 20 and 24.

Landsburg maintains that a good number of the jobs lost are miserable jobs that teens will not miss.
According to DeLong, laws of minimum wage can assist in reducing poverty. This is because employees who maintain their works at minimum wage benefit a lot and at the same time those who are not employed lose little. The problem associated with this argument is that it comprises negotiable value judgments. As far as the theory of mainstream economy is concerned, economic efficiency is achieved when markets clear because this is how all profits from trade are recognized.
With unemployment of the teens doubling to 40.8 percent, it is clear that some markets of labor are not clearing. If such degrees of unemployment are brought by labor market limitations, economics like Krueger, Delong as well as Card would advocate for governments to get involved and rectify these failures of markets. Yet they consider double teen joblessness comfortable when it emerges as a result of government intervention. This is because they want to utilize policies of this kind to reorganize income.

The theory of mainstream economy lacks any fundamentals for judging the impact of economic reorganization. As far as economics of textbook is concerned, the highest degrees of economic effectiveness are attained when markets clear. At this time, maximum gains for jointly advantageous trade are realized. Other people gain from income transfers at others expense.
There are no scientific techniques used by scientists in doing comparisons between profits and losses that comes as a result of income transfers. At the moment economists deviate from analyzing the effectiveness conditions and embark on talks about redistribution of income, they become forerunners of a political agenda instead of objective scientists.

The unemployment that results due to laws of minimum wage is not considered significant as far as Landsburg or DeLong, are considered. But these losses of jobs are significant to the employers as well as the workers affected by these laws. The ideas of few scrupulous economists should not matter most than the interests of workers and employers because these jobs might be miserable jobs. But other individuals also argue that these jobs are of significance importance as they form the fist step in getting experience on job and familiarizing with adult responsibility.
Another trouble associated with minimum wage is that they also affect older workers. As noted earlier, employees who fall in the age bracket of 20-24 years are likely to be affected by laws of minimum wage. Rates of joblessness in the age bracket of 25-34 years are higher as compared to those for the age bracket of 35-44 years.

The rate of joblessness for Hispanics and blacks aged between 25 and 35 years were 5.7 percent and 11 percent respectively in the year 2005. The rates for whites and Asians in this age group who were unemployed were 4.3 and 3.4 respectively. The unemployment rates in the age bracket of 35-44 years for blacks, Hispanics, whites and Asians were 7.1 percent, 5 percent, 4.3 percent and 2.6 percent respectively.

The black to Asian joblessness is revealing. For this reason, the laws of minimum wage are of little significance to Asian Americans. As a consequence, the Asians can afford to achieve unemployment which falls in the range of 2 to 3 percent. For the Asians with 16 years and above, they had a rate of unemployment which was 3.2 percent in the year 2005.
Those Asians who fall in the age bracket of 20-24 years, had unemployment rate of 5 percent in 2005. These figures only constitute a portion of joblessness experienced by blacks in the same year. The Hispanic white as well as black Americans have no reason of not attaining the 2-3 percent range of unemployment as the Asians.

Minimum wage advocators
Those who support laws of minimum wage do not recognize that the rate of unemployment nationally did not fall beyond 5 percent before the minimum wage laws were implemented. As far as the United States census is concerned, the rates of unemployment nationally were3.2 percent, 3.1 percent, 2.4 percent, 1.3 percent, 2.7 percent,1.6 percent and 3.6 percent in 1927, 1926, 1925, 1923, 1919, 1918, 1907, 1906 and 1902 respectively.

In the present day, there are some states that have low employment rates like 3 percent. For instance, the state of Virginia in the present day has rate of unemployment of 3.1 percent. The state of Wyoming has rate of unemployment of 2.9 percent while Hawaii consist of 2.6 percent unemployment rate.
The rates of unemployment nationally rarely reduce beyond 5 percent because some classes of employees remain within double digit unemployment. Considering these figures, one can argue that laws of minimum wage increases the national rate of unemployment by three percent.

According to economist Okun the gross domestic product falls by 2.6-3 percent for every 1 percent increase in joblessness. If the minimum wage laws can raise the rate of unemployment by three percent, then minimum wage losses are significant. Since the law of Okun is an experimental suggestion, its not real certainly. Elimination of minimum wage might not necessarily improve the GDP contrary to the way this law suggests.

Nonetheless, doing away with laws of minimum wage would have a certain positive impact on the GDP. The data available as well as economic theory show that laws of minimum wage leads to inefficiency in the economy. The living wage implementation would only intensify the losses. There arguments on whether those propose living wage want to witness the rise of rates of unemployment within ethic minorities and teens or not.

Economically, the living wage case is unfounded. The minimum wage of today comes up with high levels of joblessness within low productivity workers. Living wages that are higher would only worsen these problems. The claimed moral case for minimum wage overlooks the fact that increases in living wage have an adverse impact to the individuals who are supposed to be assisted by forerunners of living wage.

If sound policies are to be pursued by politicians, they should bear in mind to retract the laws of minimum wage more so considering the teens. Contrary to this, a good number of politicians consider political expediencies most rather than effective economic policy. Due to this, there will be an increment in minimum wage until the time the opinion of the public will change significantly.

Many economists have criticized the minimum wage due to the fact that it creates a price floor on wages. Dead weight loss in an economy can result from price floors. This implies that there is an existence of inefficiencies. In such cases the companies are forced by minimum wages to employ few workers and therefore increase unemployment.

According to Klein and Dompe, regulations of the minimum wage which were endorsed by the federal government set the minimum levels at which employees may be compensated by those who employed them. For owners of small businesses who employ other individuals, might have difficulties when it comes to compensation. Creative reimbursement packages like performance based reimbursement and others are gaining acceptance at a faster rate and thus changes the manner in which employers pay their workers. In many small businesses, the minimum wage remains an ever-present form of compensation.

Minimum wage changes affect approximately eleven million workers in the United States. 90 percent of the minimum wage workers do their jobs within the privatized sector. Inns and restaurants, retail ventures and private households usually pay the minimum wage. Considering the department of labor, more than one third of those likely to be victims of increase in minimum wage are teens who range between 16 and 19 years and part-time employees.

Protection acts for wage bill and small businesses.
There were two legislation pieces passed within the 90s. The pieces affected the manner in which the owners of small businesses compensate their employees of minimum wage. These two Acts that were enacted simultaneously and jointly were Small Business Job Protection Act (SBJA) passed in the year 1996. These acts impacted a much bigger range of aspects rather than simple wages. And this was misleading. For example, SBJA raised the amount a small business can set aside for purchases of equipment from 17,000 to 24,500 in the year 2003.

The bill also gives companies ample time to evade the problem of wrongly considering a contractor as a worker. It also sets free and simplifies procedures of S corporation and gives ample time to owners of small businesses to avail pension as well as plans of retirement for their workers.
As an owner of a small business, it is vital to come up with budgetary adjustments prior to changes in wage. Being familiar with trends of legislation may assist one in maintaining accounting procedures flexible.

It is obvious that some owners of small businesses will be impacted by alterations of minimum to a degree that is same. Some businesses heavily depend on the work force of minimum wage while others rely on employees who make more as compared to the base wage.

Usually, the most important aspect in determination of the wages paid is the industry in which a business runs. Another factor which can also determine this is the geographical location.
There are some economic analysts who insist that there are many merits associated with paying workers above the minimum wage. Considering a recent survey carried out by National Small Business United on small businesses, structures that pay above the minimum wage have advantages which include

The federal government controlled base wage fluctuations will not affect a business that pays higher than minimum wage as compared to a business that tightly holds to paying a minimum wage.
Higher wages paying employers have good options for new hires. Salaries that are higher imply better people because most people will find open position(s) more attractive.
Salaries that are competitive eradicates turnover. The workers become less tempted by other workers because they earn better salaries as they would anywhere. A work force that is stable leads to higher productivity.

Minimum wage goals
Even though minimum wage goals are accepted widely as proper, there is a big disagreement as to whether these wages are efficient in achieving their goals. Since they were introduced, laws of minimum wage have received minimal support from analysts of economy as compared to the general public. Debates about gains and cost of minimum wage are underway until today despite the economic research that has been conducted in decades.

Stigler, provided the classic clarification of weaknesses of minimum wages in decreasing poverty. According to him, employment may decrease much as compared increase in wage therefore decreasing overall income. As workers from the covered sectors are absorbed by uncovered sectors, the reduction in wages in sectors that are uncovered may surpass wages increase in covered sectors.
There might be a negative effect on family earnings distribution by minimum wage unless the better jobs that are few are given to needy families members rather than to youths from richer families. The laws which state that an employer is not to pay lower than minimum wage are equitable to laws that restrict employees from working in the sectors that are protected unless employed by those willing to pay them the wage.

Direct experimental studies reveal that effects of anti-poverty in the United States would be quite reserved even without effects of unemployment. Limited workers that earn low wages come from poor families. Teenagers and inexperienced adult females who are part time workers are the ones who are affected by minimum wage primarily.

Minimum wage economics
According to Arrigo and Steedman, a study done by mainstream economics on demand and supply indicate that maintaining a price floor above wage that is equilibrium, the laws of minimum wage brings about unemployment. This is so because a good number of employees are more than ready to work at raised wages while few jobs will be available at the raised wage.

Many introductory economics textbooks show a model which suggests that increase in minimum wage leads to decrement jobs for minimum age employees. These books puts across that it a raised minimum wage increases the rates of wage for workers who lack skills, the number of unskilled employees will reduce. The direct outcome of legislation of minimum wage is mixed.
Some employees more so whose initial wages were close to minimum wage will benefit from higher wages. Others especially those who had least prelegislation wage rates will lose their jobs. They will be forced to get in to the ranks of the unemployed or force that is out of labor.

There is an assumption that employees are work for longer periods as long as they are paid higher wages. The cost of a firm depends directly on wage rate. There is an assumption that higher wage rates will make the employers demand few hours with the employee. This is so because increases in wage rates makes it expensive for firms to employ many workers hence few workers are hired or only hired for few hours.

A combination of labor supply and demand curves allows economists to evaluate the minimum wage. The first assumption that is made is that labor supply and demand curves will not alter due to an increase in minimum wage. If there is no minimum wage, employers and employees will not stop to adjust labor quantity that is supplied in accordance to price until the labor quantity demanded equals the labor quantity supplied, thus the demand and supply curves intersecting at the equilibrium price.
The behavior of minimum wage is like that of labor classical price floor. According to standard theory, that if minimum wage is set to be higher than equilibrium price, the workers will be more prepared to give more labor while the employers will not hence creating labor surplus.

In simple terms, basic economics say that increasing the price of a commodity artificially increases its supply and lessens its demand. The outcome is the surplus of the product. When the product is in surplus for example wheat, the government purchases it. Because the government doesnt employ surplus labor, the surplus labor becomes unemployment, which seems to be higher with laws of minimum wage than without the laws.

Therefore, the basic theory puts across that an increase in minimum wage is beneficial to employees whose wages are increased, and harms individuals who lose their jobs or dont get hired. This is because organizations reduce their employees. On the other hand, those who propose minimum wage insist that the condition is more intricate than the fundamental theory can describe.
One intricate aspect is probable monopsony in the market of labor whereby the employer get power through market and can use this power to determine the wages paid. Therefore it is somehow possible theoretically that employment can be boosted by minimum wage. Even though there are possibilities that market power of a single employer in many markets of labor in the sense of customary company town, information that is asymmetric and poor mobility give some level of wage-setting power to most organizations.

Standard criticism theory
The notion that minimum wages reduce jobs is arrived at basing on the typical mold of demand and supply of the labor market. Most economists argue that the model is incoherent logically even with all its speculations. Basing on simulation results, they argue that little of the experimental work done with the model of the textbook comprises of a test that is potentially falsifying and as a consequence, experimental proof rarely exist for the same model.

Graham, argues that considering somewhat on Sraffianism, the augmented market of labor suppleness policy as well as the decrement of minimum wages does not consist an economic theory argument that is intellectually coherent.

According to Fields, who is a labor and economics at lecturer at University of Cornell, the model of standard textbook for analyzing minimum wage has a lot of ambiguity and the standard theoretical speculations wrongly measures a market of one sector only. According to Fields, a market of two sectors where the service workers who are self employed as well as workers of the farm are excluded from the coverage of minimum wage. One sector market with a coverage of minimum wage and another without (and probable mobility within the two) is the backbone of good analysis.
Fields, illustrates through his model that the emblematic theoretical argument is full of ambiguity and puts across that prophecies derived from the model of the textbook explicitly does not consider the two sector markets. Basing on the fact that since a sector that is non-covered exist almost every where, the prophecies of the model of the textbook cannot depended on.

There is another view of labor market which has labor markets that have low wage. These markets are perceived as having monopolistic competition. This is where employersbuyers have market power that is significant as compared to employeessellers. This monopsony could be brought by international collusion among buyers or natural factors like segmented markets, costs of information, poor mobility and the personal aspect of markets of labor.

In such case, demand and supply curves would not derive the labor clearing quantity and wage rate. This is due to the fact that as upward sloping supply would remain constant, other than making use of the downward demand curve monopolistic buyers would make use of the curve that is steeply sloping downwards which corresponds to expenditures that are marginal.
Such cases are forms of market failure that leads to a low pay to workers who get little compared to their marginal value. Regarding monopsonistic speculation, a suitably set minimum wage could raise both wages as well as jobs with the finest level being equitable to the labor marginal productivity. This observation illustrates the work of minimum wages as a policy of market regulation analogous to policies of antitrust.

Another factor why employment in certain organizations may not be affected by minimum wage is that the product produced by employees has a highly elastic demand. For instance, if wages are increased by force the management can set higher prices for commodities on the market so as to meet the high wages that its supposed to pay to the employees. Because the products demand has high elasticity, consumers will carry on with buying of the product at hiked prices and as a result the manager will not be forced to lay off employees.

Krugman, suggested three other probable reasons to show that minimum wages do not affect employment wages that are high may decrease turnover and consequently costs for training increasing minimum wage may reduce the complexity of hiring employees at a wage that is higher as compared to the current employees and employees of minimum wage might correspond to such a small fraction of the cost of a business. He says that he is not sure with the correctness of this and argues that that one can welcome the new experimental findings.

From many studies carried out by economists many have different views concerning the impact of minimum wage on the economy. Even though a few of economic analysts say that increase minimum wage improves the economy, the benefits associated with these are minimal as compared to the negatives that can be brought about by minimum wage increment. Increase in minimum wage results to significant job loss and also the employers will be forced to hire workers for few hours due to this. Therefore the laws of minimum wage should not be encouraged.

The growth or sustainability of a nations economy is highly dependant on the circular flow of income among the different stakeholders of the economy. It is due to the consumers habits of spending that triggers investments as a way of meeting their demand for goods and services. Such investments open new employment opportunities to the people thus increasing the net expenditure capacity of the consumers. Increase in the net expenditure ability of the householders has a linear implication on the growing demand for goods and services thus consequently increasing the investment capacity of the investor. It is the laws of demand and supply which influence the economic growth of any society.

The spending ability by the consumer greatly factors in determining the type, quality and quantity of goods and services that an organization should provide. This cycle of income and expenditure is referred to as the circular flow of economic activity. It is to be clearly noted that for economic prosperity in the society income of the citizens should exceed their related expenditure. In the event that expenditure exceeds income levels, then the economy of the society is said to be on recession.  It is still to be noted that any economic equilibrium is the state where expenditure and income are equal thus implying stagnation of the nations economic. Therefore, it should be in the sole purpose of any government to put in place the necessary measures for ensuring economic prosperity.

This paper is a critical analysis of the concept of the circular flow of economic activity as applied in the field of economics. The author in particular talks a look at how such an economic model is useful in explaining the economic growth of a nations economy. Diagrams are used in support of the authors arguments.

The Concept of Circular Flow of Economic Activity
The economy of any human society must involve the activities of production and consumption. To be noted here is the fact that firms are both producers and consumers in the circular flow chain while the household serves the consumption aspect of our economic chain.  Production can be defined as any act of using available economic resources in the process of creating goods and services which match the needs of the consumers. Consumption on the other side can be defined as the act of purchasing goods and services either for household use or for use in the process of making new goods and services. The later is the reason behind the qualifying of firms as consumers. It is also to be noted that economic activities also include employment and income generation. Employment is the acquisition of human resources for the benefits of realizing the production of goods and services by a firm. Income generation as an economic activity includes all the costs incurred by the organization in the process of producing goods and services. Such could include costs for purchasing raw materials, labor wages and other expenses incurred by the firm during the production process.

Types of circular flow of income models
There are two types of circular flow of income models. The first is the two sector model type of circular flow of income which assumes no changes in the levels of income and expenditure as well as the ultimate output of the economic activity. The model assumes that only the firm and the households are the key players in the economic development of a community. Here, the household spends on goods and services thus giving income to the firms which in return spend the gained income to sustain its production processes. In this model, income, expenditure and output should be equal for economic equilibrium to be realized. This illustrated in figure 1.

SHAPE   MERGEFORMAT                  
Fig 1. An illustration of the two sector model        
 A diagram showing the two sector model   
The other model is the five sector model which takes into consideration the economic development role played by financial institutions, the government and foreign contributions. Financial institutions here are seen as a source of investment capital to the investors as well as an institution for saving the extra income of the consumers. The government sector on the other side involves in the taxation of its citizens in return for the protection it provides to them. It should also be noted that the government is also responsible for spending such revenue collections on development projects such as building of road infrastructures and funding of the health and education sectors of our community. Foreign or oversea sector in the five sector model is quite crucial in enhancing the process of importation and exportation involvements of the economy. It is to be realized here that imports and exports are a crucial factor in any economy. It is such acts which provide for both access to goods and services unavailable in the nations as well as expanding the market for goods and services produced in the nation. It is this sector of the model which converts the nations economy to an open economy. It should be noted that the nations expenditure must not be higher than its income for exports if the economy is to be sustainable. In this model, economic equilibrium is realized when all involved expenditure cancels the incomes realized. This is demonstrated in fig

2.SHAPE   MERGEFORMAT
Fig 2. An illustration of the five sector model
Principles of economics as explained by the circular flow of economic activities
The economic development and sustainability of any society is highly dependent on production and consumption. It is to be noted here that the production process is determined by the availability of economic resources such as physical facilities, lobar and investment capital. Land is the physical resource required for the construction of the factory facilities and agricultural activities. It should also be noted that land is the source of most of the economic resources required by firms in the production process. Such resource as electricity and minerals are found in the soil, making land a crucial factor in the production process.
   
The availability of qualified and reliable lobar force is another basic requirement for sustainable production in any firm. It is the human resource which factors greatly in ensures the efficient operation of any organization. It should also be noted that by providing for employment, the firms are initiating the reciprocal factor of economic activities. With good wages, workers as consumers will increase their purchasing power for goods and services thus increasing the overall income margins for the firms. This will have the end result of increasing investment capacity for firms and thus ensuring a sustainable economic growth in the nation.
   
Any investment requires capital. These are the durable goods and facilities which positively influence the production process. Such include setting up of factories and offices as well as investing in other production supportive requirements. It is to be appreciated that it is investment capital is mainly in form of loans from financial institutions customer gained income through purchase of the companys goods and services or from the investors own savings. It is due to this reason that financial institutions play an important role in the economic growth of any society.
   
The concept of circular flow of economic activities is found in the concept of stocks and flow. The decision making process pertaining the economic position of any investment lies on its stock flow records. As a cycle of economic value reciprocation, it is worth noting that the use of economic resources in the productions process requires demand for a return value to the firms. It is due to this that goods and services are usually purchased at a given marketplace price. Such income gained from the sell of the products will serve to pay wages for workers, rent to the landowners and contribute to the tax kit of the nation. With income, the workers will increase their purchasing power thus consequently increasing the overall economic potential of the firms. The government on the other side will invest on societal development projects thus realizing a sustainable development in the nation. It is this cycle of interaction from production, employment, capital generation and consumption which leads to circular flow of economic activities in the society.
   
It is still to be realized that it is the household which provides most of the economic resources needed by firms in the production process. Households are the owners of the land which they offer at a fee to the investors. Still to note is that the consumers are the source of the labor that serves to oversee the production of goods and services in the company. The investment capital is another thing which proves the reciprocal nature of the economy of any society. It is to be understood that most investments rely on financial institutions for funding of their projects. Still to be appreciated is the fact that the financial institutions a heavily reliant on the consumer savings for their survival. This makes the economic growth of a society thus a circular flow of income among the producers and the consumer.

The concept of equilibrium and adaptation to disequilibrium
Economic equilibrium is defined as an economic state in which both the firm s and the consumers have equally benefits or spends towards the involved economic activity. It is only in such a state that sustainability of the economic can be realized. It is however to be stated here that this is not always the case in the real business world. It is a common practice by many consumers to change their purchasing patterns while seeking to save for their future lives. This leads to decrease in the companys projected market returns. Such decreases in the overall market returns of the company have a result of risking the retrenchment of the employees and closure of some production facilities. All these will have the end result of reducing the household income levels thus further reducing their purchasing power. Failure to rectify such circular flow of economic declines can lead to the ultimate down fall of the nations economic. It is in fact a result of such economic practices that the globe is experience an economic recession.

It is however to be noted that the problem of reduced can be easily by the firms. It is in the knowledge of many investors that consumer only spend part of their income while saving the rest for future use. This has the ultimate result of leading to contraction of the circular flow of the economy. However, this can be easily prevented by the firms if they spend most of their unsold output in increasing their future production capacity. This ensures that the firms spend more capital investments to reduce their investment needs in the future. Such disposal mechanisms will help reduce the immediate production capacity thus matching the household demand thus eliminating the disequilibrium factor in the economic. This aids in the normalization of the circular flow of the economic activities.

Circular flow with government and oversea investors
The inclusion of government and foreign investors in the circular flow of economic activities makes the circular flow more realistic. It is to be noted here that the government is for the people and made of the people. This means that the execution of governments responsibilities must be heavily reliant on the citizens contribution towards the governments upkeep. It is however to be noted that such contributions to the government are a direct reciprocal act owing to the protection that the government offers to its people. Such are also seen to go into the implementation of developments projects in the communities. Still to be noted is the fact that the government acts in encouraging investment through provisions of investment incentives.
   
Involvement in foreign business is another crucial element in the circular flow of economic activities. This is basically in the aspect of imports and exports. It is to be realized here that imports and exports are a crucial factor in any economy. It is such acts which provide for both access to goods and services unavailable in the nations as well as expanding the market for goods and services produced in the nation. It is this sector of the model which converts the nations economy to an open economy. It should be noted that the nations expenditure must not be higher than its income for exports if the economy is to be sustainable. Still evident in oversea sector is the fact that it aids in initiating and nurturing international relationships among nations, a crucial element for the harmonious coexistence of different members of the globe family.
Summary
   
Production and consumption are the most crucial elements in any economic setting. It is by consumption of the produced goods and services that firms get value for their investments. Still, it is by production that consumers can have the desired satisfaction for their needs in life. The production process also involves the purchasing of goods and services for aiding in the production process. It is thus clear here that firms are both producers and consumers in the circular flow chain while the household serves the consumption aspect of our economic chain. It is due to this reason that both the firms and the households are found to be two different but highly complimenting elements in the realization of a sustainable economy in any society.
   
The households are the source of sustainable market for produced goods and services in the community. It is by their purchasing of the products of firms that firms can claim guaranteed return of value for their investment. Such guaranteed market for goods and services lead to increased potential of expansive investments by organizations to meet the increasing consumer demands. It is to be noted here that increased investments come with increased employment opportunities for the people. Still to be realized is the fact that employment opportunities increase the employees income and thus greatly improving their purchasing power. Such will have the end result of having a linearly increasing demand-supply situation in the society. This means that the economy of the community will keep on expanding provided such demand and supply trends are kept.
   
It is however to be noted that demand is not always equal to supply as most a times consumers decide to save part of their income for future use. It is due to this reason that economic disequilibrium is a common thing in our society. The globe recurrent faced with economic threats mainly due to such disequilibrium of demand and supply in the marketplace. It should be noted here that equilibrium is the best state of any sustainable economy. It is due to this that many companies seek to address the problem of disequilibrium by using investment capital structures as a way of disposing their unsold products. Such acts ensure the firms added advantage for meeting any future rise in supply demands while limiting potential losses in the meantime.
   
The circular flow of economic activities, in amore realistic way relies of the government, financial institutions and foreign countries. Financial institutions are seen as a source of investment capital to the investors. It is to be appreciated that such financial institutions are heavily reliant on the consumer savings for their survival. The government sector on the other side involves in the taxation of its citizens in return for the protection it provides to them. The government is also responsible in spending such revenue collections on development projects such as building of road infrastructures and funding of the health and education sectors of our community. Lastly, foreign or oversea countries are quite crucial in enhancing the process of importation and exportation involvements of the economy. It is such acts which provide for both access to goods and services unavailable in the nations as well as expanding the market for goods and services produced in the nation.

In conclusion, it has been evidently established that a market economy is marked with production and consumption as the major key player in ensuring circular flow of economic activities. It is however evidently clear that a sustainable circular flow of economic activities should be thought out using the five sector model of circular flow. It is this model which eliminates the assumptions found in the two sector model of the circular flow. It is clear that the five sector model appreciates the fact that financial institutions, governments and foreign nations are crucial factors if the circular flow of economic activities. It is only with available financial institutions like banks that funding of investment can be assured. Still to be noted is the fact that the government as the custodian of the citizens must be involved in ensuring fair and just flow of economic activities. Involvement in import and export trading ensure the long term sustainability of demand and supply factors of the economy.

Monetary transmission mechanism is a policy and a process where the change in the interest rates affects the levels of inflation. This mechanism generally describes how changes that are induced by policies in the nominal short term interests can have a major impact on several variables such as employment and the output aggregate.  There are particular channels of monetary transmission that work on the premises that monetary policy has effects on interest rates, rates of exchange, prices of the real estates, equities, bank lending and  the balance sheets of firms. This paper will focus on the mechanisms and policies of monetary transmission in relation to the oil industry.

Preview
Monetary transmission mechanism is the channel through which a countrys monetary policy has an impact on the economic variables of that country which include output and employment. Comprehension of this mechanism has been very essential topic of research in macro economics and is central to the analysis of the economic policy.  There are various explanations of the monetary transmission policy to the real economy and they try to capture the total effects. These channels include the Cost of Capital Channel (traditional view), the Credit Channel (which has traditionally been broken down into Bank Lending Channel and Balance Sheet Channel) and the financial accelerator.  Cost of capital channel can be explained in the following way. Companies fund their operations using three ways. These ways include stocks and equities, debt methods and the reinvestment of money earned through previous trading. This means that the weight of capital for a company is weighted upon the sub total of equity and debt while the reinvested capital is charged as the cost of equity because if that money us not reinvested, it is normally returned to the company investors who are the share holders. The cost of debt is also termed as the cost of borrowing money.

In this traditional channel, when the central bank reserves reduce, the demand for deposits by the commercial bank reduces and it the prices get prickly a short term decrease in the monetary holdings in the real economy always leads to real interest rates that are higher than the normal ones and this translates into a contracted interest positive elements of aggregate expenditure. The credit channel approach of transmission postulates that fictions in information in the credit market always worsens during tight money periods and there is a resulting increase in the external finance premium which is seen as the cost variation between internal and external funds. This enhances the effects of the policy on the economic situation of a country and can be seen in the response in the GDP.  In this policy of monetary transmission, a change in the interest rates affects the levels of inflation. This mechanism generally describes how changes that are induced by policies in the nominal short term interests can have a major impact on several variables such as employment and the output aggregate.  There are particular channels of monetary transmission that work on the premises that monetary policy has effects on interest rates, rates of exchange, prices of the real estates, equities, bank lending and the balance sheets of firms. The transmission mechanism has three stages.

Stages of monetary transmission
Monetary transmission channels occur in different stages. The first stage is where a change in the rates of interest that are set by the MPS influence changes on all the other rates. This is where banks and all the other institutions react to an official change in the rates by changing their rates that govern savings and loans. This change will always affect the prices of very many other things like the households assets, security prices, shares and equities, energy and equities. The expectations of individuals and companies will also change to accommodate that change in the interest rates. The confidence about the future financial path begins to wane. The second stage is where the spending patterns of the consumers are affected thus affecting the demand of goods and services.

When the interest rates are high, the level of aggregate demand for goods is usually low because the consumers in the wake of the increased rates and the accompanying effects cut back on their spending meaning that their purchasing power is very low. The effects will also be felt internationally as the volumes of exports and imports are also affected. The third stage is the impact of the monetary transmission mechanism on inflation and the gross domestic product of the nation. These are largely dependent on the total levels of supply and demand underpinned by the fluctuations in the interest rates. However, if there is an AD increase, and enough economic capacity, then the increase in the rates may not cause a noticeable inflation.

Impacts Economic Downturn
In 2008 there was an economic crisis that had a very huge impact on the monetary transmission mechanisms and the energy sector was one of the hardest hit by the economic downturn that started toward the end of 2007. In 2008 petroleum prices went up to unprecedented levels, something that pushed up the interest rates all over the world and had a huge impact on prices of very many commodities around the world since petroleum products are hugely involved to fuel the transport industry that relays different consumer goods through the different levels. The petroleum crisis had an interweaving relationship with the global economic downturn because the shortage of petroleum led to the rapid increase in prices of the petroleum products while the global economic down turn affected the spending power of most consumers meaning that in the long run, the consumption of petroleum products went down because of the low purchasing power.

Impact on oil and Auto Industry
One of the industries that were worst hit by this monetary transmission crisis in the petroleum industry is automotive making industry especially in the US. There was substantial increase in the cost of the fuels that drive automobiles because of the combination of the energy crisis and the economic downtown. Automakers that deal in vehicle that do not have low fuel economy were the hardest hit by the this instance of monetary transmission because the demand for the sports utility vehicles that guzzle fuels and trucks went down visibly This is because of the reduced spending power occasioned by the high interest rates that had been pushed up by the effects of the energy crisis and the economic downturn. The sales for the giant automakers in America, GM Ford and the Chrysler started sliding and they did not have alternative fuel-efficient autos to provide to the customers who were highly watching their pockets. This scenario had a double impact on petroleum companies because to start with, there is a problem with the availability of fuel meaning that they will have to spend more to get the usual amount of fuel, and secondly, even if the fuel is there, the rate of consumption was very low because of the spending habits of most people who were economically conscious because of the credit crunch. Some of the petroleum companies were forced to reduce their operations in various countries.

For example, Caltex pulled out of various African countries including Kenya while Shell sold half of their stations in a number of countries to the emerging oil Libya. It is during this energy crisis coupled with the economic downturn in 2008 that prompted the shell CEO to create a global scenario that he called the scramble and Blue prints that focused on the state of the oil industry and the energy sector in the next five years onwards, forecasting a global crisis should the world opt to follow the scramble option that will see the countries scramble for the available petroleum resources, thus depleting them without having made an alternative form of energy to replace the dwindling oil resources.

Impact on Future of Oil Industry
To make long term strategies, shell has been developing scenarios since the 70s and the latest scenario is the Scramble and Blueprints that illustrates the routes the world will take in the face of the energy crisis that will hit the world as from 2015. The scramble route will be an exciting route with a lot of competition but will grind to a halt with unimaginable consequences. The scramble scenario is a path of less resistance where the nations will make haste while the sun shines meaning that they will run to secure energy resources and there will be losers and winners. However, a time will come when all the fuel energy will be depleted and the race will come to a painful end. This method solves no problem because the supplies will run short leading to high energy prices, political response and volatility. However, the Blueprint option will have a lot of problems at the start and the ride will be bumpy but due to the ingenuity and technical innovation, the excitement will be felt at the end. 

Whichever route is taken, the problem cannot be solved without the addition of other energy sources in the world in order to keep up with the increasing demand occasioned by the population upsurge. However, the Blueprints route will be disorderly at the start but less painful toward the end because positive coalitions will emerge to ensure energy security and enhance more innovation. This scenario will work hand in hand with the environmental sustainability path and there will be growth of number of cars that use alternative energy sources like electricity and hydrogen. This is where the shells scramble and blue prints scenario and the automotive industry relate because the path taken will have an impact on the automotive industry.

According to the shell CEO, this will occasion unprecedented monetary transmission mechanism around the world with prohibitive interest rates and very high prices of assets and products. Once again, the industries that will be heavily affected are the motor and petroleum industries. This is because, auto industry relies on petroleum products and with the dwindling resources it means that there will be an extremely low demand for motor vehicles from a global population that will already being reeling from the effects of an unprecedented credit crunch. The main reason for the increased demand of oil that will outstrip the capacity of the world resources to supply it is the revolutionary growth of economies especially China and India, if the world does not invest in alternative forms of energy like the oil sands or nuclear energy. However, the shell CEO says that if the world chooses to follow the blueprint option, such a monetary transmission crisis may be avoided because the blueprints path will ensure that countries invest in alternative forms of energy in the face of dwindling oil resources. This is a path of creativity and auto makers will not suffer from demand problems because they will have prepared for this eventuality by manufacturing vehicles that use alternative forms of energy and the interest rates will have been cushioned by this preparedness unlike the just ended economic crisis that saw the purchasing power of many household being completely depleted.

Inflation
There are energy advocates who are pushing for a consistent policy of energy because the swings in prices have become wild thus affecting inflation and interest rates and this has crippling effects in many industries. For example, due to the credit crunch, the GM motor company almost collapsed and it was not in a good financial position to obtain credit for it to be able to make an acquisition of Chrysler. The fall of sale and tightening consumer credits was another big impact that almost drove the automaker out of market. The other impact of monetary transmission was the effect on credit worthiness of people. The financial crisis made it hard for the average person to get credit from banks to buy vehicles meaning the rate of vehicle consumption went down thus also pushing down the demand for oil products. Most average people buy cars using loans granted by banks and at that time when the interest rates were at an all time high, most people would shy away from such risky monetary commitments. This is especially because of the instability in the job market.

Cyclical Impact
The monetary transmission especially during the 2007 -2008 period also had an impact on the industrial output of very many industries. This is because the credit crunch affected the buying power of consumers meaning that the demand for industrial products went down. Very few companies were operating at maximum capacity while some of the industries had to close down in the wake of the economic downturn that drove levels of inflation to unprecedented heights. All industries use energy meaning that if the companies were not operating at maximum capacity, then the levels of energy that they were utilizing were very low. This means that the demand for energy due to the low industrial production occasioned by the low demand for industrial good and this had a major effects on major oil companies especially the one that concentrate in industrial supplies like Caltex. The situation here was very cyclical and this manifests how deep the impacts of monetary transmission had gone. The cyclical situation starts from the high oil prices that push up the prices of products because oil is used in various stages of business, for example, industrial production and transportation.

The increase in the prices forces the consumers to cut their spending on different industrial goods including automobiles and the increase in interest rates also reduce their chances of getting credit from monetary institutions. Their reduced spending means that the demand for the industrial products goes down and the industries respond by producing lesser goods and in the process of producing lesser goods, they use lesser amount of energy including oil. These industries are now forced to reduce the amount of labour force, who are industrial consumers meaning that their spending power goes down again pushing the demand for industrial products and energy down. With the low demand of energy including oil, the prices of oil go down thus as the levels of inflation also goes down making the situation to go back to a state of normal equilibrium. That is the cyclical impact of monetary transmission mechanism that in this case is triggered by the rise in the fuel prices and is brought to a halt by the reduction of the same prices, but after a series of events and counter events.

The period 2006 to 2008 is an interesting one in the economic sense. This is because of the way the global economy went full cycle and stunned the world. In the year 2006, the global economy was doing well and generally people were hopeful about their future. Due to this optimism, borrowings from the financial markets to fund huge spending by the public dramatically increased, and as a result the financial market kind of overheated. Then towards the end of 2008, economic experts and the general public were engaged in a heated debate on whether or not the world economy was facing or was actually in a recession. However, there was a wide acceptance that the world was facing a financial crisis of unprecedented scale. Businesses were either losing money or closing down and hundreds of thousands were losing their jobs as a result.
    Hence in a way we can visualize an economic cycle having taken place in the period between 2006 and 2008.Given this position, the objective of this paper will be to decipher how economic changes affect the performance of the retail industry. First, before the financial crisis became apparent, that is between 2006 to 2007, we would like to see how the retail industry performed vis a vis the economy. Then after the financial crisis began to take its toll on the global community, spending patterns definitely changed, and it is important to note how this affected the industry. Lastly, it would be important to try and come up with an economic relationship between economic performance and the performance of the retail industry. The resultant model should be able to be used to forecast the future of the retail industry based on economic projections that are normally put forward by economic and financial experts from time to time.
LITERATURE REVIEW
Retailing is primarily concerned with the sale of finished products to the end users (Rakhi, 2009).It is comprised of both individuals and companies. On the retailing continuum, we can have a family run store on one hand. On the other extreme we have such global behemoths like Wal-Mart, the worlds largest retailers, operating in numerous states. Retailing is considered to be a primary driver of the global economy given the fact it permeates all levels of the society and employs millions across the world. For instance, according to Jones (2009) a massive 15.5 million people worked in the United States Retail Industry in the fourth quarter of the year 2007.
Economic Indicators and Retail Performance
According to Euromonitor International (2009), the performance of the economy as a whole has a great impact on retailing. This is because a retailers profits are closely correlated with the performance of the economy. This way, performance indicators such as price growth and retail turnover will either show favorable or poor prospects depending on the movements of the various economic parameters. Economic growth trends such as  HYPERLINK httpwww.investopedia.comtermsggdp.asp Gross Domestic Product (GDP), HYPERLINK httpwww.investopedia.comtermsiinflation.asp inflation, consumer confidence, personal income and interest rates are extremely important when thinking about the expectations and therefore performance  of  the retail industry(Jones,2009). A drop in interest rates by say 50 basis points for example, might look as a small gain to an individual consumer, but Jones (2009) notes that if considered in terms of an economy as a whole, it has a big effect on spending patterns. Likewise, if incomes of people fall, or they are less confident about their economic future, they are likely to cut back on expenditure, and save so as to take care of the future uncertainty (Euromonitor International, 2009).This drop in spending means that the retail industry takes a beating in terms of low sales. Coincidentally, spending is a function of peoples income levels and their confidence, and this varies with the performance of the economy. In Spain for example, 2008 saw a slow down in economic growth accompanied by increased rates of inflation and unemployment, and as a consequent, retail sales grew by only 2 compared by over 10 in 2007(Euromonitor International ,2009).

The Economy and Different Retail Segments
Economic hardships are likely to limit peoples spending, in view of the fact that most people will have lost jobs and therefore incomes earmarked for purchases would have fallen. Johnson and Scholes (2003) notes that each segment or range of products is affected differently by the economic cycles. The impact of economic cycles on each retail segment therefore tends to vary substantially. According to Jones (2009), this reflects how each group of goods represents a discretionary form of household expenditure. Some segments of the retail industry will therefore record robust sales figures while others will suffer loses. These trends might cancel out each other. As a result, the retail industry might actually record growth, even in difficult economic times. For instance, only 20 of the variation in the volume of food retailing may be attributed to changing economic conditions, compared to around 85 of movements in the hospitality and services sector (Shulha ,2006).This means that in an economic downfall, the food industry is likely to experience modest changes in sales figures while the service sector suffers huge losses.
Employment and Retail Performance
According to Shulha (2006), employment rates within an economy, which is closely linked with the economic strength, also affects the performance of the retail industry. This is particularly because the unemployed tend to exhibit spending patterns different from the employed. Myers (2004) notes that during difficult economic times, there is a tendency towards hidden unemployment whereby more people are willing to take up part time and casual employment which in many cases represents a form of under employment. On the other hand, the increasing incidence of under funded retirees who are unable to maintain previous levels of consumption takes an upward turn. All these groups represents a form of unemployment given the fact that spending is cut, particularly for discretionary items such as clothing, electronic goods and holidays. And this pattern is likely to negatively impact on  retailing. The opposite is true when an economy is experiencing a boom, when people are able to find jobs, are more confident about the future and therefore feel free to maintain high consumption levels.

Income Distribution
Income distribution also impacts significantly upon per capita retail expenditure. This is because of the income elasticity of demand (Johnson and Scholes, 2003).The income elasticity of demand is the extent to which demand for a product changes in response to a change in income. According to Johnson and Scholes (2003), per capita expenditure on clothing, and caf and restaurant meals, increases sharply with household income. This contrasts with spending on food which is relatively more stable across income groups. According to Euromonitor International (2009), these patterns of expenditure have significant implications where changes in household income occur in response a structural change in employment patterns. Considering the period 2006 to 2008, it will be interesting to see how retail industry performed in the face of drastic changes in income patterns, given that millions of people across the world lost their jobs towards the end of 2008.

RESEARCH METHODOLOGY
Information Sources
Given the size, dynamism and complexity of the retail industry, primary methods of data collection might not give a true picture of the happenings in the retail industry. Besides, the sheer volume of work involved in analyzing a representative sample is not only enormous, but also requires a lot of time, which is not available. Consequently, secondary methods will be used to collect data. Information will be sourced from newspaper articles, trade journals and white papers. Data from various government agencies, trade associations, paid databases and credible internet sources will also be considered. Among factors to be considered will include the retail turnover indicators, changes in consumer expenditure patterns, changes in factors driving growth in the industry and the influence of economic performance on retail performance indicators.
Analysis Methods
Given the global economic performance in the period 2006 to 2008, whereby the economy did very well in the beginning (2006) and headed towards a recession (towards the end on 2008) it will be important to find out how economic indicators relate to retail performance. In this regard, Linear Regression Analysis will be employed to determine the existence, if any, of causality between the two parameters. Besides, attempts will be made to come up with a Historical Trend Analysis of the period under review. This will be represented in bar graphs and line graphs. Lastly, Ratio Analysis will be used to analyze performance in the period .This will give us a glimpse of whether the retail industry has the capacity to pose any further growth..

Purchasing power parity is a theory of determining exchange rate and a means of comparing the average costs of goods and services between different countries. This theory operates on the assumption that the actions of both exporters and importers are motivated by cross border countries prices variances, inducing changes in spot exchange rate. In addition, the theory of purchasing power parity also suggests that transactions on a countrys current account, affects the value of the exchange rate on the foreign exchange market.
Purchasing power parity theory states that the exchange rate between one currency and another is in equilibrium when their domestic purchasing powers at exchange rate are equivalent (Joseph, 2002).This means that ther price of goods like a computer in China and United States of America should costs the same taking into account the exchange rate between the two countries.
     According to Sustav Cassel, a Swedish economist, the external value of currency depends on the economic purchasing power of that currency relative to that of another currency (Joseph, 2002).. This means rate of exchange between two inconvertible paper currencies is determined by the equality of their purchasing power or by their relative price levels. The purchasing power parity theory explains   exchange rate determination and its currency fluctuations when different countries are on inconvertible currencies.
The theory of purchasing power parity is best explained using two principles the law of one price and from the Law of One Price (LoOP) to Purchasing Power Parity (PPP).
The Law of One Price (LoOP)
This law states that goods which are identical should be sold for same price in two separate markets when no transportation  costs is incurred and no differential subsidies or  taxes are applied in the two markets. In cases where no transportation cost is incurred on such goods, this opens an opportunity to make profit through trade. Therefore, discrepancies in price of goods is due to transport costs incurred between different countries and taxes applied by different countries  and states on their goods thus leading to variation in prices of goods (Joseph, 2002)..
From Law of One Price (LoOP) to Purchasing Power Parity (PPP).
This theory of purchasing power parity is an aggregate of law of one price with a bit of twist added to it and it says that all identical goods should be sold between countries or in both markets. This law states that if two countries have different inflation rates, then the price of goods in both states will change. Hence, the price of goods is determined by exchange rate through the theory of purchasing power parity. In this case a country with a high inflation rate is believed to have its currency value decreasing.
In conclusion, the theory of purchasing power parity argues that the rate of exchange is usually determined by the ratio of purchasing powers between countries. Therefore, goods and services identical in nature from different countries should cost the same price in different countries. The price differential between different countries is not sustainable in the long run as the market forces (demand and supply) will tend to equalize prices between states or countries and their exchange rates.

According to classical economics, wage tends to be flexible in the short-run. Suppose, there is a leftward shift in aggregate demand, aggregate supply shifts leftward. To maintain full employment of labor, firms cut the price of labor (wage). At the new intersection, say point B, L0  L1, or the previous supply of labor is equal to the its present supply. However, w1  w0, or the new wage level is less than its previous level. Cutting wages, in cases of say recession, generally restores full employment.
Stagflation refers to an economic condition where an economy experience stagnation and excessive employment (which remains unchecked for a specified period of time). Keynesian economics attribute stagflation to significant disruptions to the supply side of the supply-demand equilibrium. For example, when there is an artificial scarcity of key goods, resources, or services, production of primary goods are affected. This leads to economic stagnation. The effect however goes beyond stagnation. Scarcity of key commodities triggers excessive inflation. This results , possible, in the contraction of an economy. The 1970s stagflation was generally caused by the failure of the Peruvian anchovy fishery and the 1973 oil crisis. Putting either demand or supply incentive will have no bearing on the actual supply because of relative scarcity. Keynesian economics, therefore, did not offer a realistic solution to the 1970s stagflation.
Supply-side Economics
Supply-side economics rests on the assumption that supply incentives (like tax reductions, the imposition of capital gains tax, and regulation reduction) will lead to steady increases in aggregate supply. If this is the case, aggregate demand shifts rightward (opportunity to increase spending). Inflation follows suit. The gain in consumer and producer surplus is approximately equal to the decrease in government revenues (CS  PS  -R). The effects 1) budget deficit increases equal to the increase in CS and PS (multiplied by a multiplier, a), 2) higher interest rates, and 3) revaluation of the currency. In the case of the United States, the resurgence of the dollar during Reagans administration tripled the foreign debt of the country. US debtor countries such as Indonesia and Thailand suffered considerably from the revaluation of the US dollar. Because their loans were OPEC recycled dollar, the loans would have to be paid at a higher interest, at the real value. Hence, their debts also tripled as a result.
The effect of an increasing GDP to the trade equation is not direct. After the recovery of 1985, the US faced trade deficit. Germany and Japan were blamed for this de-trickling effect. Germany and Japan were major exporters of primarycapital and secondary goods to the United States. The United States, on the other hand, was a major importer of the two countries. Increases in US GDP triggered increases in domestic supply, but increases in aggregate demand seemed to be exuberant. Thus, increasing the import level in the midst of an economic recovery would increase the trade deficit. Thus, as many economists pointed, the increase in the budget deficit was a humorous direction to the trade deficit. Japan devaluated its currency to compensate for the quantity of exported goods to the United States. However, by devaluing its currency, the country had become a major importer of secondary goods.
The function of the International Monetary fund (IMF) is to oversee the global financial system by following the macroeconomic policies of its member countries, specifically those which concerned exchange rates and balance of payments. It is an organization tasked with the objective of stabilizing international exchange rates and facilitating development. The organization also offers low-interest loans to developing countries (long-term loans). Its developmental program, however, was rendered irrelevant in the 1970s following the failure of the trickle-down policy. The trickle-down policy rests on the assumption that technology adoption would generally trickle down to the lowest strata of societies. The benefits of improved technology, thus, would trickle-down. A qualified development would then result to increases in production and consequently demand.
Stimulus packages are conservative means to increase spending. Currently, the Obama administration is distributing stimulus packages to its citizens for the sole purpose of increasing aggregate spending. This is a classical approach. Increasing spending would naturally stimulate firms to increase production schedules. In theory, this causes a shift in the aggregate supply.
The problem, however, with this policy is the potential effect of crowding out. Suppose the deficit increases and savings remains the same, either investment or net exports must fall, causing trade deficit. Hence, the term twin deficit applies. If foreigners pay for the budget deficit, the trade deficit grows. If the countries citizens savings finance the borrowing, the effect of crowding out magnifies. To solve this problem, there is a need to revaluate the currency of the export-oriented country (say China).

In a world like today where everyone wants to have the most economical means of attaining goals and realizing targets, it is but no wonder why companies, employers, and business owners look for alternative means to cut down on costs to augment their income not to mention the most prevalent option of most companies nowadays, the so-called outsourcing.
    Outsourcing typically means that a company would opt to have a particular job or process be done by a third party company. A third party company may be in the same locality with a cheaper labor cost, and the like, or one across the ocean (oversea) like in the case of most call center services and manufacturing firms.
    On the employers perspective, this can be very advantageous since it can cut down costs, like overhead costs for instance, thereby increasing the margin. Companies will have lesser expense on the benefits for their workers since they can already survive with a considerably few people.
    As a result, this can bring about a possible negative economic drawback on its community. This can create an impact of lesser employment opportunity for the area of the company which adapts outsourcing. The idea of patronizing local talents of the productive workforce is being neglected thereby increasing the population of the unemployed individuals for that locality. Companies tend to adapt and prefer foreign talents and skills (from the third party company) over local ones since they could save up on their expenses.
    Looking at another possible effect of this scenario on the behavior of the youth, this could somehow create an atmosphere of confusion and perhaps, a source of panic, for most individuals who are about to pursue a field of specialization in college. Many will get confused on what particular field of study would still be able to give them immense chances of getting employed. Accordingly, a particular individual may have a negative outlook on pursuing college degree, thinking that there will still be a big possibility of being unemployed even if heshe has graduated in college.
    Outsourcing may also heighten the competition in a particular business arena since more and more graduates are produced every year and yet there are only a few job vacancies offered to them. A graduate may be strained on getting on a particular job even if heshe is overqualified due to a strong need to have a source of income. As a result, this would increase the unemployment rate and underemployment rate.  This may even lead to a chain reaction on its economy.
    Hence, outsourcing both has advantages and disadvantages on the economy. This has created positive global economic effects yet along with it, comes domino effects on its local economy as well.

The market of a product is the availability of people who can buy the product for consumption or utility. This can be influenced by several factors depending on the demand and supply of the product. Other factors that influence the market of a product may include the tastes of the people fro which it draws its demand, the number of the people available to buy it, the income of the people who are likely to buy it and its price. In essence, price is the biggest factor that influences the demand of a product hence its market. On the other hand, demand is the need for a product by consumers.

    Factors that may likely drive the demand of the product include the tastes of the people who might need to use yachts. There are people who find it within their interest to use yachts for fun or even for business and as such, they might be influenced to purchase the yachts. When used for business, the yachts is bound to be rented out or at other times, leased to tourists or locals. They prices of the yachts also play the key role on its demand. High prices may attract low demand. In such cases, the consumers are highly likely to rent or lease the yacht for use within a specified period. The number of buyers drives the need to supply more or less of the yachts. Other factors include the income of the people who will probably buy the yachts. It is a well known fact that yachts draw their market base from the people whose income is well above the average income earner. Therefore, the higher the income of the people in a specific area, the higher the chance that they can afford yachts.

    Price elasticity is the measure of responsiveness of quantity demanded to a change in price when all other factors are held constant. In this case, when the prices of yachts go down, there is a chance that the demand will increase. On the other hand, when the prices go high, the demand will go down. We have to take note that the low prices might bring about not a steady rise in demand but a gradual one as the buyers are bound to question the price that has gone down. On the same ground, an increase in price might create demand amongst customers who believe that the quality of the yachts might have gone up so as to influence the prices.

    So as to increase demand, the suppliers should increase the advertisements of their products so that they create the demand. They should also bring the price range to a level that favors both their profits and the demand by the customers who might be within the capacity to buy. The supply should be accompanied with such services as after sales services. This should include better offers for warranties and offers for the servicing of the yachts over a certain longer period of time. The suppliers should increase their demand by offering more appealing prices to the tourism sector players as tourists play a huge role in the consumption of services offered by people who rent out their yachts.

In most cases price discrimination is practiced in market short of perfect competition such as monopoly markets. Where monopoly exists, firms are likely to charge higher prices on product than in competitive market and quantity sold is less generating supernormal profits. Further this profit can be increased if the market is segmented with varying prices charged in different segment.
    However price discrimination can be practiced in oligopoly markets. In order to maximize profits, firms segment markets or customers depending on how sensitive are in their demand. According to most economists price discrimination prevails in monopolistic or oligopoly markets due to customer heterogeneity (Lars, 2006). In perfect competitive market firms have no market powers and hence price discrimination cannot exist because only one price prevails.
    If price for the same product or service vary across market segment and its difference is not based on cost of production then price discrimination is said to exist. Price discrimination can exist in three levels namely First-degree, second-degree and third degree price discrimination.
Price discrimination currently practiced by UK mobile network providers.
    Due to its high technological growth rate, mobile industry plays important role in communication industry (Cricelli, et al, 2005). Over the year the mobile industry has been characterized by exponential growth in demand for traffic.  In UK mobile network providers are practicing different price discrimination as discussed thereof.
    Mobile roaming The UK mobile industry has more than six mobile network providers which include, Vodafone, Orange, O2 etc. according to David (2006) UK mobile operator charge different retail prices in different European Union countries (David, 2006). This form of discrimination can be termed as first degree price discrimination or perfect price discrimination. This is so because in perfect price discrimination, suppliers charge whatever customer segment is willing and able to pay. Although difference in roaming call price is a form of price discrimination, any analyst suggests that it increases operators competitiveness.
    In addition, the big issue which is been debated is not the difference in roaming price but the roaming charges are viewed to high beyond many customers reach. As result the commissioner for information society and media is considering forcing the mobile operators to lower roaming charges.
Network to network calls charges this is another area consumers in UK mobile industry have been discriminated accordingly by mobile operators. It is evidenced that each industry player charges differently to calls made to other networks. This means customer bear more cost when calling to some networks over the others.
    Mobile phone handset subsidies as a strategy to grow their market share and customer base, mobile operators subsidize customer particularly those buying their hand sets (CIT Information  Analysis, 2003). One a customer buys a handset from a given operator he or she is supposed to remain royal to that particular company. Price discrimination come about when customers buy phones from a given company but opt to remain with another operator. What happens is that, a customer who opts to remain with a given operator receives the hand set at reduced price while the one who move to another operator buys at a higher price (not subsidized). In addition mobile handset are subsidized depending on the tariff you are in. pre-paid tariff holder are normally not subsidized when buying phones.
    Different retail prices Each network operator offer different tariff which become difficult to decide on which one best fits your needs (MobileGuru, 2009). Do you go for post or pre paid The choice between the two significantly affects call rates and service received. In pre paid tariffs there are no monthly bills and hence one can control his or her monthly bills. Basically one pays for the service before using it. Under this tariff call charges are high and it supports minimum services. Post-paid services accrue more benefits than pre-paid in that calls rates are lower. In addition the cost of handset for post-paid is lower since they are subsidized. Since one mobile operator offers both services then this is a form of price discrimination as it is charging different price to different customers for the same service. This form of discrimination can also be classified as first-degree price discrimination as the operators charge what consumers are wiling to buy. 
REASONS FOR TARIFF PACKAGES PROLIFERATION
The issue of tariff proliferation has become an everyday among the leading UK mobile phone service providers. These companies are 3mobile, O2, orange, t mobile, Vodafone, and virgin media but not necessarily in that order. Why do these companies have to increase their tariff packages every now and then The answe6rs to this question are the companies want to increase their market share and base in doing this the companies try to shape their tariffs in away that will satisfy the consumer needs and lastly, the current stiff competition calls for such measures as tariff proliferation.
    In this section I will try to expound how the companies try to achieve their objectives through tariff proliferation. By increasing the number of tariffs more often the companies aim at increasing their market share. The argument here is that if a company has ten tariff packages it is possible that it will have captured a small share of the market in every tariff. For example, a company can have 2 per cent of the whole market share in one tariff, 3 percent in another and so on. Then the total number of subscribers in this company will be the sum of all the subscribers in each tariff package. The argument is realistic that if a company can increase the number of tariff packages it can have more subscribers that if it had only a few packages.
    The other reason why the proliferation is of late a common thing is because companies want to capture the different components that form the customer base. A market may be divided into the young and old customers or working class and students or business class and the ordinary jobs category. Companies for instance introduce tariffs that are flat rate all through the days be it week days or weekends. This tariff is usually meant for the business class who has to make calls every time regardless of what time of the day or the week is. Companies do have other tariffs that are meant to capture the students customer base. These tariffs are usually pre paid and the calling rates depend with what time of the day is. At night especially the calling rates are usually low than during the day because of a simple reason students are always busy during day time but at night they are usually free and can make calls at this time. Other tariffs do target the ordinary working class  most phone companies targeting this group have post paid tariffs that are meant to attract this class. These tariffs ensure that customers can make calls even when it is mid month and the customers have spent all of their previous months salary. It also makes sure that a phone company gets the maximum from a subscriber this is because subscribers sometimes do not mind just how much they spend on calls as long as at end month they will have a salary from which the telephone bills will be deducted. Apart from the aforesaid tariffs, companies have also come up with tariffs that target those people who are almost always making trips abroad. These are the roaming tariffs. Companies collaborate with other companies or their subsidiaries in other countries to ensure that a subscriber does not have to migrate to other networks when heshe flies abroad.  Apart from the ones mentioned here there are other tariffs that are meant to capture different classes but in, different ways.
    Another reason that makes companies proliferate their tariffs is because they want to retain their customer base. A company cannot afford to lose its already hard won market share. To achieve this companies have to understand the customers tastes and preferences which do change with time. Sometimes it calls for a tariff package modification or a change if the subscribers tastes and needs have to be fulfilled sufficiently. There are times that companies have d one this just to maintain a few customers but always companies have always weighed the costs and benefits before taking such an action.
    There are also times that companies have introduced new tariffs with an aim of spreading the intervals at which the subscribers are making calls. Calls are usually congested at particular times of the day especially at 9 pm. To reduce this congestion
Some companies have introduced tariffs that do decongest calls from this time to some other time. For example there are times when call networks are idle. Companies in such a case have com-e up with tariffs that ensure that subscribers make calls at this time.