Economics

The South American continent was for a long time a continent that struggled with its democracy. Its political leadership concentrated mainly in benefitting from all that came with the trappings of power and as such most of these nations never gained from the leadership provided by the political class. Military-led coups did little to salvage an already desperate situation. The region is however rich with resources that include minerals, oil and natural gas. The minerals that are distributed across the countries are gold, bauxite, iron ore phosphates, uranium, tin, and manganese among others. As a whole, the countries in the South American continent have a very high population of people who are unemployed. This is demonstrated by the fact that in most of these nations, the rich possess almost ninety percent of the riches. For instance, in Venezuela, the rich are in possession of nearly ninety percent of the countrys wealth. Therefore, most of the South American nations suffer from unequal distribution of wealth that seems to leave the poor out of focus (Santiso 1) (Latin Americas Political Economy of the Possible 1).

The economies of the South American countries rely heavily on the exportation of resources found within their boundaries. Resources such as minerals, oil and agricultural produce are exported to foreign countries. From the exports, these economies earn foreign currencies that they use to boost their foreign reserves. During the most tumultuous crises that caused uncertainty in the region, foreign reserves reduced to dangerous levels due to the withdrawal of investors who no longer found it profitable to trade from within the South American region. A case in point is Brazil that suffered the most during the economic crises of early nineties. The final characteristic that the economies of South American countries share is that of depending on foreign economies. For instance, Mexico depends heavily on the United States of America for donor funding and other general trade agreements. An effect of this is that when the economy of America suffers, it is bound to have serious ramifications on that of Mexico. This was clearly demonstrated during the recent economic meltdown of the year 2008 to 2009. Argentina, a country whose population is Portuguese-speaking, is another example. It depends on the economy of Brazil which is known to be the biggest in the region.

In as much as all these countries share similarities in their economies and how they are run, Brazil has set itself apart as a country whose economic stability is unrivalled. Not only is it the strongest in the South American continent, but the world at large also recognizes it as an economy to reckon with. Its abundant mineral resources easily outclass that of the other countries in the continent. Apart from relying on the mineral resources, Brazil is one of the largest exporters of agricultural produce worldwide. The agricultural sector mainly deals in production of grains such as wheat, corn and rice. The labor it needs is provided by its population standing at a staggering 97.21million of labor force thus guaranteeing the lowest unemployment rates in the continent. It also practices free-trade that has enabled the traders in the region to set competitive prices for their goods. The steady growth of economy has in turn led to an ever-increasing number of middle class workers who provide the economy with a healthy internal consumer market. The interest rates are considerably lower in Brazil as compared to the other countries (Economy Watch 1) (South American Economy 1). The advantages that Brazil has over the other countries are a bonus for its economy as it does not suffer from some problems that continuously dog the other nations. This is attributed to the efforts of President Henrique Cardoso who started a stabilization program in the period 1994-1996. The economy was made robust by the increase of lending from within while at the same time reducing the foreign debt. A move that saw the foreign debt greatly reduced while domestic debt kept at a healthy level at a time when foreign investors had closed shop and moved out.  The programs ended up controlling the taxes and rates of inflation while simultaneously increasing public investment. With these sound advantages over its South American counterparts, Brazil has set up an economy that is rivaled largely by the developed world.

Economics can be described as the study of how scarcity of resources influences the economic behavior of individuals, households, organizations and governments. There are two levels of economics, microeconomics and macroeconomics. Microeconomics is the study of individuals economic behavior either as a member of a household, government or a business unit. The study of economics enables people to understand economic trends hence enabling them to make good choices that enhance the quality of life and living standards. Descriptive economics is a branch of economics that explains and predicts peoples economic behavior. On the other hand, normative economics deals with the choices that people should make (Frank, 2006).

Market
A market is the process of interaction between the buyers and sellers of a commodity. Due to scarcity of resources, demand and supply forces establish a balance, which translates to the market value or price for a particular product. However, other forces may affect the market value of products. Economists use analytical theories and models known as structures to make assumptions on the forces that influence the market. Externalities refer to other forces other than demand and supply that may influence market price.  For demand and supply forces to be the only forces determining the price, it is assumed that there is a willing buyer and a willing seller. The seller is motivated by profits while the buyer has a demand for the product. Costs in this case refer to the production and supply inputs and therefore marginal cost is the cost incurred to produce one additional output. Marginal revenue on the other hand, is the revenue obtained from adding one unit of out put. The concept of marginal and average costs, revenue, profit etc applies relative to time. This refers to market period of which there are no changes in supply, the short run and the long run of which changes can occur in the market (Kreps, 1990).

Factors of production
All economies have limited factors of production that is resources, labor and capital. Economies tend to utilize these factors in an efficient way to maximize on investments. Economic theories are formulated by analyzing the correlation between economic variables. Opportunity cost is the benefit that would have been derived from an alternative. A graph of production possibilities frontiers is applied to explain the concept of opportunity cost, employment, efficiency and economic growth rate. This is especially important considering that economies efficiently employ the factors of production due to scarcity of resources. More over, firms and consumers optimize on efficiency in terms of demand and supply, this builds the structure for preferences and production functions that translates to the social preference curve.

Perfect and imperfect market structures
Generally, there are two market structures, perfect and imperfect market structures. For a market to be described as perfect the buyers must be many and able to make independent decisions, there should be perfect information on products in the market, free entry, exit, and many independent suppliers. In addition, the benefits and costs of trade are born by the buyers and suppliers only. Most markets are imperfect for they do not exhibit one or several of these characteristics. In perfect markets buyers tastes and preferences differ depending on cost-benefit analysis. Graphically, the vertical axis displays the total value of benefits while the horizontal axis represents the total cost. However, total benefits rises at a diminishing rate due to diminishing marginal benefits. Diminishing marginal utility therefore sets the market price by applying the laws of demand and supply. Buyers buy more of a product when its price is lower other factors remaining constant, which represents the demand curve. On the other hand, other factors remaining constant an increase in price would lead to an increase in profit maximization level, which is the supply curve. Imperfect markets describe markets characterized by externalities or spill overs. These externalities may have positive or negative impacts on the market.

The price mechanism
Under competitive environment, there is market equilibrium between the quantity demanded by the buyer, the quantity supplied and the price function. It is important to note that the level of demand is affected by numerous factors like tastes and preferences, income and prices.  These factors may cause an increase in demand, which further leads to increase in quantity demanded. A shift in demand refers to such changes in equilibrium price and quantity. A decrease in demand would cause the opposite effects on the demand curve. It is the same thing for the supply curve. Better production technologies or favorable changes in weather for agricultural products may lead to an increase in supply. This leads to an increase in quantity supplied and reduced prices, which constitutes a shift in supply curve.

Price controls
In the public sector, where the government has influence, price mechanism does not work. It is very clear that government intervention is critical in stabilizing markets but this does not mean going to the level of fixing prices. By fixing prices, the government creates a good environment for resource misallocation, which may lead to poor standards of living (Landsburg, 2001).The government exercises huge influence especially in the labor market where there are regulations on the minimum wages for cadres of workers. This minimum wage is made to support the working poor. In the rent control programs, the government has set a price ceiling to make housing more affordable for low-income families. These interventions have not helped matters yet and therefore it is important to let the market set the price.

In Chapter 6 of the book The Structure of American Industry, Brock discusses the structural elements that affect American industry, such as competition and sources of industrial powers. This paper reviews other journal articles to gain more understanding about the forces that affect the automobile industry. It answers the question about the two most important elements of the automobile industry structure.  It argues that the two most essential elements of the automobile industry structure are the interconnection between internal and external organization and the number of players and their size, because they mediate the power of suppliers and buyers and improve the firms competitiveness.

The first important element of the automobile industry structure is the interconnection between internal and external organization, because they affect the power of suppliers and buyers and improve the firms competitiveness. The case in point is how Japanese automobile companies caught up with the erstwhile Big Three- General Motors (GM), Ford, and Chrysler. Adams and Brock (2002) stressed that the internal and external organization dynamics for the American Big Three served to subvert innovation efficiency (p.48).

The Big Three became complacent in their industry, while follower companies decided to aggressively pursue innovation (Adams and Brock 2002, 48). Japanese automobile makers experimented on innovations such as the front wheel drive, disc brakes, fuel injection, fuel-efficient engines, and compact minivans (Adams and Brock 2002, 48). At first, there was no alarm caused, because according to Porters (1979) theory of industrywide or shared asset profit determination, which states that profit determination may vary across firms, but within a growing industry, it is possible that the leaders profit growth also impact the profit growth of followers. This is because of the exploitation of differences within the industry that lead to competitiveness.

Long-term complacency in the part of the Big Three, however, crumbled its innovation capacity. Japanese automakers, in turn, improved internal and external organization relationships to improve product development and customer service, as well as to optimize the supply chain management system (Adams and Brock 2002, 48). Even when these Japanese companies operated abroad, the case studies of Majek and Hayter (2008) showed the continuous innovation that Japanese companies pursue. In their case studies,  Japanese hybrid automobile plants depicted the concept of hybridization, wherein best practices are not automatically standardized, and instead, hybrid plants capture local knowledge from diverse stakeholders that convert foreign practices to practices that are appropriate to local cultures. This made these plants more competitive than if best practices are directly adopted, and so innovations lessened the power of suppliers and buyers, by using their input to improve production processes and product development.

The second important element of the automobile industry structure is the number of players and their size, because they affect the firms competitiveness. Studer-Noguez (2002) argued that the concentration of the industry will affect the accessible strategic options for players, both existing and incoming (p.8). The theory of shared asset profit determination also asserted that when there is top-end concentration, leaders profits increase (Porter 1979, 221). However, if there are also mobility barriers for follower firms, they can also protect their profits and find them increasing also (Porter 1979, 221). In the case of the Japanese firms, when they were still followers, they also created mobility barriers through producing innovations and technologies, which cannot be easily imitated by other companies.  They then flooded the American automobile market with more fuel-efficient cars that effectively stunned the growth of the Big Three (Adams and Brock 2002, 48).

The American automobile industry has diverse elements that affect its competitiveness. This paper argues, through the use of case studies and economic theory, that the two most essential elements of the automobile industry structure are the interconnection between internal and external organization and the number of players and their size, because they mediate the power of suppliers and buyers and improve the firms competitiveness. These are important elements that depict the critical need for innovation, collaboration, and knowledge management, for the achievement of efficiency and effectiveness in the American automobile industry.

In preparing to write this paper a lot has flashed in my mind. A century is as wide as a hundred years and to identify a specific and identical item to settle on as the most important effect in the economy can be very difficult. Think of it, the various wars within the 21st century, the tumultuous and insurgent technological improvements that left various organizations at crossroads, the various depressions yes I believe this is the answer to the first bit of this question, the great depression (1929  1939). However, in the current century one cannot avoid the current depression (Dec 2007  current) which emerged and is affecting every economy irrespective of who was involved directly. In the following sections I will go into depths of explaining how economically these have been internalized, but first let me explain what an externality is and how it can be internalized.

economics.about.comcseconomicsglossarygexternality.htm defines an externality as an effect of a purchase or use decision by one set of parties on others who did not have a choice and whose interests were not taken into account. They are of different categories thus those whose effects are beneficial to the third parties are termed positive externalities while those whose impacts are not beneficial to the non participating parties are called negative externalities. From the ensuing definition I believe to internalize an externality is to engage in economic transactions that will minimize as much as possible the negative spillover on the third parties while maximizing the positive spillover on them i.e. it is the process of converting private costs (or benefits) so that they are identical to the social costs (or benefits).

This is a very critical decision that every institution must engage in order to survive in the ever changing world andor economy.

Considering the 20th century, much of discussions were based on environmental pollutions, bad leadership that made a lot of economies to drown andor the struggle to cope with the technological advancements. However my discussion will take a closer look at the Great Depression (1929-1939) whose effects were felt all over the wide world and economies suffered from its various devastating effects including unemployment and low personal income, dropping tax revenues and profits, low productivity, price declines, and negative social effects. International trade also plunged by a greater margin. These effects were to roll over again given time and efforts of the various economic stakeholders to internalize them. Various administrative input and collective bargains enabled a growth back.

In the current century, various issues have been frequently discussed including globalization, war and terrorism, global warming, technological developments diseases and their effects on non participating parties are numerous, however, the most significant economic externality is the just ended depression. Thanks to the forces we are receding from that trough. The effects of this are very evident as various institutions went on knees and are only now trying to pick up their pieces back to their upright position. We all know this may take time but our hopes are high.

In conclusion, depressions are very critical times in any economy and all the stakeholders must device ways of internalizing all the externalities brought as a result.

We learnt from historical texts that trade have taken part since the existence of human being. While trade is not limited within countries, it develops into what we know as international trade or trade between countries.
Paul Krugman and Maurice Obstfeld say that countries engage in international trade for two basic reasons. First, countries trade because they are different from each other. Therefore, nations, like individuals can benefit from their differences by reaching an arrangement in which each does the things it does relatively well. Second, countries trade to achieve economies of scale in production (Krugman and Maurice, 1997).

Concerning the international economics, this paper will discuss about two aspects summary the essence of the Ricardian model, the sector-specific factor model, and the Heckscher-Ohlin model second, this paper will also discuss about the trade pattern of one of the four economies the United States, Canada, Japan and China in terms of these three theories. The discussion focuses on where theories appear to be inadequate, focusing on the large items in exports and imports.

Summary of International Trade
Ricardian model
We learnt from historical texts that trade have taken part since the existence of human being. While trade is not limited within countries, it develops into what we know as international trade or trade between countries.
Paul Krugman and Maurice Obstfeld say that countries engage in international trade for two basic reasons.
First, countries trade because they are different from each other. Therefore, nations, like individuals can benefit from their differences by reaching an arrangement in which each does the things it does relatively well. Second, countries trade to achieve economies of scale in production (Krugman and Maurice, 1997).

There are two famous theories that help us to understand the international trade. First is from British economist, David Ricardo that his theory is known as Ricardian model. In this model, Ricardo says that international trade exists when each country exports goods in which it has a comparative advantage. Moreover, Ricardo also says that existence of international trade is due to international differences in the productivity of labor.

In general, Ricardo develops the Ricardian model based on several assumptions as following
There are two countries that involved in trading
It assumes that only two goods are produced
This theory also considers only that labor becomes the main factor influencing production activities
This theory is developed on a general equilibrium framework, implying that it works on perfect competition in all markets
The produced goods in countries are considered to be homogenous
(Economy Watch, 2009)

Sector-specific factor model
In addition to Ricardian model, there is also another theory that takes into account two sectors and three factors in an economy in which each sector has particular factors that confined to it. In addition, each factor in the economy must employ labor. The model of economy that composes of labor market, the labor endowment, and the two sectors demands can be described into following diagram.

Based on these factors, it evolves into Sector-specific factor model that composes of following influences
Effects of Changing Prices
Effects of Changing Endowments of Specific Factors. It describes that an increase in the endowment of a specific factor in a sector makes labor in that sector more productive.
Effects of Changing Endowment of Labor

Heckscher-Ohlin model as explanations of comparative advantage
Second approach is from two Swedish economists, Eli Heckscher and Bertil Ohlin. Instead of solely determined by labor productivity as in Ricardian model, Heckscher-Ohlin theory emphasizes that comparative advantage is influenced by the interaction between nations resources (Krugman and Maurice, 1997).

Moreover, Heckscher-Ohlin theory also explains that trade affects the distribution of income within trading patterns. It exists since trade produces a convergence of relative prices in which changes in relative prices, in turn, have significant effects on the relative earnings of labor and land.

In this manner, Heckscher and Ohlin concludes that owners of a countrys abundant factors gain from trade, but owners of a countrys scarce factors lose (Krugman and Maurice, 1997).

U.S International Trade and Its Relation to Three Trade theories
As mentioned above, the U.S trade policy reflects the trade agreement with other countries based on the need to alleviate the productivity and unemployment problems. Under such circumstances, the country performs several trade agreements.

Figure 2 shows the increasing trends of international trade that the U.S. experience during January 2003 to April 2007 periods. In addition, economists consider the U.S. as a free market economy that has a little bit more government intervention than the United States, but much less than those of the European economy. The economy of U.S. is also highly influenced by international trade, especially with the Canada that accounts for 21.4 in 2006. Most of its exports are designated for Canada, Mexico, and China (see Figure 2).

According to the Appendix, it is found that the most growing export commodities from the U.S. is natural gas that grow about 1464 from 2001 to 2005 and also coins that grows above 1000. Another export commodity that grow fast within 2001-2005 period is Nickel ores.

Meanwhile, most of its import is coming from China, Canada, and Mexico (see Figure 3). Nevertheless, the U.S. has GDP  per capita of 45,800, which is a lower than the Qatar, but still larger than most of European countries. Meanwhile, according to the Appendix, the import commodities that grow fast is natural gas (above 400) and also copper ores (274).

The relationship between economic growth and population growth has long been established.  Thomas Malthus claimed that there is a tendency for population to outgrow food production because the latter increases at a geometrical rate, the former at an arithmetic rate. The Philippine economy has proven this Malthusian catastrophe holds true, in that way the country has not been able to post a significant level of economic growth to satisfy the ever increasing demand of its ballooning population.

There is the on going debate on the relationship of population and economic growth. On the positive side, a huge population means a bigger labor force, more competition in the market which in turn entails innovations and technological advancements (Fumitaka, 2005). On the other hand, a large population heightens the scarcity of resources, meager savings, and constrained development of foreign exchange and human resources. Unfortunately for developing countries, the latter is always the case as proven by the Philippine experience.

It is worth nothing that Philippines was among the pilot countries to launch a population program in 1970 that became a model for others (Orbeta  Pernia, 1995). However, while other counties embarked on effective implementation of population programs to bring down their annual population growth rate, the Philippines is still growing by over 2 percent. Philippines and Thailand used to have the same population size of 36 million sometime in 1970. The effective population program of Thailand allowed them to slow their population growth and to speed up their progress. On the other hand, Filipinos are yet to appreciate the importance of strong policy on population to achieve socioeconomic growth.

The population of the Philippines in 2007 is about 89 million, composed mostly of young individuals (National Statistics Office of the Philippines). The population growth rate of the country is among the highest in Asia, averaging 2.04 percent per year. According to the last survey conducted by the National Statistical Coordination Board in 2006, 12.2 million Filipinos or 15.5 percent are considered subsistence poor which means that these people do not have enough income to buy their own food. True enough, saving rate at the household level has been declining, only 15 percent of the total income of the family in 2006 goes to investment. As the youth dependency group swells, the demand for primary education and primary health care becomes more taxing in the economy.

On the Policy Paper released by Philippine Institute for Development Studies, Orbeta and Pernia (1999) stresses that population growth impedes economic growth because of its impact on savings. Estimates using cross-country data show the negative impact of rapid population growth on savings. Low savings implies limits to finance investments which are imperatives of economic growth. While Thailand and Indonesia (the latter with lower per capita income than the Philippines) have been saving at around 35 percent of GDP in recent years, the Philippines has a meager savings rate of around 20 percent. Consequently, the Philippine investment rate (as a percentage of gross domestic product) is only around 25 percent compared to 40 percent and 44 percent of Indonesia and Thailand, respectively. Simulation exercise done by Mapa (2009) shows that had the Philippines followed Thailands population growth path results to an additional increase of at least 0.76 percentage point per year, for the period 1975 to 2000, on the average income per person, an increase in the year 2000 to US 4,839.00 from US 3,971.00.

The problem of booming population is always associated with unemployment (Asian Development Bank). When the economy is growing slowly it cannot generate the necessary employment to satisfy the labor supply and this will translate into either a fall in wages or an increase in unemployment. As shown in table above, Philippines has the highest unemployment rate among South East Asian countries. Further, the continued growth in the number of overseas Filipino workers is also a testimony to the lack of employment opportunities in the country.

Human capital investments are also negatively impacted by rapid population growth. National level analyses show that while this negative impact is negligible in terms of school attendance rates, the allocation of resources per pupil has been quite telling.  More pupils are accepted in school but with lower resources per pupil. This is also the case in the health and nutrition sector. At the household level, bigger family size per household implies smaller share per members education, health and nutrition needs. Performance in school of children in large families is relatively poor compared to children belonging to small families (Asian Development Bank). Also, they have relatively poor health, lower survival probabilities and are less developed physically.

Philippine has not able to bounce back to its per capita income level attained in the early 1980s. The regional economic crisis experienced in 1997 plus the recent calamities that hit the country made the situation even worse. Thus, if the political leaders want the country to catch up with its neighbor countries, the country cannot afford anymore delays. Mapa (2009) identifies three possible sources of countrys population growth and the corresponding responses the country have to commit. The causes are (1) unwanted fertility at 16 percent (2) wanted fertility at 19 percent and (3) population momentum at 65 percent. Unwanted fertility calls for an effective family planning to incorporate well-targeted human capital investments as well as greater economic opportunities for women (Orbeta  Pernia, 1999). Wanted fertilities warrant socio-economic environment that favors small families. Finally, raising age at first birth and delayed age at marriage are deemed appropriate to solve the population momentum (Mapa, 2009).

The economy of a country can be considered healthy when its employment rate is remains low. Indeed, unemployment can be considered burden to the economy but then again unemployment is normally part of the economic trend. Some degree of unemployment could be observed even in the healthy economy. In fact, unemployment never reaches zero and normally fluctuates around the normal rate of about 5 to 6 percent.  Unemployment may occur due to various reasons. It could be because the worker himself decided to quit his job to look for another one. Individuals typically find better opportunities despite holding certain position already. Job-seekers seek for better opportunities which they think are more apt for their skills and knowledge. They ay opt to leave their current job and seek become momentarily unemployed. But since the individual possess the skills, he may not be unemployed for very long. On a more difficult scenario however, a worker could not find any job which suits his qualification. In this case, the worker may become unemployed for a longer period. Unemployment rate is a great concern in many countries because of the consequences that may precipitate out of high unemployment rate.  A small percentage of unemployed individuals would not have significant impact to the overall economy but when unemployment rate rises, it may be an indication that the economy is ailing. Unemployment can be caused by several factors and thus in order to battle against unemployment, it is important to look over these factors so that appropriate means to counter it would be done.

Chapter one Introduction or Statement of the Problem
1.1 Introduction and background
Labor market is affected by each and every change in the economy. Rapid growth creates employment opportunities and a slowdown reduces the job opportunities in an economy. A slow down in economy affects the job market because overall reduction in demand and supply reduces the production and that is what forces the companies to layoff. Due to the shrink in job market a person will be willing to accept any job at even a minimum wage rate. This happens because the slowdown in economy causes the prices to fall and low wages can still serve the purpose. Low wages help companies in cost cuts which eventually help in increasing employment because company then can hire more employees on low wages.

Not all the savings go to the investment market because there are not many people who are willing to take risks on their investments. Investment carries a huge financial risk which is not easy to be held by people who are not risk-oriented. There is a concept which says that increase in saving would not necessarily lead to increase in investment. This concept makes it clear that not all the savings are converted into investments. The notion explained by classical economists is true that the investment would eventually equal savings because the interest amount will fluctuate and it will actually get equal to amount that is not invested in the market. More specifically, it is the interest on investment that keeps on multiplying and serves as a saving.
During the period of great depression most of the savings were wiped out in the stock market crash. The other thing that wiped out the savings was the failing of banks due to downturn of the economy. The saving accounts diminished as nothing could cure the problem of banking industry. Savings were also affected by the decline in wages and increasing unemployment during the great depression. Obviously no one could survive such a slowdown in which millions of accounts in thousands of banks were removed. Thousands of businesses failed and there was no one to save.

When the economy slows down, a producer has no option but to reduce prices because of the reduction in demand. It is an overall effect of demand and supply which creates a deflationary impact in the economy. When the cost of the resources decreases then there is no harm to reduce the prices. In economic slowdown the labor cost decreases due to low-wage rates and cost of factors of production also decreases because of the deflation. Businesses may also lower the prices just to stimulate the economic process through increase in output. As an economic rule lower price will increase the demand which will eventually force the company to increase the production. Another factor due to which companies lower the price is competition and competition increases in the situation where economy is facing a slowdown because every company will look out for producing and selling more than its competitor and that will lead to price cuts.

1.2 Statement of the Problem
The effect of unemployment on inflation has also been insignificant in the United Kingdom.  The current credit crisis affected   growth rate to have only 1.5 in 2008, which was a reduction to 1 in 2009 in the United Kingdom. Consumer spending also reduces to 0.2 and a significant drop in the investment level. The price of housing also shows a declining trend. The mortgage approval falls by 70. Factory production dropped by 0.5, 12 out of 13 categories of factory production fell. (2008 economic crisis in Europe .November 12, 2008)

This financial crisis expects to cost job losses in the UK. In UK unemployment increases to 7.8, this is twice than the pre crisis rate. Average hours worked per week also reduced. Uncertainty is the main cause which reducing consumers confidence and at the same times the level of spending across the world.

In examining the above research question, the research objectives below were formulated
To find out how unemployment is affected current credit crunch
To find out effects of inflation on Philips curves
To find out what they think about the national minimum wage
To find out how many are paid national minimum wage

Chapter two Review of the Literature and Research Questions
2.1Inflation
When aggregate demand exceeds aggregate output at full employment there exists demand- pull inflation. Therefore excess demand causes inflationary pressure. The inflation may then give rise to wage claims which increase firms costs, but the inflation is actually caused by excess demand.

The excess demand itself can originate in either the real or monetary sectors of the economy- that is, can be caused by autonomous increases in government spending, investment, consumption or exports in the real sector or by an autonomous rise in the money supply or fall in the demand for monetary sector. This has been illustrated below

Demand shifts the AD curve to the right. This increases the equilibrium level of real income form OY1 to 0Y2   reducing the rate of unemployment and raises the equilibrium price level from 0P1 to 0 P2.  Therefore at full employment AS curve is steeper and has effect on aggregate demand on the price level thus the rate of unemployment.

The government will through policy measures try to mitigate effects of this inflation this is because the government has some control over the money supply and can finance its own spending by raising taxes, borrowing or by printing money.

When rising money wages or other production costs are passed on to the consumer in the round of wage claims so that an inflationary spiral develops it is called Cost-push inflation. Rising costs shift the AS curve upwards, as shown in the graphs above. This reduces the equilibrium level of real income from 0Y1 to 0Y2 thus creating some unemployment and raises the price level from 0P1 to 0P2.

Although cost push inflation can exist when there is less than full employment, it is reasonable to suppose that wage claims are more likely to be successful when the economy is at full employment because then employers will be competing with each other for the existing work-force.

The greater the inflationary pressure, the greater the rate of unemployment, the less the inflationary pressure. Keynes argued that with unemployed resources, money wages would be more or less constant, but at low levels of unemployment, money wages would start to rise as bottlenecks occurred in the labor market. As full employment was reached, money wages would rise rapidly as employers competed vigorously with each other for the existing workers. All this suggests that there maybe a trade-off between the rate of unemployment (U) and the rate of money wage inflation (W).

The relationship created here is called Philip curves. The Philips curve appears to have been a remarkably stable relationship would have extremely important policy implications for a government. It would mean that the control of inflation and the maintenance of full employment were conflicting objects. The trade off relationship between unemployment and inflation influences policy-making in many countries.

2.2MONETARY THEORY OF INFLATION
Monetarists argue that sustained and serve inflation can be produced only by excessive increase in the money supply. Indeed, Friedman has said that inflation is always and everywhere a monetary phenomenon. This view is backed up by an impressive amount of empirical evidence showing a correlation between increases in the money supply and consequent increases in the price level.

Less extreme forms of the view that excess demand is the main cause of inflation tend to place more emphasis on fiscal, rather than monetary, factors as the source of the excess demand- that is, government overspending, however financed, is seen as the main cause of inflationary pressure by some economists.

Friedman argues that an inverse relationship may exist between the rate of wage inflation and the rate of unemployment in the short run, but there is no such relationship in the long run. Instead, the long-run Phillips curve is vertical at the natural rate of unemployment. He claims that there must be a different short-run curve for every different expected rate of inflation the higher the expected rate of inflation, the further up and to the right will be the relevant short run Phillips curve.

Starting at point Un on the graph, the natural rate of unemployment prevails and there is zero wage and price inflation. The expected rate of inflation is also zero so that expectations are being realized and there is no pressure being exerted to change either prices or the level of employment. Suppose now that the government tries to reduce unemployment by following some expansionary policy. As aggregate demand increases, firms will attempt to increase output and, to attract the required labor, money wages will rise by . Although this rise in money wages will soon be followed by a rise in prices, workers will at first interpret the rise in money wages as a 4 rise in real wages- that is to say, in the short run, the workers suffer from money illusion. The reducing unemployed workers respond to this apparent increase in real wages by reducing their search periods.

This, then, is the short-run trade off 4 inflation and is the penalty being paid for the reduction in unemployment. Friedman argued, however, that in the long run all money illusion will disappear as the workers come to realize the price inflation is depriving them of their increased real income. Search periods will be lengthened again and some workers will withdraw their labor. At the same time, employers who initially demand more labor in response to the increased prices ( which led them to believe that real wages were falling) eventually come to realize that real wages were falling) eventually come to realize that real wages have not fallen at all and so revise their employment plans downwards. As some workers withdraw their labor and employers reduce their demand for labor, unemployment rises back to the natural rate. But now there is an actual and expected rate of inflation 4. If the government should again attempt to reduce the rate of unemployment below Un, the economy would this time move along the short-run Phillips curve, B, which is relevant when the expected rate of inflation ( Pe) is 4.

It is the complete absence of money illusion in the long run which ensures that any trade- off between unemployment and inflation can only be temporary so that long-run Phillips curve is vertical at the natural rate of unemployment. This means, of course, that any rate of inflation is possible at the natural rate of unemployment.

The vertical Phillips curve is of little use to policy-makers except as a warning that continued attempts to reduce unemployment below its natural rate can only lead to increasing inflation.

This theory augmented Phillips curve allows for the existence of a short-run trade off between unemployment and inflation, but not for a long-run trade off. The reason for this is that inflationary expectations are revised according to what has happened to inflation in the past. So when the actual rate of inflation rises to 4 in graph above, people continue to expect zero inflation for a while and only in the long run do they revise their expectations upwards towards 4. This assumption concerning the formation of expectations is called the adaptive expectations hypothesis.

Although a rise in the price level may have its origin in cost increases, it can only be sustained if it accompanied by growth in the money supply.  Is the money supply is kept unchanged this position can only be temporary. The higher unemployment will eventually lead to fall in wages and so cause the short-run AS curve to shift back to SAS.

If follows that they are only likely to be effective against inflation caused by excess demand. A cut in government spending, an increase in taxation or some combination of the two should have the same effect. As we have seen .Keynesians place emphasis on fiscal policy as a means of controlling aggregate demand. Monetarists attach a greater degree of importance to the influence of the money supply. Monetarists do not favor the use of monetary policy for short- term stabilization purposes because of the uncertain length of the time-lags involved, and the difficulties involved in making accurate forecasts.

If Friedman is right and the long-run Philips curve is vertical, so that a high rate of inflation can exist at the natural rate of unemployment sustained by inflationary expectations, then the appropriate action to bring down the rate of inflation will be to keep a tight rein on growth of the money supply. This will increase the rate of unemployment above its natural rate and reduce the actual rate of inflation below the expected rate. Expectations will then be revised downwards and eventually the natural rate of unemployment can be restored at a lower rate of inflation.

2.3UNEMPLOYMENT
Unemployment is categorized into four types frictional, structural, seasonal and cyclical unemployment, which generally reflect the causes of each type of unemployment.  Frictional unemployment refers to the gap between an individuals employment and job-seeking. It is also called transition unemployment or search unemployment since it is only temporary and usually due to the workers own decision. That is, individuals normally find better positions thus they normally apply for more jobs due to the aim of finding the best choice. Moreover, at any given period, even those with marketable skills can be fired from their current job or they may decide to quit their job to look for a new one. The job-seeking process takes time and thus at such period, the individual is unemployed for the mean time. Frictional unemployment is also explained by the employers discretion not to hire everyone that applied for a vacant position. Employers also take their time in deciding who among the applicants would be hired. This is because employer would find who is best fitting for the position. With this, frictional unemployment could be considered voluntary since it requires time for the job-seekers to find the job openings that matches his skills and knowledge. Frictional unemployment is a normal and transient and is caused by the time required for qualified workers to search for jobs or change jobs. When a person decides to leave his current position and momentarily stay unemployed because he is seeking for a better job, this individual could be considered to be in the frictional unemployment labor force. Frictional employment is short-term and voluntary hence it does not really pose a threat to the labor market and to the economy (Macroeconomic Unemployment Explained).  Despite the fact that frictional unemployment is not of great concern, it is still necessary to reduce the frictionally unemployed. This can be done by wide dissemination of information about new jobs such as posting vacancies in the internet where the frictionally unemployed may find the jobs they want more quickly (Tucker 161).

While frictional unemployment is only transient, the structural type of unemployment can be long-term and permanent. Structural unemployment refers to the state wherein there is huge number of unemployed individuals because they do not qualify for any job openings in the labor market. Generally, the labor market sets off standard for each job opening and thus it would not be a guarantee for job-seekers to be immediately employed. Job-seekers must be competent and should meet the criteria required for a certain position for them to get hired. One of the concerns of structural unemployment is the training or retraining as well as education needed by the structurally unemployed workers in order to match with the job vacancies.

Three types of structural employment results from the changes in the economy. First, unemployment may result from the lack of skills or education required by the available jobs.  This type of structural unemployment affects teenagers and the minorities since they tend to have little experience or less skilled.  Other workers such as loggers can also be affected because of environmental concerns. Example when cutting of trees are restricted, loggers would be losing their jobs hence there is a need for retraining these loggers so that they would be able to find a new job.  Second, shift in demand can cause structural unemployment. This happens when for example demand for Porsche increase while demand for Chevrolet Corvettes decrease. This shift in supply can lead to structural unemployment of the auto workers In the United States. In order to regain employment, these workers must retrain so that they could find jobs in other industries. Third, structural unemployment occurs because of certain changes in the labor market such as technological advancement. For example, in order to save from textile exports, the textile industry may opt to install modern machinery which would eventually replace the textile workers (Tucker 161).

Furthermore, there are also cases wherein a qualified job-seeker would decline a certain position due to the geographical demand.  The occurrence of massive mismatch of jobs and skills of job-seekers as well as the concern about geographical location of the job characterize structural unemployment. (Macroeconomic Unemployment Explained).  Compared to frictional unemployment, structural employment is not voluntary and individuals may stay unemployed for an extended period. It would take time for job-seekers to actually develop the skills currently demanded in the labor market while at the same time they may consider looking for job in other places. The whole process takes long causing pain and frustrations to the job-seekers. With this, the society would be ill-affected (Macroeconomic Unemployment Explained). In order to curb the number of structurally employed, it is necessary to create programs designed to train the structurally unemployed workers (Tucker 162).

Seasonal unemployment is driven by the demands of certain goods and services which may result to sudden upsurge of the demand for some positions. These positions however are only seasonal and thus the hired individuals would be left unemployed once the season ends and the demand for the goods and services subsides. For example, during Christmas, workload in postal services increases thus postal workers is highly demanded. However, as Christmas season ends, so does the demands for postal services thereby resulting to unemployment (Macroeconomic Unemployment Explained).

Another type of unemployment is cyclical unemployment results from the cyclical changes in businesses. It is characterized by fluctuation in unemployment following changes in the business cycles. During recession for example, businesses typically reduce production because of low demands. With the decline in production, business may not be hiring new applicants until the economic situation fares better (Macroeconomic Unemployment Explained). The labor force of a country is affected by the changes in the output of goods and services. When there is a high demand for production of certain goods and services, there would be high demand in the labor force. Thus when a business decides to produce smaller quantity of a certain product or service, then it could be translated to lower demand for workers of such positions. Other than that, businesses may also lay off workers thereby contributing to the increase in the pool of unemployed individuals. Unemployment is usually higher during recessions when demands for goods and services are smaller. The unemployment in the United States for example is slightly higher during the periods of recession but it was also observed that unemployment gradually decline when the GDP starts to expand (Mankiw 2008).

2.3.0Factors Affecting Unemployment
The impact of unemployment on labor market demographically differs. Race, age and educational attainment are all factors influencing unemployment in certain demographic areas. It should be noted that unemployment rate in males and females is almost equal. The differences only show when considering the three factors. For example, there is higher unemployment rate for African-Americans compared to the Hispanics and their white counterparts. New entrants in the workforce are also subjected to the qualification screening and since their experiences may not be sufficient, they tend to become rejected from a certain job openings. This explains why age is a factor in unemployment. Age and age combined on the other hand is a strong factor in unemployment. It was revealed through research that unemployment rate is higher among African-American teenagers. In fact, the unemployment rate among African-American teenagers is almost twice the rate for white teenagers. The trend could be explained by discrimination wherein whites are preferred for certain positions over African-Americans primary due to qualification. Aside from that, African-Americans are more concentrated in inner-city where there are fewer opportunities for less skilled individuals (Tucker 166).

Education on the other hand proves important in battling against unemployment. In the 2007 unemployment rate, it was revealed that individuals with college education are more likely to be hired and less likely to be laid-off (Tucker 167).  The differences in educational attainment across racial groups along with discrimination explain why blacks have lower chances of getting hired. Blacks have fewer years if education compared to whites. They also have significantly lower years of experience. Since education and years of experience are both considered by employers, blacks tend to become cyclically unemployed. The cyclical unemployment of blacks is even more pronounced during recessions. It was observed that in the 1981-1982 recession, there was 5 percent increase in the unemployment rate for blacks whereas there was less than 3 percent increases in whites (Zavodny et al.).

2.3.0Consequences of Unemployment
Unemployment could be burdensome to the economy because it incurs potential losses in outputs. But the monetary loss is not the only consequence of unemployment. Nonmonetary consequence of unemployment could be more costly. Some people may endure unemployment because they have enough savings but there are people who become frustrated and dwell in despair. This primarily brought about by issues of self-worth in which an unemployed person may think of himself less valuable in the society for being unable to support a family. According to research, unemployment is related to suicides, crime, mental illness and other problems while severe unemployment results to despair, breakups in families as well as political unrest (Tucker 165).

The workers can be considered fuel of the economy since they help in the production of goods and services. But there are situations wherein workers may lose their jobs and become unemployed. Various factors can result to unemployment. Seasonal demands for goods and services for example mean seasonal demand for workers. Although, there are cases wherein it may be the individuals decision not to look for a job, there are also those who cannot find one despite persistence in looking. It shows however that the highly skilled and educated individuals are more marketable and thus they are more readily hired. It is therefore important to place importance on education as well as training so that unemployment and its consequences would be avoided.

2.3.1Effects of Unemployment
Unemployment can impact the government, society and the individual. It becomes difficult to demarcate the effected under different headings because they are all intertwined within one another. An effort has been made in the following paragraphs to keep the information as non-redundant as possible.

On the Government
One of the effects of large number of people losing their stable incomes is that the Gross Domestic Product (GDP) goes down and the amount of taxes that are paid to the Government becomes less. The result of this is fiscal instabilities and constraints on the spending budgets. This in turn results in the Government borrowing resources from other countries, increased national debt, more fiscal difficulties and so on in a vicious cycle. (Unemployment Encyclopedia, 2009)

On the society
Whether on the society or the economy as a whole, the major impact that unemployment has is to lessen productive labor i.e. the number of people who are able to contribute to the betterment of the economy and the government (Jones, 2009). Another effect is under-employment. The individuals who are holding jobs during an unemployment wave or those who have been newly unemployed may settle into low paying jobs for which they may be over-qualified. This again causes lowered productivity. (Unemployment Encyclopedia, 2009)

On the individual
The most severe and immediate effects of unemployment is seen in the affected individual. The phrase work is worship becomes meaningful especially when a person is out of it. This is because, a job is not just a source of income and stability it also is a platform that exposes a persons creativity, his ability, dedication and perseverance. A sudden loss of such an outlet can lead to drastic effects starting from ill-health to psychological maladies and suicidal notions (Linn et al., 1985).

A large number of papers have been published in the past and the recent years analyzing the different aspects by which a persons health, both physical and mental is affected by unemployment. In fact Janlert (1997), reviewing the effects that losing a job has on an individuals health (increased smoking, alcohol consumption etc.) called this a disease. Summarily, these papers stress on the fact that the loss of a job leads to elevated levels of stress, anxiety and depression and this lead the unemployed to resort to smoking, drug abuse and alcoholism. The following paragraphs deal with the physical and psychological effects of unemployment in more detail.

2.3.2Physical effects of Unemployment
The Economic Deprivation model has been used to explain the relationship between unemployment and health. The explanation is straight-forward. Without a job, there is a lower amount of cash inflow and this result in lesser resources and increased constraints to buy the necessities of life like food and clothes. This results in ill health through poor sanitation and bad food. Studies conducted during high tension situations like during the Great Depression and during war times reinforce this model. (Janlert  Hammarstrom, 2009).

The relationship between smoking and unemployed is well documented. It has been found that unemployed persons smoke more cigarettes than those who are employed. The reason for this is that unemployed people use smoking as a means of short-term relief from the stress and anxiety associated with the loss of a job. The relationship between smoking and unemployment seems to be a two-way street  people who are jobless smoke more and if a person is a heavy smoker, he is probably unemployed. Increased smoking has its own ill effects on health including lung cancers.

Alcohol consumption was also found to increase, especially among the unemployed men (Janlert  Hammarstrom, 1992). Other physical maladies like headaches, weight gain and loss, gastric discomfort and problems, allergies, inflammatory reactions etc. were also found in people who were unemployed for more than 20 weeks. These effects were present in men several years following unemployment as well (Hammarstron  Janlert, 2002). A direct effect of increased stress  insomnia, is also seen among the long-term unemployed (Janlert  Hammarstrom, 2009).

2.3.4Psychological effects of Unemployment
This is the most researched side of the effects of unemployment. One of the important initial effects of job loss is elevated stress levels. When Linn et al., (1985) compared the stress levels of a group of men who had been either fired, dismissed or laid off with a group who still had their jobs, it was found that on a stress scale of 0  9 where 9 shows extreme stress levels and 0 none, the unemployed men showed levels averaging about 6.66. It is believed that this elevation in stress is the forerunner of all the other deleterious changes that are seen in these people. The stress model popularized by Hans Selye (Janlert  Hammarstrom, 2009) links stress borne out of the combination of loss of employment and genetic predisposition to ill health.

Recently, Kaplan et al., (2008) reinforced the direct relationship between the stable income and psychological well being. Those people who had a high income and prospects of increments were happier, optimistic with a greater purpose in life, self respect and more creative compared to those otherwise. Unemployment has been found to result in social isolation (lack of friends, for example), depression and mental instabilities.

The most serious effect of unemployment is increased mortality (increased incidents of suicides and violence). Mortality has been shown to be significantly greater among the unemployed than among the employed (Morris et al., 1994). Martikainen (nd.) suggests that unemployment may either have a direct causal effect or it could be a selective factor for mortality. In the former case, the loss of a job and the deprivation of basic necessities and healthcare can result in increased psychological stress and mortality. Conversely, people who have perpetual ill health are more likely to be unemployed than other healthy people.

Among the factors that result in increased mortality, the one that contributes the most is violence and accidents. This is followed by death due to respiratory syndromes and then by alcohol associated maladies. Other factors include cardiac instabilities and other diseases (Martikeinen, nd.).

2.3.5Social support and Unemployment
In many studies, it has been found that social support relieves some of the adverse effects of unemployment. It has also been seen that the amount of social support for the unemployed in cities is much lower than that for those in rural areas (Linn et al., 1985). Social support has been found to have a strong positive effect on the mental health of the individual (Roberts et al., 1997).

2.3.6Unemployment effects and Gender
In all the aforementioned studies, the effect of unemployment has been found to be more significant among males than among females. The reason for this is due to the different roles they play in the society. Although a large number of women work these days, the title of home-maker has remained exclusively feminine. Thus, when a woman loses a job, she is quite unaffected unless the financial conditions are absolutely desperate. The man, on the other hand is expected to work. That is the social norm. So, while the woman just feels the economic pinch, a man feels completely useless without a job. From the psychological standpoint, the lack of a job may make a women feel that her talents are being unutilized and her flow of ideas and creativity may slacken, but she would not lose her image of herself as she always has something else to do. This is not the case in a man. The loss of a stable income job can be disastrous to the male as his ego gets a severe jar and he has a lot of time in his hands (time that he never had until then). As an idle mind is the devils workshop, so is the lack of employment a platform for unproductive and often criminal thoughts and actions. (Artazcoz et al., 2001)

Chapter three Research methodology
There are two types of information required for this study Primary and secondary information. Literature review was mainly constructed using secondary information gathered from relevant journal articles which had been accessed via the universitys educational resources. On the other hand primary information was gathered and the tools to collect data were categorized into questionnaires for the quantitative analysis, and detailed interviews and focus groups for the qualitative analysis.

The research with relevance to the above stated aspects is conducted by reviewing secondary data which is readily available.  The various sources of secondary data that have been reviewed as part of this research are  a large number of international journals, books and obviously the World Wide Web.  Research is the process of finding a solution to a problem or a question through the use of scientific tools and techniques ((ICMR), 2004).  In a nutshell, research is a methodical and purposeful study conducted to obtain solutions for specific problems.  Research is a process of collection of data in an organized manner with subsequent recording and analyzing of such data that will help in an effective decision making process.

3.1 Philosophy of Research
Research is generally assumed to be a complicated task which is actually not if the various parts or phases of the research are clearly understood.  A research project is basically a well-structured process which has a beginning, intermediate part and the end.  In todays world, research is alternatively being termed as logical reasoning (Trochim, 2006).  Logical method of research consists of two different methods namely, the inductive and deductive methods (Trochim, 2006).  For any research to be effective and meaningful, lot of assumptions and philosophy are two aspects which are linked. Another important aspect that is worth discussing in this context is the quality of research.

3.2Data Collection
Data is a collection of related observations, facts or figures.  A collection of data is called a data set, and each observation a data point.  As already discussed, data collection can be done either by collecting first hand information i.e. primary research or from already existing records i.e. secondary sources.  Primary data is collected using research instruments like questionnaires, mailers, telephonic interviews etc.  Secondary data is collected from already available sources such as published papers, journals, magazines, reports, company literature etc.

Secondary sources have been relied upon.  The reason is that secondary data when compared to primary data is easy to collect and is less time consuming.  As information in the secondary sources is readily available, it can be compiled quickly.  Also, traditional information and past history with respect to the exchange rate mechanisms and other similar relevant data with respect to all three economies under discussion is something difficult to collect or make available by conducting primary research and hence the secondary sources of research have been used to produce this Dissertation. This benefit was proven, because the data editing process was quick and efficient, hence saving a lot of valuable time.

3.3 Analysis of Results
Once the information is collected, it is edited and coded.  The data after coding is tabulated and evaluated using statistical applications.  Before starting to analyze the data collected, it is important to review the method of data collection  quantitative or qualitative.  If the data collected is quantitative in nature, then statistical methods like mean, variance, standard deviation and frequency etc. are calculated.  Quantitative methods like regression analysis and correlation analysis help in the prediction of the unknown value of a particular variable form the known variables ((ICMR, 2004).

Frequency in the above method is nothing but the number of times the same response is received.
Mean is the average of a series or sequence of the responses.

Variance is calculated using the sum of the squared distances between the mean and each observation divided by the total number of elements in the distribution.  While calculating the variance the deviations are squared to make them positive.

Standard deviation is the square root of the average of the squared distances of the observations from the mean.  The standard deviation is expressed in same units as those used in the data set.

Correlation is a statistical tool that helps to measure and analyze the degree or extent to which two or more variables fluctuate with reference to one another.  Thus, correlation denotes the inter-dependence among the variables.  For correlation two phenomena, t is essential that the two phenomena should have a cause-effect relationship and if such relationship does not exist, then the two phenomena cannot be correlated ((ICMR), 2004).

The term regression literally means stepping back towards the average.   The technique of regression analysis is used to determine the statistical relationship between two or more variables and to make prediction of one variable on the basis of the others ((ICMR), 2004).

Simply put, regression is a mathematical measure of the average relationship between two or more variables in terms of original units of data.  This analysis provides estimates of values of the regressed variables from the values of regressor variables.  Estimates of regressed variable i.e. the dependant variable can be made using the regression line, which describes the relationship existing between two variables.

If the data collected is qualitative in nature, then it is analyzed by reading the data and sorting it out.  The data collected through qualitative is to be organized properly and then it has to be categorized and arranged.  A method called Content Analysis is used for Qualitative analysis of data.  According to content analysis, the data collected is carefully read first.  Then the main themes and topics of the information or the data are identified, coded and categorized.

3.4 Limitations of the Study
The topic is of such a nature that it does impose some limitations on the findings. Following were some constraints, which might limit research project into boundaries

One of the major limitations is of generalizabilty. The research might not be able to generalize on all the parts of the world.

Another limitation is the limited time frame for its completion. So sample size, in spite of being large enough it is still relatively limited and would not be increased.

Another important limitation is that it is just a cross-sectional study. If the study was conducted on longitudinal basis, the results would be different since change is the hallmark of todays world.

Cost constraints are relevant however, these were manageable, since the research was conducted within the University.

Chapter IV. Results and Discussion
Inflation rate in UK has increased from 1.9 to 2.9 in the year 2005 to 2009 over the same period unemployment rate change from 4.7 to 7.8. But the change has not been smooth it has been fluctuating from time to time e.g. in the first quarter of the year 2005, it was 1.9 percent. It dropped to 1.8 in the same quarter of the following year before going up to 3.1  in the year 2007.  Now, the graph below shows how unemployment has been affected by the inflationary rate in the United Kingdom (Bank of England 2009). We are using consumer price index as a measure of inflationary tendencies
EMBED Excel.Chart.8 s

From the graph it can be noted that there has been a growth in consumer price index in the United Kingdom but one thing should be mentioned that the growth has been fluctuating up and down but with an upward trend. In the year 2005, the inflationary rate was 1.9 it went up to 2 then up to 2.5 then down to 1.9. This is repeated in the year 2006 however in the year 2005 it moved up in the second and third quarter before coming down to the rate that was prevailing during the first quarter. This trend which ahs been witnessed affects the consumption and the purchasing power of the people. The consumer price index is used to measure the purchasing power of the citizens. The fluctuations in the consumer price index, is reflected in the changes in the unemployment rate. The consumer price index is a determination of the consumption rates of the economy. The times when the price index changes upwards the unemployment rate responds to the same direct.

An increase in real income in any country will mean an increase in demand for goods and services. Thus the unemployment will reduce as people will invest more in production. From the data, it can be noted that rising real income in UK will tend to depreciate a sterling pound. However, all other things may not be equal one needs to explore why income might rise in the UK. Over the long run, real income rises when a country becomes more productive  the country produces more goods for given supplies of inputs and adds to its stock of productive capital, both human and physical capital.

The European Commission has put across elaborate ways of ensuring transparency and control of budget expenditure throughout all European Community members. This boosts the concerned budgetary authorities such as the European Parliament and the European Council to effectively monitor the realization of annual budget.  The budget control is further broken down to monthly reports where the monthly expenditures incurred and the corresponding revenues are made available to the commission. The guideline specifies the information to be made available within a period not exceeding ten days after the end of each month. The European Union members have restricted the expenditure to avoid circumstances where the community would resort to borrowing to cover its expenditure. This has been affected by the union drawing a ceiling which limits expenditure by law and agreement. The use of multi annual framework underlines the allowable expenditure for each sector and their appropriate allocations,

On the expenditure side there are eight main areas commonly captured in the budget. These are given priority on the level of their significance it the integration and its sustenance. Agriculture tops the list of highest prioritized sector this sector accounts to close the half of the commissions expenditure budget. The emphasis given to agricultural sector is in no doubt a clear indication of the commissions commitment in ensuring sustainability in food production for its population. This is closely followed closely by structural actions. Other activities in that  receive quite a significant amount of expenditure are internal policies, administration, external actions, pre-accession strategy, compensation and least on the line is reserves which receives the lowest amount of budgetary allocation

In 2006 for example, agriculture accounted for approximately 46  of total expenditure. This amounted to a total cost of over 49.biollion Euros. The structure actions also had a significant allocation from the commission which accounted to over 30  of total budgetary expenditure. In monetary terms, structural actions amounted to over 32 billion euros.  On the other hand, internal policies that were aimed at covering the welfare of the Unions population accounted for about 8  of the total budget expenditure. These internal policies includes among other policies like, information, youth, media, culture, energy among others at a cost of close to 9 billion Euros. Other initiatives such as administration accounted for close to 6  (6 billion), external actions 4  ( 5 billion), pre-accession strategy 2  (2 billion), compensations 1  (1 billion) and reserves less than 1 which accounted to close to 100 million Euros.

On 17th may 2007, three parties that constituted the European parliament, the council, and the commission adopted a financial framework 2007-2013. This is a seven year framework and is intended to cater for the enlarged union in the matters of budgetary discipline, financial management. Under the framework, the three institutions prioritized their agreement on the following matters. First, integration of member states into a single market with a broader aim of achieving a sustainable growth. Through gathering of economic, social and environmental policies. Second, offering more essence towards the ideology of European citizenship. This will be achieved by fulfilling the equitability of freedom, justice, security and easing access to primary goods and services to all members of the community. Thirdly, establishment of a consistent responsibility for the union in the global arena. This is aimed at emphasizing the responsibility the region has in ensuring the world attains a sustainable development. The union also puts in its shoulders the duty of making a significant contribution towards civilian and strategic security. The estimated budget expenditures on the above named three ventures are represented in the figure below

However on September 2007, a revision was carried out on the framework which was aimed at meeting additional financing requirement at a total of 309 million Euros for an establishment of European Institute of Technology and another 2.4 billion Euros for Navigation satellite system Galileo. This framework saw its adoption on 18th of December 2007 and it covers a period of seven months. By the year 2004 the following plans were envisaged in reforming the budget procedure. This included the establishment of multiannual financial framework, the creation of a distinction between compulsory expenditure and non-compulsory expenditure. The council and the parliament under the new changes were to have the mandate of examining the budget proposals presented to it by the commission.

In summary, the expenditure of revenue collected by the European Union is decided trough a competitive process whereby the representatives from the parliament makes a choice from the proposals submitted to them. Money is allocated to projects that deal with training of the members on new skills. Projects that stimulate business growth as a way of innovating and creating jobs, and others that contributes to safeguarding of environment.

International trade is simply the exchange of goods and services between nations. This trade is carried out between the territories or the boundaries that exist internationally. International trade has existed since long time ago. One aspect of international trade that has become very common in the twenty first century is offshore outsourcing. This paper discusses the phenomenon of offshore outsourcing. It further elaborates on whether the phenomenon changes the overall understanding of gains from trade.

Offshore outsourcing
This is whereby organizations hire other external companies to carry out business tasks and duties. This also entails hiring employees from overseas nations to carry out an organizations tasks. In this case, the business functions are performed in a nation that is different from the one where services or products are actually manufactured. Critics of this venture assert that the aspect of sending work to other nations overseas reduces the employment opportunity of natives within a nation.

For instance, a Canadian computer manufacturing Company can carry out offshore outsourcing. This is despite making and selling its products in Canada. In this case, the Company can have its customer care services handled by another overseas Company. Other tasks that are commonly outsourced include data entry jobs among other duties. It is quite imperative to note that the internet has played a great role in enhancing offshore outsourcing in the twenty first century. Erber, G. and Aida, S.

There are four main types of offshore outsourcing. They include ITO, BPO, R and D, and finally the KPO category. The ITO category entails outsourcing information technology while the BPO deals with outsourcing business processes such as processing customer claims. R and D involve outsourcing research and development. In this case a Company hires experts in another oversea nation to carry out its research and development activities. Finally, the KPO deals with outsourcing processes that are knowledge based. These usually require skills of very high levels. This can be engineering or accounting tasks.

How offshore outsourcing changes the overall understanding of gains from trade
Gains from trade relate to the net benefits agents get as they trade with each other. This emanates from economies of scale and division of labor. Labor is a factor of production that highly affects offshore outsourcing. Offshore outsourcing is highly based on the aspect of comparative advantage where companies take up the initiative so as to have a low opportunity cost.

The income accrued from the venture is used to expand an organizations product line and this would not be possible with high costs of production from factors such as high labor cost. The benefit of this venture is therefore referred to as the gains from trade. This explanation of aspects of offshore outsourcing helps to understand the overall concept of gains from trade.

Research also shows that gains from trade can mean the net benefits accrued when a country reduces its import tariffs. These tariffs can also be imposed such that one nation has more gains from trade than the other. In this case offshore outsourcing is a venture whereby labor is outsourced either in information technology or research and development among others. In this case, a nation that has Companies or organizations that carry out offshore outsourcing has more gains from trade than nations that provide human labor. This is considering the fact that most the employees are paid very little money as compared to their counterparts in the offshore outsourcing nations. While these Companies make enviable profits the venture is not beneficial since it denies citizens the employment opportunity given to foreigners.

Offshore outsourcing is known to have had a significant contribution to loss of many jobs. This is not a gain of trade but a loss. Further research shows that this venture causes very dire consequences to a nations economy. This is considering the fact that there is loss of revenue accrued from income taxes collected by the government among other levies.

Companies that carry out offshore outsourcing enjoy the gain of increased profits. Research on offshore outsourcing however shows that in many instances, the quality of services provided to customers is compromised. This is more so on issues of technical assistance and customer services. Offshore outsourcing has also had adverse effects on the growth of talents and skills in nations.

Conclusion
Many organizations in the twenty first century carry out offshore outsourcing. This is whereby organizations hire external organizations or employees in overseas nations to carry out diverse business functions. These include information technology, research and development, and business processes. Gains from trade refer to net benefits agents get as they trade with each other. Offshore outsourcing takes advantage of factors of trade such as cheap labor in other nations. This leads to increased gains of trade hence helps to understand the entire concept of gains from trade.