Economics

China has undoubtedly been the economic success story for the last 30 years, it has gown from being a centralized economy to a more independent system which is largely dependent on market forces and a fast growing private sector. The opening of foreign trade and investment has led to annual inflows of foreign direct investment of around 108 billion in 2008. However with the rapidly growing economy, China faces a number of problems which include corruption, environmental damages and work force related issues along with the recent global financial crisis that has adversely affected its exports (Schuman).

Currently, China is the fastest growing economy in the world and so far the main force pulling the world out of the recession however according to leading economist, the growth has its effects especially on the real estate sector in China. After the global financial meltdown in 2008, the prices of real estate have skyrocketed in the urban centers across China. According to regional experts, some areas have experienced a rise of around 150 in real estate prices during the last year and the demand for housing in China is still on the rise. Chinese growth rate is expected to be around 9 however, due to the global recession the export figures have declined which has led the country to shift its focus from global consumption to domestic demand as their primary engine of growth. Earlier, the Chinese government had tried to promote the real estate through easy real estate lending and development to boost growth. According to Chinas Central Bank, mortgages for new homes in the first nine months of 2009 have quadrupled from the amount borrowed during 2008 (Smith).

China announced a stimulus plan of around 586 billion for the real estate sector which is 17.8 of their GDP as opposed to Americas which stands around 5.7 of their total GDP. There is visibly a link between the ultra loose monetary policy and real estate price hike the availability of easy money has lead to the rise in the demand for real estate which remains the one most lucrative form of asset investment in China. Analysts around the country are concerned due to the current aggressive stance of the government which has produced a tremendous rise in construction, lending and speculative buying. The central bank is under tremendous pressure to control the current situation through tightening of the monetary policy and credit restriction in order to control the price hike in real estate. Many people fear, that if the Chinese authorities dont take quick action then the housing bubble would increase in its severity (Mufson).

Another reason for the price hike is rooted in the investors bet in Chinas currency, the Yuan which is expected to be revalued upwards in the near future. These bets are largely foreign in nature and are largely based on the expectation that the investment in Chinese assets such as real estates will increase in value once the revaluation of the currency takes place. The lack of performance by the Chinese stock exchanges has led the local and foreign investments to be poured into the real estate sector which is based on speculation about the future.

A similar situation developed in the Japan during the early 1990s when the real state and stock prices were inflated and according to many an economic bubble had developed. The reason it had developed was the same as financial assets became lucrative investments due to easy availability of credit and appreciation of the Japanese yen. However due to the corrective policy making the real estate bubble was elongated (some say until 2003) which minimized the losses. One of the measures taken by the Japanese central bank to combat deflationary pressures during these was that it reduced interest rates to approximately zero, thus the bubble collapsed gradually rather than catastrophically (Amyx 52).

Many experts believe that the lack of solid data to justify such high levels of housing sector prices is a proof that the bubble is developing as it is typically defined as the prices at higher level without any economic justifications. In this case, the investors purely base the purchase decision on speculation hoping that the prices would increase in the future without any solid reasons such as the change in the demand or supply of houses in China. Another reason is Chinas overall economic growth which has led to the development of luxury houses in city centers which are designed for wealthy foreign corporate executives and consists of around 90 of new constructions taking place. These houses are unaffordable to average Chinese households as a result these new homes are sitting empty and are largely purchased as investment. Moreover, the current boom has led to a high price to income ratio and a high price to rent ratio for real estate, hence many Chinese firms in the industry such as chemical, steel, and textile are opening real estate divisions expecting higher return than their core businesses (Barboza).

Most of the land in China is owned by the government and a huge proportion of government revenue comes from land sales therefore the government needs money and any measure taken in order to curb the real estate market might be ineffective. The flip side also points out that the real estate boom has led to the development of other industries such as construction and steel industries which provides income to numerous families and is a source of growth to the country. Some analysts also say that the demand in the housing sector is fueled partly by the millions of rural migrants moving from villages to large cities which would lead to the development of the country.

The lack of housing for the middle income groups which include most of the working class in China is a cause of great concern for the government as this would later develop into social instability and protests. The large number of mortgages in China and the continuing relaxed credit policies is leading China towards a housing bubble which would destroy the developing banking sector in China along with lifesavings of numerous investors. However, lately, the central bank has shown great concern and vowed to impose new limits on the speculative borrowing through deposit requirements for housing.
On the other hand, many economists believe that a bubble does exist but it wont explode due to a lot of factors to support the bubble which largely include the strong buying power of the existing consumers. Other factors include economic growth, rising family incomes, migration of labor to cities, high demand for housing and banking system which is less vulnerable to mortgages compared to banks in the US or Japan. These are the reasons which can protect China from a real estate meltdown for years to come (Barboza).

The revival of the real estate industry is the key reason that Chinas economy is emerging from the global recession but the superficial increase in the home prices may be fueling concerns that the property boom might turn into an unstable and dangerous bubble. With China acting as the engine of global growth, a bursting of the bubble could be a huge bang, heard across the globe which would not be good for the global economic revival. A real estate burst might also shake the confidence of the world when they are looking at Chinese consumers to increase spending to uplift the global trade.
However most people believe that the burst in still further and can be prevented through effective policy making and management. Looking at the following situation, the Chinese government has tried to calm the real estate bubble through variety of policies which include the higher mortgage rates and the larger down payments. However it is not only the government policies but other financial and cultural issues have also played a part in the development of the risky bubble.

The low level of property tax has led to the development of real estate into speculative instruments without any carrying cost or risk. The unexpected nature of the stock market and regular slumps have left investors more interested in real estate options which are considered much more rewarding and less risky long term investments. Speculation in Chinese real estate is largely due to the easy availability of credit in the country which is both in the form of FDI and the local loose monetary stance however the dependency of local government on real estate as a source of revenue is another reason for the lax attitude of government towards the recent price hike. The government also aims to impose other restrictions in order to curb the crisis.

Chinese citizens have limited access to foreign investments therefore it has artificially increased the appeal of domestic investments such as property which is the only viable option. Chinese culture also requires home ownership as a source financial independence therefore there is a high demand for housing.

The government has stepped in to check the current situation and devised a few important strategies. This year a capital gains tax is to take effect on residential property sold within two years of purchase. In addition a new law is to be implemented which would require the owner of residential property to settle the mortgage before selling the property. However, these measures are moderate steps which would take time to calm the current crisis. These measures could also backfire as the exports are still weak and the immediate effect would be detrimental for the growth. Restraining the real estate market too soon could effect growth as it accounts for 10 of GDP in the current situations. On the other hand, further tools of deflating the bubble could have other negative impacts on the economy, such as transaction tax, on home sales aimed at reducing speculative trading, may reduce the size of the bubble but would discourage real buyers which would suppress the demand unnaturally in the market. The development of efficient Chinese Capital market and the overall financial sector would improve the overall system by introducing better practices and standards especially in the case of mortgages (Mufson).

Looking at the history of economic bubbles, it would be a point in time when the investor would loose the confidence which would lead to panic selling. The prices may fall reasonably low and the investors would wait on the sidelines waiting for the prices to hit the bottom which would shatter the whole real estate market in China. This would harm the major banks whose balance sheets consist of large number of mortgages and collaterals based on private property.

The government has a to take a balanced approach towards the situation as from one point of view the massive stimuli and easy credit has spurred a massive mal-investment in unneeded assets, marginal infrastructure projects and speculative luxury market which is sitting empty as investment. The other point of view signifies the critical role of domestic investment in supporting the growth and leading to an economic recovery locally as well as internationally, at the same time supporting urbanization in China.

The government can take a number of actions such as increasing the interest rates in order to curb the money supply and the availability of easy credit and imposing capital gains tax along with sales tax. It can provide other venues for investment, making them more lucrative than housing, to direct the local and foreign funds to other markets. It also has a proposal of making the first transfer of property exempted from tax so that middle income people from rural areas can find housing in urban areas. At the same time, the government can apply restrictions on transfer of real estate by imposing taxes on secondary transfers and full payment of mortgages before transfers which would reduce the volatility of the real estate sector (Smith).

However, all these proposals cant be applied at the same time and for the right time to put checks on the growing real estate sector, the government should wait for other indicators of growth such as exports to show more positive signs which would provide the support for the overall growth targets without damaging the economy as a whole. The authorities in Beijing are hoping that they can shrink the bubble through balanced and delicate approach without adversely affecting the economic growth.

The term financial means money or money related resources and the term crisis means deterioration or disaster or emergency so the financial crisis means the rapid deterioration of financial indicators such as asset prices and short-term interest rates which becomes the cause of financial disaster. It is also defined as the sudden change in stock rates in the financial markets. An example of financial crisis is stock market crash (Feldstein 1991, p. 12).

The reason for financial crisis is not the huge investments made by the business leaders in the venture related activities which fail and do not bring any profitable outcome but the reason is the sweeping of numerous market participants in the heavy risk-involved dealings for the same venture for profitable means. This can be in the form of thrifts lending, bank lending or share investments in the stock market. NBER study classifies the financial crisis into three major components
Domestic capital related financial crisis
Economic and financial crisis through international origin and transmission
Financial crisis transition through economic collapse

Thus, the overall reasons for financial crisis arises through the excessive involvements and investments of financial resources (money, assets, properties) in the stock market for increasing the number of shares in the interest of venture. Other reasons are the unintentional means which too arises from the market through the declining rates in short-term interest and assets prices which ruin the financial resources of a developed company and finally become the reason of financial crisis (Feldstein 1991, p. 23).

Economics, as a field of study, covers both macroeconomic and microeconomics. Numerous factors are considered in the study including but not limited to, aggregates of demand, total employment and unemployment rates, total output, price levels, imports, and exports and other economic issues regarding the economy as a whole are considered (Hillier 1991).

Labour markets are the focal point in studying employment in the economic perspective, particularly, the supply and demand for labour. A perfect market is manifested when the supply for labour meets the demand. On the other hand, in a prefect market, an individual who is equipped to provide labour has no power to dictate wage rates. Similarly, a firm who demands for labour has no capacity to dictate wage rates. A perfect market dictates that economic agents have perfect information so that they become reasonable.

Important Concepts in the study of labour markets
The study of labour markets necessitates that some concepts should be defined. The term labour force refers to the total number of the capable workforce, both employed and unemployed labour units. Unemployment rate is defined as the number of unemployed versus the total of the labour force while employment rate is defined as the number of employed labour units versus the total of the labour force (Artis  Nixon 2007 Blanchard 2005).

The classical and traditional theory
Classical and traditional economic theories are supported by the assumption that full employment exist in an economy and that markets have perfect competition. Both theories also assume that there exist a large number of buyers and sellers. In full employment theory, labour units will be employed if it accepts the prevailing market wage rate. Consequently, labour units that are not amenable to the prevailing market wage rate will be unemployed of their own accord. In such a setting, involuntary employment is non-existent since the labour market is able to take in all available labour units at the prevailing wage rates (Chrystal 1994 Dornbusch  Fisher 1990)

The Keynesian Theory
Keynes was not open to the idea of full employment. Yet, he also resisted the idea that only voluntary employment will be prevalent in the labour market. His assertion point to a market equilibrium characterized by high unacceptable employment rates. To ensure that unemployment rates in the labour markets remain at acceptable levels, Keynes advocated for government interventions such as implementing monetary and fiscal policies that will help regulate the labour market. Projects that have the capacity to increase employment opportunities should be given special attention by the government by allocating extra budget. Providing subsidies that will help generate employment opportunities can also be adopted. Such monetary policies suggested by the Keynesian theory also include reduced interest rates to boost investments in the private sector which also has the capacity to contribute significantly to the labour market. The aggregate labour market created by such policies will introduce a clearing market so that the available labour units can fill the increase in demand which will also set definitive wage rates. The end result will be a perfect market wherein employment levels will reach acceptable levels and only voluntary unemployment will exist (Hillier 1991 Levacic  Rebmann 1984).

New classical and New Keynesian theory
New classical economists follow the standards set by classical economists. Rational expectation concept is incorporated with the classical theory creating the modern classical theory. The new theory dictates that wages are adapting to economic changes and labour markets will adjust accordingly with changes in the levels of supply and demand. This implies that wage rate will change along with the different economic forces involved. This theory involves rational expectations wherein firms and people can make informed decisions regarding employment.

The labour market participants will gain information about the labour markets while employers will be knowledgeable of data concerning the demand and supply of labour from which both can make an informed decision. Households that provide labour will know of employment opportunities within their reach as well as prevailing wage rates. From there, they will be able to decide which jobs are appropriate for them based on their skills and their needs. The aggregate labour market will gather the informed rational suppliers of labour and employers. Employers will have access to the workers that they need and labour units will find jobs that are appropriate for them. Full employment can be achieved and only those labour units that refuse to take the prevailing market wage rates will remain without a job (Chrystal 1994).

On the other hand, the new Keynesian theory suggests that wages are fixed. Full employment cannot be realized by the simple interaction of supply and demand forces in the labour market. The theory states that economic agents make rational decisions and their expectations are dependent on whatever information they have. The theory also suggests that the relationship between supply and demand does not have great influence that it could possibly lead to full employment. While economic agents can make informed decisions from the knowledge that they gain, this also will not result in full employment. Instead, this will lead to unacceptable employment levels and involuntary unemployment. This effect can however be prevented by implementing effective fiscal and monetary policies which is aimed at creating employment opportunities to the unemployed workforce. The government spending will increase the income of employed household which will eventually increase the demand for goods and services. This increase in demand for goods and services will help keep the economy afloat as this will be a desirable location for investors. This means more production which translates to more demand in labour force. More jobs will be created and only voluntary unemployment will exist in the long run (Chrystal 1994 Leslie 1993).

The rule of rational expectation states that economic agents are rational beings such that it will constantly make rational decision based on self interest. Rational decisions are always regarded as the best of all choices available to the economic agent (Leslie 1993).

Employing this concept, it is to be expected that the supplier of labour, which is the household, will expect the best wage rates from whatever information they have gained about the labour market. Alternatively, employers will want to employ whoever fits the jobs best with consideration given to skills, experiences, other desirable traits and best wage rate. In an employers perspective, the best wage rate would refer to the lowest possible wage rate. The expectation an employer will also depend on the information obtained about the market and weighing effectively between good, skilled employees and good wage rates.

In a large labour market, such that of the United States, a large flow of workers is experienced (Blanchard 2005). This can better be explained like how an airport operates. Workers do their jobs as passenger ride on the planes. Some reasons will result in employees shifting some aspects of their job as weather, destination, or any other reason can affect what plane a passenger takes. Similarly, the airport clears the demand for transport of various customers. A labour market will function to bring demand and supply of labour as long as the willing supplier of labour will meet with the willing employer who requires labour. An active labour market is manifested by a flow of workers leaving and entering stages of employment. Workers are bound to leave their jobs if they find a better, more rewarding job. Some workers are laid off by an employer and will soon find themselves working for another employer. The labour markets will eventually deal with issues such as high unemployment, increase in layoffs, and decrease in labour supply.
 
With labour unions, collective bargaining agreements will play a significant role in determining appropriate wages for employees. However, the role of labour unions in liberal economies such as the U.S. is limited. Bargaining will play a major role in determining wages taking into consideration the quality of the specific labour unit involvedskills and experiences considered. Certain external factors can also affect the determination of wages. Technically, a lower unemployment rate translates to higher wages since the cost of replacing a worker is higher if there is greater demand than supply which ultimately affects bargaining power. Through the labour market, a firm may be able to lay off a worker who asks for a higher wage since he can be replaced by someone who is amenable to the current wage rate. Inversely, it would be difficult for a firm to lay off a worker especially someone holding a position if there is low unemployment since it would be difficult for the firm to find a replacement, In such a situation, employers will want to keep their workers satisfied with high wages so that they will not desert their jobs.

Supply and demand forces in the labour market which affects unemployment rates play a major role in the conclusion of collective and individual bargaining of labour units with employers. Blanchard (2005) utilizes the classical theory to explain the scenario. In the labour demand and labour supply market structure, less unemployment will shift the balance to the labour units and they are able to state their demands such as better wage rates. Blanchard indicates that market wages are dependent on factors like unemployment rate, expected price levels, employee benefits, bargaining power, etc. (p.24).

Parkin and Blade (2001) indicates that the expectations in prices of certain products in the market play a critical role in the function of the labour markets. Employers want to maximize their profits and since product prices is an important factor in determining profits, expectations of low prices will result in employers letting go of some employees or negotiate for lower wage rates. In such a case, the labour unit that does not agree with a lower wage rate will be laid off in place of a new labour unit taken from the aggregate who is amenable with the offered low wage rate.

Conclusion
The labour market is the core for employers, who provide the demand, the labour units who supply the labour. It is where households obtain jobs that they need to survive and where employees get the workforce that they require for their business to function. They complement each other since a balance must be maintained between the supply and the demand. In this aspect, the labour market acts as a clearing market.

After 1976, the Chinese government under Deng Xiaoping initiated reforms which changed the face of a nation. New institutions were imposed from above. Most of these institutions were controlled by the Chinese government. For example, the Township and Village Enterprises was created to allow farmers to sell their surplus to the government.

After Mao, economic reform may be considered an economic success. For two decades, China experienced sustained economic growth. Standard of living has also significantly improved. The goal of the Chinese Communist Party was to achieve modernization in the shortest possible time. Throughout the country, infrastructure, agriculture, and telecommunications center were visible to the public.

The first major reform was directed to the countrys banking system. The Chinese government created a complex but conservative banking system (heavily regulated). Monetary and fiscal policies were set according to fluctuations in world capital markets. Indeed, according to Naughton, China has fundamentally restructured its banking system and experimented with numerous financial innovations (449). Temporary borrowing from the banking system has been a major innovation, as state-owned companies were unable to effectively compete in the world market. From 1978, policy-makers have been sensitive to financial innovations that might draw a considerable amount of funds from the countrys banking system. This clearly shows that the government is in control of all banking reforms.

Deng Xiaoping also introduced the so-called open door policy which encouraged international trade and foreign direct investment (FDI). Restrictions on foreign trade were relaxed to allow capital formation in urban centers. The Chinese government also held joint ventures with foreign firms. With the rise in income, there was a marked growth in the service and industrial sectors of the Chinese economy. These reforms on trade and foreign investment were closely controlled and monitored by the government.

In order to facilitate trade, the government set up Special Economic Zones. SEZs encouraged lower tax rates, fewer customs procedure, and duty-free imports. In 1985, the Chinese economy was emerging as a major export-oriented economy. Indeed, according to Naughton, China has achieved trade success through a combination of domestic economic reform with an astute accommodation of the opportunities created by East Asian economic restructuring and foreign investment (398).

In the early 1980s, the Chinese government created market institutions aimed to converting the economy from a planned economy to a generalized market economy. Price reform was achieved with the adoption of the dual-line pricing system. Under this system, prices of some goods particularly grain were determined by the state while the prices of other commodities were determined by the market.

From 1980, there was an increasing incentive to privatization of state-owned enterprises. However, some SOE were retained because they were essential instruments for transferring funds to social services. Quotas were kept but allowed SOEs to retain profits. With competition, state-owned industries became less profitable. Indeed, some state owned enterprises were opened for public bidding (mostly foreign corporations).

In summary, after 1978, economic reform in China has been controlled by the Chinese government. Deng Xiaoping, a pragmatist, opened China to modernization and capitalism (market-oriented economy).

After the initial waves of the global credit crisis, many stood in disbelief in the ferocity of the crisis as it slowly rode the maelstrom of the credit crisis, with many with baited breath on the next financial colossus that would be swallowed up in the rage of the financial storm. Headlines and news reports slowly unraveled companies being swept under the rush of the global contagion, countries and governments forced into drastic financial moves designed to resuscitate their dying economies. But in all events, there are players who either instigated the crisis or contributed to the emergence of the elements in the present financial crisis. In this paper, we would look at the contribution of one of these financial giants, Lehman Brothers, and how did the collapse of the financial giant gave more impetus to the financial crisis prevailing in the global economy.

Valued at more than 600 billion, the collapse of American financial giant Lehman Brothers is considered as the single largest financial insolvency in corporate history. Secretary Henry Paulson, having just engineered an earlier massive corporate bailout less than half a year ago, bailing out distressed investment banking entity Bear Stearns, Paulson seemed hesitant at conducting another bailout in such a short time. Earlier in the week, Paulson had to usher mortgage financiers Fannie Mae and Freddie Mac into conservator-ship. To Paulson, the actions of bailing out these financial giants, collapsing one at a time but with increasing frequency, created the impression that the Federal government would be ready to provide a financial lifeline to the distressed financial and banking industry, tolerating their actions of irresponsibility with regards to risks that turned toxic for them.

It is stated that the day that one of the largest financial icons filed for bankruptcy was the beginning of the worst financial malaise that has buffeted the global economy since the Great Depression in the 1930s. Before the collapse of Lehman, there was a foreboding that an event of earthshaking proportions would take effect. After the collapse, talk was rife of the effects, then unknown at the time, but was buttressed by the actions of then American President George W. Bush, calling for a financial lifeline to be thrown to the distressed and in near collapse banking and financial industry. Lehman headed to bankruptcy court for Chapter 11 protection at the United States Bankruptcy Court in the Southern District of New York. Lehman, though under bankruptcy proceedings, will continue to service the accounts of the company and their subsidiaries, including Neuberger Berman Holdings LLC. 

Lehman, one of the largest traders in fixed interest markets and invested heavily in the sub prime mortgages that were later on adduced to be the trigger of the prevailing global crisis. With the collapse of Bear Stearns earlier in the year, it was inevitable that the public will lose confidence in the sub prime mortgage equities being marketed by Lehman. When Bear collapsed, the Treasury Department crafted favorable terms for rival JP Morgan to acquire the company when Lehman collapsed, American finance officials made it harder for a potential buyer, UK-based Barclays Bank, to acquire Lehman by not issuing a guarantee on the trading activities of the company, saying the taxpayers had put too much already in the rescue of Bear, Merill Lynch and Fannie Mae and Freddie Mac. The trading of the company in what are termed as credit derivatives, which offered banks higher returns on the risks they acquired, was not the sole entity that drove the global market over the cliff, but contributed to the panic of the financial managers as they made trading less clearer to get the bottom of the problem, a loss of confidence in the market that could not get a firm grip on the problem besetting the industry

In the opinion of Lawrence MacDonald, author of the book A Colossal Failure of Common Sense (2009), he states that the financial condition of the bank was no worse than any of the other banks on Wall Street affected by the global crisis. What happened was that Lehman Brothers became the benchmark of the era that defined which banks could be allowed to go under and which banks were to risky or important that they could never be allowed to sink, or the doctrine of  too big to fail .  The same question was posed by Davis Wessel, author of the book In Fed We Trust (2009), in which he questions the logic in rescuing one bank, Bear Stearns, and letting another, Lehman Brothers, sink. But the bomb that ultimately destroyed the more than 150 year old company were the rumors and the short selling activities, with Lehman shares taking the brunt of the rumors, the rumors led to investigations, further dampening the confidence of the public with the firm

Lehmans board of directors allowed the company to file for bankruptcy in an effort to safeguard the assets of the company and to optimize the value. Along with the bankruptcy motion that the company filed, they also stated that they will be initiating several first day legal motions designed to keep company operations running at a normal level. Along with Paulson, Fed Chair Ben Bernanke and New York Fed President, the three argued that Lehman chief, Richard Fuld, could have done more to save his company. When Fuld could not find a    white knight  to save the company, he filed for bankruptcy. 

The banking system of United States has changed significantly over the years. Today, these banks offer a wider rage of services to their customers than any time in history. However, banks central functions have remained constant over time. The main function of banks is to put communitys surplus funds into use through lending to people who need them. They therefore serve as a link between the lenders (those with surplus) and borrowers (those with a deficit). Banks are the first choice in saving, borrowing and savings for millions of Americans (Pearson, Par.1).

The first banks in America came into being around 1791. These banks were required to obtain permission from the state government for them to operate. The central bank of the United States was formed in 1791 and was called the Bank of the United States. This bank provided additional oversight and was initiated by Americas first secretary of the treasury, Alexander Hamilton. A second bank of the United States was formed in 1816 after the expiry of the charter of the first bank (Pearson Par 2).

The banks of those days were very cautious about who they lent money, how much they lent and for how long. They avoided long term loans so as to meet unexpected demands from the depositors. The normal lending period ranged from 30 to 60 days. However, rural lending was more liberal. Farmers used to get loans to purchase farm machinery and pay for the transportation of their farm produce. Because of the unpredictability of the weather, loan losses were high (Pearson Par 3).

The biggest problem those days was lack of a uniform currency. Counterfeiting was the order of the day and commerce suffered greatly. The congress responded to this problem by passing the National Currency Act in 1863. President Lincoln signed a revision of that law in 1864, the National Banking Act. The laws established a new system of banking that was to be headed by a Comptroller of the Currency. This was to be the beginning of the conception of a uniform currency that would be accepted everywhere without risk, a currency that would make it hard to counterfeit (Pearson, Par 4).

The banking system of the United States has undergone a major revolution. This has been as a result of advanced technology which has seen Americans get better and faster services from the banks. Such technologies include telephone banking, debit and credit cards, automatic teller machines and electronic money transfers. The Office of the Comptroller of Currency continues to monitor the operations of the banking sector in the United States. However, its methods and techniques of doing so have been changed by the current technology. Today, this office uses computers to ensure that banks follow the guidelines set to ensure that a smooth banking industry is in place and both depositors and borrowers are protected (Pearson, Par. 4).

William A. Scott writing on the banking system of the United States identifies three kinds of institutions. These include the state banks which have been organized with respect to the various banking acts of the respective states, national banks founded under the authority of federal law, and the private institutions which have emerged without the authorization of any statute, specific or general (Scott, Par. 1).

The most central and dominant position in the United States banking system is taken by the national banks. There are several factors that have contributed to this domination by the central banks. First, they enjoy a monopoly of the right of note issue. They are also supervised and regulated by the federal government and are the most convenient correspondents for the state and private banks. (Scott Par 2)

All institutions organized under the authority of national banking act are required to invest a part of their capital in the United States registered bonds. This investment should be to the par value of which it is permitted to issue notes, if the market value is not below that point. The comptroller of currency at Washington is the custodian of these bonds, together with an amount of cash equal to five percent of the notes circulated by the bank. This sum is supposed to be used in the redemption of the notes for which the comptroller acts as an agent of the banks. The bonds help the government to guarantee the chief banking systems of the world payment of note incase the banks fail (Scott, Par. 4).

The banking act of the United States requires banks to maintain a minimum percentage of the cash deposited with them for the sake of protecting the depositors. Different banks are required to maintain different percentages of the deposits, the difference being primary in terms of the location. Those banks located in a number of cities designated as reserve zones are required to maintain a minimum balance of 25 of the aggregate amount of the notes and deposits. All the other banks have been given a minimum of 15 to maintain (Scott, Par. 4).

The comptroller is under the obligation to ensure strict observance of these regulations. To do this effectively, he normally inspects the banks at regular intervals, and calls upon them for complete reports of their condition at least five times every year. The dates for these reports are set by the comptroller himself (Scott, Par. 5).

The Encyclopedia of the Nations indicates that the United States has a central banking system which was provided for by the Federal Reserve Act of 1913. The Federal Reserve Bank system is a government organization which is independent. It has important posts which are appointed by the president and approved by the Senate. It dominates the US banking with strong influence in the dealings of commercial banks. It exercises unlimited control over money supply (Encyclopedia of the Nations, Par. 1).

The 12 Federal Reserve districts in the United States have each a federal bank. This bank is presided over by a board of nine directors, six of whom are elected by the member banks in the district and the rest are appointed by the board of governors of the Federal Reserve System and are presumed to represent the public. This is because they are supposed be officers, directors, stockholders, or employees of any bank (Encyclopedia of the Nations, Par. 2).

It is the federal reserve board that regulates the money supply and the amount of credit available to the public by asserting its power to change the rediscount rate, through buying and selling securities in the open market, by setting margin requirements for securities purchases and by altering the reserve requirements of member banks in the system. They also achieve this by resorting to a specific number of selective controls at its disposal (Encyclopedia of the Nations, Par. 3).

According to The Columbia Electronic Encyclopedia, the deregulation that occurred in 1999 overhauled the whole US financial system. The legislation repealed actions like the glass-steagall act, allowing banks to enter the insurance and securities market. It was hoped that this would allow US banks to diversify and compete more effectively on the international scale. However, there were those who felt that this measure could lead to failures in many financial institutions, as had happened with the savings and loans (ENotes, Par.1).

The banking system of the US has had its rough time too. Mike Whitney in his article, US banking system in the brink of collapse in 2008 reported that the banking system was basically underwater and insolvent. He believed that the sudden and shocking depletion of bank reserves was due to the huge losses inflicted by the meltdown in sub prime loans and other similar structured investments. In his article, he attempts to explain the means by which capital is lost in an economy. According to him, this happens when US home owners default on their mortgages in large numbers. In such cases, they destroy money faster than the Fed can replace (Whitney, Par. 1-4).

The US banking system is one of the oldest and most sophisticated. It has grown through time to give its clients exceptional services. However, it has not been without major challenges which it has braved through.

The availability of resources both natural and manmade has a direct influence on the way we eat today. Due to the financial constraints which individuals are facing in the contemporary world, majority are not able to afford expensive food products in the market. As a result, members of the society have emulated traditional foodstuffs. Another way through which economics influence the way we eat is due to the culture of saving that has been adopted by individuals. Some people forego expensive foodstuff now in order to save for future expenditure. This implies that they consume less costly food so as to increase their savings (Boulakia and Jean David, 1971).

Cost of food and health
Food can be healthy regardless of the cost. It is imperative to note that the traditional foodstuffs which were used during the era of agrarian revolution are still used even today. This is due to the fact that they were nutritious as compared to the recently scientifically developed foodstuffs. It is also fundamental to note that such traditional foodstuff are cheap to buy and they easily available. This implies that even the low income earners can easily access such foods without difficulties.

Implications of food production and consumption choices on their supply and demand
The forces of demand and supply have reasonable implications on the food production and consumption choices and vice versa. For example, the production of a traditional foodstuff and selling them at low prices attracts high demand for such foodstuffs from low income earners. On the other hand, the high income earners demands high quality and expensive foodstuff. This implies that in order to meet the demand of both the low income earners and the high income earners, the producers of such food stuff have to reduce their consumption in order to meet the demand of the two social groups in their market. In addition, income levels of individuals affect their mode of consumption as stated earlier in the paper. For instance, low income earners prefer to consume the foodstuffs they produce instead of selling them in the market. In this way, the supply of such food stuff decreases thus causing an increase in their profits.

Unintended consequences that come from our foodconsumption choices
The choice that we make in our consumption habits does not always bring about positive consequences or improved health. This is due to some factors as analyzed on this part of the paper. First natural charamities such as drought or diseases may affect our food choices resulting to their destruction. In this way, we are exposed to hunger due to the over reliance we have placed on our choices (Sihag, 2005). Similarly, due to bacterial or viral diseases of the foodstuffs our health becomes exposed to dangers. Secondly, the supply of our food choices may be affected by our over consumption or under consumption. In both the two scenarios the market prices for such foods are adversely affected. This implying that if we over consume our food choices their supply in the market decreases resulting to increased prices. On the other hand, if due to some reasons we decrease the consumption of the food the supply will increase thus resulting to reduced prices.

Some healthy food options owned by some of the big name brand companies
Big brand names companies have invested in quality food options in order to maintain the loyalty of their customers. For example, Kellogg Company, the world biggest cereal producer has embarked in the production of high quality food products such as frozen waffles, crackers, cookies, fruit-flavored snacks among others. In the same way, the company has provided wide range of products in order to meet the high demand of its brands. Some of the notable brands the company has provided in the market include Kashi, Nutri-Grain, Eggo, Frosted Mini-Wheat and Pop-Tarts. Another example of the company which has embarked in providing high quality products is Dole Company. The company has been in the forefront globally in the provision of fresh fruits and vegetables for its consumers.

In the current scenario, it is important to set certain constants such as the premise that regardless of how one gets to work the assumption is that one will get to work on time and will work the standard 8 hour work shift.  This means that the only other variable is how much time individuals will spend for work-life balance activities such as recreation and rest.

Under the current assumptions, the options can be ranked accordingly, riding a bus, riding a motorcycle, riding a limousine and walking.  From a cost perspective, while walking is the cheapest, it is also the most hazardous to ones health and more time consuming.  This means that more is lost in the long run if one gets sick.  The motorcycle and limousine are also not cost effective since both will entail parking costs as well as gasoline expenses (rental for the limo).  This means that from a purely financial perspective the bus ride is the most economical.

Limousine  while it allows the luxuries and comforts to bring a person quickly to their destination, suffers from a few impracticalities.  The end goal is to get to work to earn money.  Using this option, a person will spend more than he is capable of earning, making this an impractical and unsustainable use of resources.

Bus  offers the best balance and use of resources.  It allows a person to get to work on time with relative ease.  It does not require expending so much time and energy since one is only a passenger.  It also is the more efficient allocation of resources since it is a minimal expenditure that accomplishes the task at hand, getting to work on time.

Motorcycle  no matter how exciting and exhilarating this may be, it does not count as a practical alternative because it would also mean the acquisition of a motorcycle, a capital expenditure that immediately depreciates.  There is also the additional maintenance cost and licenses.  All over and above the parking costs that are incurred.  Choosing this alternative, a person would have to allocate a larger amount of resources than is actually necessary to get from the house to the office.

Walking  by far the cheapest alternative, this also carries with it certain considerations such as the time that is needed to complete and the energy.  Given that the weather is cold, it also exposes a person to the elements and possible illnesses that could be more expensive. 

One option not considered is car-pooling, whereby individuals bring together their scarce resources and optimize its use by sharing it with others.  This method is also very cost effective and can make efficient use of time if the individuals come from similar areas.

From a convenience perspective, while a limousine will offer the most luxury, a bus is not way off because there is also no need for a person to drive.  It also means that a person will not have to spend time parking and will also not spend as much.  From a cost benefit analysis perspective, the bus is also the most practical solution since it not only provides the basic comforts and conveniences but it is also priced relatively lower than the alternatives, save for walking.

From the perspective of scarcity, it merely shows the opportunity costs and what one person has to give up when he or she chooses one alternative.  In order to either walk, ride the motorcycle, take a limousine or the bus, one has a limited number of options with a fixed amount of time and money and the selection of one precludes the selection of another.

Economics has been defined as the allocation of scarce resources among unlimited needs or desires (Mankiw 2006).  Basically, this is explained by the concept of supply and demand.  However, the real decision making process involved in economics is much more complex than just a supply and demand curve.  There are basically four principles that are employed when people make economic decisions trade-offs, opportunity costs, rational thought responding to margins and response to incentives (Mankiw 2006).  The first two principles deal with the things that must be given up in order to acquire another commodity.  This is an offshoot of the definition of economics since all resources are limited and a person must make a choice between allocating his or her resources between one good while giving up another (Blaug 2007).  This is measured by the opportunity cost.  The third principle involves the marginal cost of an item over the marginal benefits.  Applying the theory that people act rationally, people make their decisions when the marginal benefits outweigh the marginal costs.  Finally, the last principle involves incentives which affect the decisions of people (Blaug 2007).  Providing incentives makes people choose in favor of incentives because it is basically a value added that makes the marginal benefits higher than the marginal costs (Blaug 2007).

The Declaration as well as Treaty establishing the Southern African Development Community was signed on July 17, 1992, in Windhoek, Namibia. There after several countries joined South Africa joined in 1994, Mauritius in 1995, the Democratic Republic of Congo in 1997 as well as Seychelles in 1997 but later pulled out of the SADC in 2004. The objectives of Southern African Development Community included regional economic integration, harmonization and rationalization, poverty alleviation and strategies for sustainable development in all areas. The SADC Protocol calls for an 85 percent reduction of internal trade barriers. Within the SADC region, the national currencies of Namibia, Swaziland and Lesotho are linked to the South African rand through the Common Monetary Area. SADC members have been working to eliminate exchange controls in preparation for an eventual single currency.

In March 2004, the SADC executive secretary announced a tactical plan that set out a time frame for the economic integration of the region. Some of the outlined measures included the creation of a free trade area by 2008 the establishing of a SADC customs union as well as the implementation of a common external tariff by 2010 establishing of a SADC central bank and the preparation for a single SADC currency by 2016 creating a SADC regional development fund as well as self-financing mechanism by 2005 a common market by 2012.

SADC focus was on the trading agreement among the different countries that had joined it. Currently the trading industry is not improving as expected in the African countries and it has become an alarming situation.

Literature Review
Trade is a means of exchanging goods and services and is of paramount importance to any country. This is because countries do not have equal distribution of resources and trading is a means of equalizing the resources and these eventually result in a widespread formation of regional integration. However, the distribution of these resources and the equality is questionable. In 2004, the combined Gross Domestic Product for Southern Africa was about 296.4 billion. South Africa being the regions most developed country had a GDP of  213.1 billion which was more than double the combined GDP of the other Sothern African countries. Trade creation is one of the non-monetary effects of the regional integration that should increase the transaction among the participating members due to the reduction in the custom duties. The increase in transactions should have a spiral effect that stimulates all the countries economies as well as their growth. Studies show that the actual share of Sub Sahara Africa imports and exports were slightly higher than model prediction trade. Trade among African countries is still low and has not shown any signs of growth (Foroutan  Pritchett 1993).

There is a question of whether the trade agreements have been effective in the African countries especially the SADC. According to African literature and research done about SADC, developing countries have a different perception of integration as compared to developed countries. Third countries use integration as an instrument to reach economic development or industrialization while developed nations perceive integration as a way of boosting performance by improving and concentrating on the poor community. Another approach in the studies done is considering which is more important between integration and trade in developing countries.

According to studies done, one of the problems with SADC countries as well as other African countries was the dependence on raw material exportation to the developed countries. This is done to sustain their economies. Developing countries lack industrial diversification or there is inexistence of industries. This results to redirecting their imports to developed nations as a way of fulfilling their needs for manufactured and industrialized goods.  And this can be pointed out as the major reason why South Africa is way ahead of majority of the other member countries of SADC. Trade among the SADC members is very minimal and this is justified by the low levels of industrialization and diversification among the countries. For example South Africa has the traditional trade structure of a developing country in its total trade but in intra-regional trade it is similar to a developed country. South Africa does not have options when it comes to industrialized product demand so it has to follow the patterns of developing countries and import from developed countries. This means that the creation or diversion of trade which leads to increase of terms of trade among SADC countries is very important.

By using the concept of trade creation and diversion, an analysis of SADC will be done in order to see the benefits that are acquitted to the members. This will be done using Namibia as the case study. The study should be able to determine whether the conditions of Namibia are extended to other SADC countries allowing a generalization of the SADC effects on its members. The study should also determine whether there are any improvements in the countries when they are members of SADC. The study should also help identify which of the two is more important creation of regional trade or diversification of goods for trade which eventually would force countries to trade independently. There is importance of infrastructure, sound policies and institution but would they be as important if there was no diversification and trading of goods. The study should identify the reason why the trading levels in African countries are low. This study focuses mainly on regional integration.

Main Aims and Objectives of the Study
According to the review done previously, SADC has played a major role in various aspects of the economy of developing countries. The aim of this study is to highlight the role it has played in economic regional integration for its members. It should also highlight the reasons why SADC does not play the intended roles that have been stipulated on paper but not in practical terms. In 2004, there were stipulated roles of what the SADC should help the members to attain but most of those plans have not been fulfilled. There are benefits that the members of SADC have gained and this study should stipulate them. Using Namibia as the case study, through the study one should be able to see the benefits as well as drawbacks it has experiences due to this membership in the SADC. There should be analysis in weather the conditions of Namibia could be extended to the other members of SADC.

Definition of the Research Problem
Using Namibia as the case study, the study intends to analyze the role of SADC in the countries that are members. There are benefits and setbacks of being a member of SADC but the question is whether there is equalization of resources if the conditions in Namibia can be compared to other countries that are members and appear to be similar. This study should also show the effectiveness of SADC and the limit it has as a result of the conditions in its member countries.

The Main Concepts and Variables of the Study
The main concepts of the study are trade creation and the diversification of resources among the countries that are members of SADC. There should be a set of hypotheses from the theories of econometrics as well as regional integration. The concepts from the gains due to the exchange of goods and services as well as the gains from specialization should be identified. There should be a way of presenting the comparative advantages of the countries being members of SADC. The patterns of trade should be put into consideration as it was earlier identified that the perception of economic integration in developing countries is different from developed countries. There should be use of economic models. In order to accomplish the analysis the above concepts and variables are very crucial.

Methodology or Research Method
There are two types of data required in this study quantitative and qualitative data, which could be collected as primary or secondary data. Putting into consideration the concepts above, the main source of data will be collected as secondary data throughout this dissertation. Consequently the consultation of electronic library, internet will be the strategic point of collecting secondary data. There should be use of graphs and tables to evaluate Namibias pattern of trade. There should be the use of SADC work as a sample, either area sampling or size sampling which should show a fair representation of the population which is Africa. As an inexperienced researcher, it would be wise to consult with experts of trade, and my supervisor to ensure accuracy and success in this project.

Expected Outcome of the Study
Expected outcome of the study involves producing a useful as well as practical analysis of SADC under the perception of the gains generated to increase the actual trade. The production of a study that may be of practical use for the improvement of SADC is important such as the information and conclusions draw could add value to SADC and its members. The study should help improve the theories for economic regional failure of Africa and come up with ways to alleviate the burden in developing countries. This study should be of particular use to Namibia since it is used as the case study.

Exchange rates are the value at which one countrys currency can be exchanged for another countrys currency. International trade cannot exist with out the exchange rate system. While many countries around the globe try to manage their currency exchange rates stringently others leave them to settle themselves with the forces of demand and supply in operation. For many developing countries it is inconceivable to let the forces of demand and supply to act on their own and determine the exchange rates and many a times government intervention is deemed necessary. Whereas countries like United Kingdom and United States deem, many a times, government intervention in exchange rate determination unnecessary and prefer let demand and supply forces act on their own accord and determine exchange rates. Where such a system is in operation the country is said to have a Floating exchange rate.

Section A Prices of goods and services and exchange rates
Since the concept of division of labor and comparative and absolute advantage was brought forward and economists and governments started to appreciate the advantages they will get with the application of these systems. Countries since then have developed a tendency to produce those goods, only, in which they have a comparative advantage in order to utilize its scarce resources in the best possible manner and obtain the maximum possible outcome from them. These concepts were developed to enable nations to take full advantage of international trade. Moreover, faster means of communication and transport meant that goods around the nations can take full benefits of the goods that they were best at producing and the goods in a country could be matched against their counter parts in another country. This matching of prices of goods and services meant that consumers demand the goods and services that presented them with maximum utility at the most economical price. Exchange rates provided a direct link between them as any changes in exchange rates would result in changes in their prices as well. This impact became more visible in the recent years when the oil prices were most uncertain and crossed their hundred dollar threshold and disturbed the exchange rates systems around the globe. It specifically brought about changes in the dollar exchange rates forcing it to reach unpredictable levels which in turn forced the prices of goods and services to fluctuate.

There are rarely any products and services that are fully produced with in a geographical boundary. One or other component is bound to be brought from other country. These exchange rate adjustments were more important in this context, as the costs of commodities and the cost of provision of services were greatly altered because of this and manufacturers were left with no option but to change the prices of these commodities. As most of the products have oil as their primary input the need to bring a change in the prices of the goods was yet, more evident because firstly the oil was getting expensive and secondly, all countries required foreign currency to pay their bills. This impact was not only for producers who manufactured goods locally and had a market for their goods somewhere else in the world but also those who sold their products domestically. Not only the manufacturers but also importers were forced to sell their goods at an altered price due to the impact that the exchange rates had on the goods they imported. Many people are of view that the changes in the currency exchange rates can easily predict the future prices of commodities and services and this holds truth to a large extent. While many are convinced that these are the reasons behind the link of the prices of goods and services but do not also negate the concept that many other factors play a part in the determination of prices. Due to this a casual relationship between the prices of goods and services and exchange rates can not be established. Although a major hurdle in all of this is the unpredictability not only of the future but also the exchange rates which has witnessed unusually inconsistent movements in the recent past.

Section B Factors that cause changes in exchange rates
The exchange rates between two countries are primarily determined by supply and demand in the foreign exchange markets. Demand generates from individuals, firms and governments who want to buy the currency while anyone willing and able to sell currency generates supply. Before we can analyze the factors that cause these changes it will be helpful to have a look at the recent trends in the currency markets. The following table is an average annual currency exchange rate for the British Pound as recorded by Forecast chart, 2010.

Pound sterling is analyzed against US dollar since is used as a yardstick to value many commodities and is generally accepted, also because both are amongst the most trade currencies around the world other than being world economic leaders. The changes observed during the period were a combination of strengthening dollar and weakening Pound sterling. Perhaps the major factor that led to changes in foreign exchange rates during the period were the economic conditions through out the world.

After following a trend of slight rises and falls during late nineties in 2001 rose before falling again but it does not seem that the real reason for the fall after 2001 were 911 incident although some observers feared that might be the case. During 2006 economy has started slowing down but it was not until 2008 that United Kingdom together with the rest of the world came to realize the gravity of the situation.

Early 2007 the Pound sterling stood at 1.96 level after as series of rise and falls during 2006. During whole of 2006 Pound sterling strengthened reaching its highest ever mark of 2.11 in November but this could not be sustained because of the economic situation and it dropped back to 2 in a very short time and 2008 was not very good for pound sterling. 2009 saw the worst of economic crisis and Pound sterling dropped still more forcing dollar down to all time low 11.41 in January 2009. But since then as can be observed dollar has gained. Having seen the trend we can now consider the factors that have lead to such a trend. Portfolio of investments

There were times when investors thought it safe to invest with in geographical boundaries but now investments whether they are in stocks, bonds or in financial institutions are done keeping in mind the profits that it will earn. Investors do not hesitate to invest in concerns abroad as long as it gives them higher profits. With Investors venturing investments around the globe the exchange rates are bound to be affected by them. Exchange rate changes clearly reflect this.

Foreign investment
United Kingdom historically received a significant amount of total investment of the world it was not different during early 21st century and it has also been investing in other countries, this has helped to shape the exchange rates as it creates supply and demand for currency.

During early 21st century funds were flowing in Britain helping it economy but situation turned and investment in Britain went down drastically as compared to any other country partly due to the fact that economy through out 2009 did not show any appreciable signs of improvement. The economic situation did not help to convince already reluctant investors to invest in Britain and according to a report by UN Conference on Trade and Development (Unctad) investment in Britain has decreased drastically. Investment into Britain fell by half to 97bn, while outflows, or British companies making investments abroad, collapsed to 111bn from 275bn the previous year. A cause of this is seen to be the state of affairs in United States since it is a major investor in United Kingdom concerns and a reason why the blow was harder for Britain. The impact was doubled due to the reluctance from investors with in Britain to invest abroad, and create a supply, since the Pound sterling was falling, as observed earlier. The remittance of profit of United States based Multi National Corporations also aggravated matters. Britains stock of foreign-owned investment projects fell over to 983bn in 2008 from a record 1.35tn in 2007. Most other countries saw far smaller falls. The UK drop was also much larger than the drop in global foreign investment to 1.7tn which was estimated to be 2tn in 2007. This was not anticipated since UN Conference on Trade and Development (Unctad) predicted a lesser fall (Guardian, 2009).

Interest rates
As discussed above investors tend to pursue investment options that give them the best returns so for instance if interest rates are high in United Kingdom the investors will, in an attempt to earn higher returns, invest in financial institutions of Britain. If a significant number of investors reacted in such a way the increased supply will force a change in exchange rates and in the long run, if floating exchange rates are in operation, the forces acting on their own will bring currency rates to a level that will make it impossible for the investors to take advantage of the increased profits.

This is what exactly happened in 2007 when an expectation of rise in interest rates together with problematic Housing Market in United States forced Pound sterling to its highest level of 2.11 in more than 26 years (Guardian, 2007). This move was with expectation that interest rates in United Kingdom might increase to 6 percent while in United States it was expected that a problem in housing sector will compel government to drive the interest rates below 5.25 percent. During this time United Kingdom had highest interest rates in group of seven leading economies so investors not only from US but also from rest of the world were eager to invest in UK. The news that the economy might improve even failed to halt the decline of dollar. Thereafter as the recession hit its full force the government had no option but to reduce the interest rates one of the factors that were responsible for bringing down Pound sterling from all time high to 1.41 with in a span of just two years. The exchange rate changes were not with out the fact that the demand and supply forces were acting as mentioned earlier. Investors were de motivated and investment, as observed, was low. The speculations suggest that given the current state of economy the government will again lower the interest rates if this is the case it might not help Pound sterling.

Current account
In 2002 UK current account deficit was 18,965 billion pounds and the situation did not improve in the later years resulting in pressure on pound to fall (bized, 2003).In 2009 UK had the third highest current account deficit in the world (Economy watch, c2009). A couple of years of economic growth together with an increase in consumer spending during the recent past with an inclination towards foreign goods and interest rates changes, compiled to the current state of current account deficit and resulted in an impact on exchange rates.

Inflation
It is held, theoretically though, that exchange rates will try to bring the purchasing power of two countries in equilibrium. So they will continue to fluctuate under floating exchange rates until there is parity between the purchasing power of the two countries. If we believe this theory to be true than any inflation in a country will trigger the exchange rates to change in an attempt to bring purchasing power in equilibrium again. In other words, foreign currency depends upon the comparative purchasing power of each currency and that exchange rates will vary over time to relative price variations.

This is again is true for the prices of goods. A manufacturer facing inflation in his country will increase the prices of goods of his products in order to maintain his profit margin. Alternatively, if because of inflation in another country the price of raw materials changes the producer will in this situation also, will be forced to change the price of his goods or the price at which he provides services. This in turn will again start the cycle of exchange rate fluctuations.

As the exchange rate was weakened in early 2000s there was some inflationary consequences witnessed due to them but they were not disturbing.

PIMCO (2007) observes that although there was news of increasing inflation in the economy during 2007 the Pound sterling still did not react and continued to strengthen. The interest rates were recorded during 2007 to be 3.1 over year in March versus the 2.8 consensus. During this entire time Pound sterling was appreciating. This was surprising as most economic texts would predict increasing inflation to be followed by depreciating currency, so would the theory explained above. Though this was only short lived as in the long run when inflation continued to increase all of the theories were held to be true as Pound sterling dipped dramatically to an extent that was beyond imagination of many. Thus it can be safely concluded that though due to some reasons the exchange behaved unusually once the fervor was over they did show their impact on foreign exchange rates.

Government reserves
Role of government reserves are more evident in fixed exchange system were government inject or extract funds in order to keep currency at a certain level. However it would not be fair to conclude that there is no role of reserves and there is no government intervention in floating exchange rate, as it is there although rare. Government only intervenes when it feels that currency price has dramatically fallen or risen. UK government did intervene during late 1990s to stabilize the currency and if Pound sterling continues the way it is going now government intervention might be necessary. Although government has tried other macro economic measures in an attempt to stabilize the currency direct intervention has not been used.

Speculation
Speculations have always had a hand in driving the exchange rates, the extent to t asserts its power and makes its presence felt is always debatable. With all the bulk of foreign exchange transactions taking place, all cannot be trade related there is always some degree of speculation going on under covers. Their effects, therefore, cannot be negated during the above mentioned period. Though these speculations base themselves on all above mentioned factors still there is an element of wild speculation rather than rational calculated speculations. Some people are of view that future speculation does not affect current prices. Though it will be futile to deny that future speculation does trigger demand in the market resulting in changes in the prices if it is a strong enough speculation to move significant number of buyers or sellers.

Conclusion
Although economists have tried to take account of all the factors that can influence the exchange rates and trigger their movement their will always be some factors that will be ignored. The assumptions around the models and theories with the help of which they try to understand the likely cause, have also got flaws in them and in the opinion of many observers they do not belong to the real world. This leaves another space that some causes will always remain unidentified. However, these do regulate exchange rates of the world and have proved quiet useful in the current economic situation. Yet finding the causes will only be of limited use in giving a solution out of the current economic crisis. It is time we look for quick solution before the world economy dips any further or we witness yet another bizarre movement in exchange rates.

Many people in the world depend on the hospitality industry, directly or indirectly for employment. In the US it makes up about 2.6 of the total economy, according to 2009 estimated by the Department of Labor. Like all the sectors that were affected by the economic downturn, the hospitality industry needs some remedies to aid its recovery and generate jobs to million of people who depend on it. This paper will look at the general overview of the economy, its meaning, and its organization in the US. Problems facing the sector too as a result of the economic crisis as well as the proposed solutions and their effects will be discussed as well.

Definition
Land labor resources and other agents comprise the economic system of a defined territory. In an economic system, there is production, exchange and consumption of goods and services. Economies comprise of the macro and micro sectors. The macroeconomic sector involves decisions firms make regarding production and output while microeconomics focuses on individual decisions that consumers make regarding consumption of output from firms.
   
The hospitality industry although seems like insignificant its general performance can be used to assess the overall macroeconomic .Its important to note that the industry is heavily service oriented. For it to thrive therefore, minimal interference by the state is required. That perhaps explains why it has been successful in capitalist economies like the United States.

Since the collapse of the Soviet Union in 198990, command economies have largely disappeared. They were dominant in the former socialist republics of Eastern Europe but capitalism has largely take root even all over the world including the former soviet republics themselves. China, Cuba and North Korea are the only know countries that still practice centrally planned economies.
   
If the strict ideals of the capitalist economy were to be enforced, the role of the government will only be seen as a facilitator. In the capitalist economies, dominant in the United States and Western Europe, the private sector is left to run important sectors and industries like manufacturing, hospitality, transport and healthcare. The private sector thrives in the capitalist economy set up. The government regulates the sector through a series of laws that are enacted by legislation. Individual firms and consumers are left to make decisions based on preference and need. Market forces dictate prices but the authorities subtly shape the economic trends through regular revisions of monetary and fiscal policies spearheaded by central banks and treasury ministries.
   
The hospitality industry largely belongs to the private sector. In command economies where the sector was notably absent, hospitality industries did not perform well. Recreation and entertainment are tailored to meet different peoples tastes. The standardized services that were available in the command economies therefore did not contribute much to meet clients preferences.
       
Market economies go through cycles that reflect the level of activity and growth prospects. Recessions, depression, recovery and growth are all part of the cycle that market economies go through. (Solomou, 1998, p, 6) says that Fluctuations of economic activity are a feature of modern economies that little can be done to avoid. According to Adelman (1960), business cycles are propagative or impulsive (as quoted in Solomou, 1998, p 9). Propagative business cycles are as a result of the internal workings of the economies. Parameter of multiplier and accelerator effect work to generate business cycles (Solomou, 1998, p, 9). Impulsive business cycles on the other hand are caused by exogenous shocks on the economy (Solomou, 1998, p, 9).
         
During such cycles, governments took measures like increased spending that sought to reverse negative trends or stem the collapse of the economy altogether. The world recession that started in 2007 is one such cycle that resulted in the decline of many world economies. The hospitality industry was among the industries most severely affected by the recession. The massive layoffs shifted people spending patterns to focus only on necessities rather than luxuries. Tourism, recreation and other sub sectors of the hospitality industry that depend on direct spending were affected because consumers considered their services a luxury. Declining revenues and negative growth in the industry has generated calls for a second stimulus package that will encourage more spending in the industry hence accelerate its recovery.

Role of government in economy
Whether an economy is command or free market, the role of government is critical. Governments play an entrepreneurial, regulative and rehabilitative role in economic development (Adelman, 1999, pp 1-8). Governments boost investment through increased spending. Government spending is crucial in sustaining economies and in some cases governments are the biggest employers. Keynesian economics tend to be biased towards the government as well. According to the theories, private sector alone cannot make decisions that will ensure sound economic development is realized. Monetary policies by central banks and fiscal policies by government planning ministries according to Keynes should always be actively involved in economic decision making to ensure a stable economic climate.

The Keynes model advocates for an economy that is largely controlled by the private sector but with the government and public sectors actively involved in making decisions. However, industries like the hospitality can hardly succeed with much government involvement. After the Great Depression of 1930s, the theory gained momentum and was used by many governments to justify intervention in economic matters. The recent economic crisis of 2007 has again thrown the focus on Keynes theory of economics and many countries have done more or less of what its recommendations are, during that period.
       
The 2007 recession, whose genesis was in the US housing market is blamed in some quarters as a result of poor oversight by the American government and over reliance on private sector players to make major decisions regarding the economy. Keynes economists advocate for a mixed economy where both the private and public sectors thrive with joint ownership of properties. The resultant bailout and stimulus packages in the US after the financial crisis served to underscore the importance government can play in economic development.

Role of US government
Though largely a capitalist economy, the US economy the US government plays a critical role in shaping growth, stability and role in the World (Slater, David, National Research Council (U.S.)  Committee on National Statistics, 1998, p1). The governments borrowing, spending and taxing policies affect the entire economy including the hospitality industry. Generally the spending of the US government on the economy has increased since 1992 (Slater, David, NRC, CNS, 1998, p 1). Like any government would, the US government facilitates a conducive business atmosphere which allows the thriving of the private sector. Regulation of the economy is another role played by the US government. The recent enactment of the healthcare reform bill once again proved the regulatory role of the government. Insurance companies were subjected to drastic laws curtailing freedoms that were once thought to be a preserve of the private sector.

US economy
The United States has the largest and most advanced economy in the world. As a result most economic agendas pursued by other countries consider the US position before any decisions are reached. From 1945 the world economy was largely dominated by Americans and the American economy (Agnew, 1988, p 1). However, the position of the US economy has always come under threat from global events that have served to prove that it does not enjoy the untouchable status that it once enjoyed. The continued growth of Chinese economy in particular has threatened to challenge the dominance of the US in the world economic matters. Nevertheless, its importance cannot be underestimated as many countries still depend on the dollar for pegging of their currencies and for holding reserves.

Sectors of the US economy
Generally, the economies of various countries are divided into public and private sectors. Within these sectors are thriving sub sectors that comprise of primary, secondary tertiary and quaternary sectors. They are defined based on the goods they produce and the level of refinery of the goods and services. According to Economy watch, the services sector is the biggest sector in the US economy. In the year 2008 when the country GDP grew by 2.8 in the second quarter, the sector contributed 67.8 towards the GDP of the US. In 2007, the services sector contributed 78.5 to the GDP way above the 20.5 that the industrial sector contributed (Economy watch, n.d, p 1).
     
The US economy has numerous sectors including the following  Mining, Finance and Insurance, Real Estate, rental and leasing ,Manufacturing, Wholesale Trade, Retail Trade, Transportation, Information, Management of companies  enterprises ,Utilities, Construction, Administrative, support, waste management  remediation service, Educational services ,Health care  social assistance, Arts, entertainment,  recreation, Accommodation  food services, Professional, scientific,  technical services (Economy watch, n .d ,p 1).
     
The agricultural sector employs many people in the country but its contribution to the GDP of the US is a distant 1 (Economy watch, n .d, p 1). When calculating the value of its GDP, the US economy is divided into three sectors. The Services sectors which accounts for 76.9 of the GDP, the agricultural sector that accounts for 2.1 of the GDP and the industrial sector that accounts for 21.9 of the GDP, according to 2009 estimates. The hospitality industry therefore falls in the services sector that comprises the bulk of the US economy. There is always interdependence between the different sectors of an economy and the American economy is not excluded. These sectors provide employment to the people who in turn pay for services in the hospitality industry. In a nutshell, the hospitality industry is sustained by the stability of other sectors of the American economy.

Hospitality industry in general and in US
The hospitality industry of the US like in any part of the world, depend on the spending patterns of people in the economy. According to the American Hotel and Lodging Association, the industry employs 1.8 million people directly. It also supports a further 8 million through air travel related jobs (Patel, 2009, p, 1). According to the U.S. Department of Commerce, Bureau of Economic Analysis, the hospitality industry comprises of the arts, entertainment and leisure sectors and the accommodation and food services sector (Department of Labor, Employment and Training Administration, 26, p 6).  The report further said that the accommodation and food services sector represented 2.6 of the GDP in the year 2004, equivalent to 308.1 billion (DLETA, 2006, p 6). The recession that hit the country in 2007 resulted in the loss of over 8 million jobs in the US. Such losses impacted directly on the hospitality industry since recreational spending reduced drastically. The accommodation and food services sector is responsible for 8 of the total workforce in the US. However, the US Bureau of Labor Statistics predicted in 2007 that the industry was expected to add 17 in wage and salary employment between the years 2004 to 2014. The food services and drinking places are expected to add 16 of wage and salary jobs within the industry in the period 2004- 2014, equivalent to 1.6 million new jobs (US Bureau of Labor Statistics, 2007). The industry has many entry level jobs in the US providing many young people aged 16-19 with jobs. They comprise more than 21 of the industrys workforce.

However, stereotyping of the industry as low and entry level coupled with the youthful employees has made the industry experiences high employee turnover. High turnover of employees is one of the traditional problems that are associated with the industry even in the course of strong economic performance. Economic down turns like the recent one that led to unemployment affected demand of the hospitality industry services. That, together with declining real wages sparked layoffs in the industry which coupled with the generally high turnover rate to make matters worse.
       
The US government introduced the stimulus package that was meant to jumpstart the economy. The money was supposed to be spent in various projects especially in green energy that would have boosted hiring therefore reducing unemployment. Returning people to work is overally advantageous to the hospitality industry because more people will be able to afford recreation spending.  The kind of deficit spending that the US government is undertaking during the time of recession is in line with Keynesian theory. However, in the 787 billion stimulus proposed by president Obama, the hospitality and lodging industry was largely ignored (Patel, 2009, p, 1). There are individual actions that the government should have taken or should take to enable quick recovery of the industry. In an economic climate like the one the US is struggling to exit, it will make perfect sense if an industry that can provide real stimulus to a faltering economy is protected (Patel, 2009, p, 1).

Measures government can take
According to Keynes the demand for goods and services during economic downturns may dwindle. It has happened in the hospitality and lodging industry in the US. Price Waterhouse Coopers estimated a fall in bed occupancy in hotels in the US of 5.2, in the year 2009 (Patel, 2009, p, 1). It was the steepest decline in the last 20 years in an industry that generates 116 billion in tax revenues, according to the American Hotel Lodging Association (Patel, 2009, p, 1). That calls for some level of induced investment meant to stimulate the economy. Thats where the role of the government comes in market economies like US. Reduction of interest rates by the Federal Reserve and the enactment of stimulus measure for example the one undertaken by the US government and other governments in the world, are typical Keynesian ideas. Government spending is directed towards infrastructure spending while interest rates are meant to encourage lending to ensure credit flow in the market. While the stimulus package may help other areas of the economy, it fails to mention the hospitality industry, which is being hit hard by the recession (Patel, 2009, p, 1). A second stimulus in the United States may be necessary to stimulate the economy further after the first one had modest success. Hospitality and lodging industry should be the primary focus since the first bailout and stimulus money concentrated on the financial and automobile sectors.  The US 2009 lodging report released by Earnest and Young said that additional federal dollars injected in the countrys infrastructure whether in the hospitality industry or otherwise, will lead in a net gain for the industry in the long run. That will be through improved access to tourist destinations and the improvement of domestic travel industry. Besides, any stimulus package that will be aimed at aiding other industries will help save the hospitality industrys property market. Low mortgage delinquency rates have made hotel values drop and the properties are being sold in throw away prices.
     
In post 911 attacks, the American Hotel and lodging association proposed to congress some stimulus measures that were to help resuscitate the industry. The hospitality industry at the time had lost property and customers were reluctant to travel. The bedrock of the plan was to get some few tax breaks as well as liquidity adjustments. That could have attracted people who could otherwise reluctant to spend in recreation and traveling. The tax incentives included a spousal travel tax deduction and an increase in the business meal and entertainment tax deduction (AHLA, 2001) as quoted in hospitality net. The same stimulus measure will apply in the year 2010 but a little differently because the magnitude of the problem is bigger.

Reduction or suspension of taxes deductions that are levied on people traveling with families will encourage more families to reconsider their position in the course of the economic recovery. Further, the taxes levied on any entertainment that families will have to be halted temporarily to encourage travel and recreation.
   
Payroll tax payments of employees and employers should be temporarily cut or deferred altogether. The money saved through such halting of tax payments will ensure increased income for the employees as well as employers hence reduce financial stress that may spark layoffs. Additionally, the eligibility for qualification for Small Business Loans for the hospitality industry should be extended. The stimulus will create a fund where small hospitality industry businesses will apply for loans to boost their liquidity levels.

The current economic climate has ensured many hotels and other hospitality industry business run short of cash. Hotels have also reported reduced bed occupancy rates due the unsold rooms. Special offer packages to American residents can do a lot to kick-start the growth efforts that hospitality industry may need it. Some of the stimulus money therefore will have to be used to extend subsidies to the hotels so that they can reduce prices customers have to pay.
     
The view by classical economists that non-intervention in the economy by the government was the way to go contradicted sharply with that of Keynesian theory. The government according to him (Keynesian) needs to prod the economy if any growth was to be realized. In cases where there was increased spending by the government, the imbalance created would lead to increased aggregate demand. Businesses will react by increasing the workforce by hiring more employees. It assumed that the increased government spending will enable all industries including the hospitality industry to hire. The stimulus bill enacted last year plus any other that may aim to bailout the service industry, will therefore encourage more hiring in the sector hence accelerate recovery.

Conclusion
The importance of the service industry in economic growth and development cannot be underestimated. The hospitality industry employs 8 of the American workforce. There have been concerted efforts by the American government to prop up the economy out of the recession. The bailout and stimulus packages have worked modestly so far and hiring is somehow picking up again. The stimulus bill to a large extent ignored the hospitality industry and concentrated on industries like construction and the financial services.
     
Part of reasons may have been the difficulty associated with bailing out hospitality industry businesses since they only serve a small number of people. Further more they were not directly hit by the economic downturn as were banks. The hospitality industry was largely a victim of circumstances suffering from the effects of the collapsing financial sector. Its recovery will depend on the direction of the economy as far as unemployment is concerned and any other programs the government may rollout in reviving the economy.
   
Even if there is likely to be another stimulus package in the spring, its highly unlikely that the hospitality industry will be factored in directly. The nearest that the industry will gain will be from a common fund that will be set up to enable businesses access cheap loans. That may be only appropriate for small and medium enterprises in the industry. The big corporations in the hospitality industry will have to depend on credit from financial institutions, an option that may not be economically viable given the uncertainty in the economic growth prospects in the country.