Economics

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Macro economics is the study of the aggregate economic performance of an economy whereas micro economy focuses on the individuals and studies their economic decisions (Investopedia). It is clear that macro economy has more number of variables and hence it is more complex as compared to the microeconomics. The most important indicators of macro economy are the Gross Domestic Product (GDP), unemployment and inflation (Investopedia). GDP is the accumulated market worth of finished goods and services produced within the boundaries of a country during a particular period of time, usually one year.

Nominal GDP (inflation not adjusted) should not be confused with real GDP (inflation adjusted) as the increase in nominal GDP (merely increase in prices) doesnt mean that country has made more money during a certain period (Investopedia). Unemployment is equal to the number of people who could not get jobs among the total labour force available at a particular time. The inflation means the rate of increase in the prices of goods which is measured by the Consumer Price Index (CPI) and GDP deflator (a ratio of nominal and real GDP) (Investopedia). Some other important variables of macro economy are the interest rates, economic growth, budget deficit and poverty.

US Macroeconomic Scenario in 1990
United States economy is considered to be the greatest and most diversified economy of the world having a per capita Gross national Production (GNP) of more than 21,000 per annum. In 1989, the US has begun its eights year of continuous growth which is considered to be the longest period in peace times. This growth is the outcome of consistent improvements in the wages and employment opportunities. The unemployment rate was 5.2 at that time which was the lowest in the previous ten years and the inflation rate was the around 4.8 at that time. In 1990, the year I was born, the US economy entered into a period of recession. The major factors of that economic down turn were the significant increase in the oil prices because of the invasion of Iraq on Kuwait (Greene and Tishchishyna). There was also a quick increase in interest rates. This increase in the interest rates put negative impact on the availability of credit to the industry. These factors along with many others drag the national economy to recession. Because of this recessionary pressure, the output of the nation was decreased by 1.6 (Bureau of Economic Analysis). Due to the slowdown in the business activity, almost 1.7 million people were laid off (Bureau of Economic Analysis). Unemployment rose from 5.2 in 1989 to 7.5 in 1990 (Bureau of Economic Analysis). However, the economy has started to revive in the next year (1991) and this positive trend persisted in the next decade which is considered to be the third longest growth period after World War II. During this growth period, the real GDP kept on fluctuating between 2 and 3.5 till 1998.

US Macroeconomic Scenario in 2009
The CPI-U (i.e. Consumer Price Index-Urban) for the year 2009 was increased by 2.7 for all items as stated by the Bureau of Statistics. This increase is due to the rise in energy prices by 18.5 (Bureau of Economic Analysis). The unemployment rate was about 10 and the total unemployed personals were 15.3 million till December 2009 (Bureau of Economic Analysis). On average, the hourly earnings per person were 18.8 in the year 2009 (Bureau of Economic Analysis). The GDP rate has shrunk to 2.6 and its worth in dollars was about 14.204 trillion which was 22 of the worlds economy (Bureau of Economic Analysis). Per capita nominal GDP was 46,442 till December 2009. United States has witnessed the most wobbly situation in 2009 which is considered to be the most uncertain case during the last 70 years. Because of this uncertainty, government has experienced a negative trade balance, capital accounts deficits and balance of payments deficits as compared to the previous years. Main causes of this recession are the subprime mortgage loans, excessive derivative activity, real estate bubble and huge expanses on defence due to the war against terrorism. Though U.S. has injected a large chunk of money (700 billion as a bailout plan) to support the economy, yet it was considered insufficient by the experts (News). In January 2009 the United States congress approved a bill consist of an additional 787 billion fiscal stimulus of which two-thirds amount will be spent on additional spending and almost reaming money on tax reductions in order to create jobs and to assist the economic revival (Congress).

Comparison of US economy (1990 and 2009)
By comparing the economic snapshots of 1990 and 2009, it is clear that total buying power of Americans has increased from 4.3 trillion in 1990 to  11.1 trillion in 2009 (a total of 159 increase), while at the same time there was an increase of 66 in the inflation (Bureau of Economic Analysis). It means that on average there was an improvement of 93 in the real purchasing power of people. Average rate of growth in the purchasing power and inflation from 1990 to 2009 was 5.1 and 2.5 respectively (Bureau of Economic Analysis). It means that if a typical American earns 100 in 1990, he or she earns 105 in 2009 and the inflation adjusted income is 102.5. During these nineteen years, county has seen two mild recessionary periods and one longest growth period. The duration of the 1990 recession was 8 month and GDP of the country went down by 1.4, consumption by 0.7 and investment reduced by 3.2 (Bureau of Economic Analysis).  But the recession of 2008 to 2009 is comparatively longer and deeper (Bureau of Economic Analysis). In 1990, a typical American has the nominal income equal to 28970 per annum, while the price of a new house at that time was  123,000 on average a new car can be bought in 16,000 and price per gallon of gas was 1.34 (The People History).  The value of a 100 currency note has increased to 150 during the last nineteen years (The People History). Average retail price of electricity was 9.81 cents per kilowatt-hour in 2009.

Similarities and differences between 1990 and 2009
Although a lot of things have changed since I was born in 1990, there have been few similarities as well. For example, when I was born, there was war going on in the Middle East between US and its Allied Forces which are trying to force Iraq to bow down. Today in 2010 as well, we have war going on in different theatres of the world, which are being conducted to eliminate terrorism. Back in 1990s, the world was suffering from a surge of recession in market, and this phenomenon has repeated now as well. On the other hand, things which have changed dramatically since 1990 include increase in the overall purchasing power of an average American, the positive influence of e-commerce and  the Internet everywhere. Many things have changed for the worse as well. If we look as unemployment rate, inflation, food prices and house prices, all these have either increase to make the life of a common man more difficult today.

Q1. Discuss the difference between profit maximization and shareholder wealth maximization. Which of these is a more comprehensive statement of a companys economic objectives
In technical terms, Shareholder wealth can be calculated by multiplying a firms total number of shares outstanding with the price of the particular firms stock trading in the market, hence, it is the market value of the firms stock. On the other hand, profit maximization is primarily a more stationary concept in the sense that it defines, in simplistic terms, the extra revenue that is generated after paying off all costs. In essence, profit maximization does not really cater to the risk and time elements involved with the calculation of the profit. Shareholder wealth maximization, on the other hand, does include all internal as well as external forces that have an impact upon the firms profit generating abilities.

Shareholder wealth maximization is a more preferred approach than simple profit maximization because it is a long term objective of a company and therefore is more aligned in terms of achieving economic growth. Basically, Shareholder wealth maximization function incorporates all the managerial decisions that have a long run impact upon the firm and therefore is, without doubt, a more comprehensive approach.

Q2. What are some of the forces that cause managers to act in the interest of the Shareholders
The main cause behind managers not acting in the favor of shareholders is defined adequately by the principal agent problem. Since the question has not asked us to go into the details of the reasons behind the problem, lets just move on to some of the policies that help align shareholder and manager priorities upon a common platform. Incentive based measures such as commission on extra revenue generation, profit sharing, frequent performance measurement evaluation and efficiency wages can entice managers to work in the interests of the shareholders. Such incentive based policies primarily work because of the sole reason that both entities, the shareholder and the manager, are gaining from it.

Q3. A company has two million shares outstanding. It paid a dividend of 2 during the past year, and expects that dividends will grow at 6 percent annually in the future. Stockholders require a rate of return of 13. What would you expect the price of each share to be today and what is the value of the companys common stock
We will essentially use the Dividend Discount Model to calculate the price of the share and eventually the value of the common stock.

Dividend Discount Formula  Price  D1 (k  g)
D1  2 x (1  0.06)  2.12
Therefore, Price of share  2.12 (0.13  0.06)  30.28
Value of Common Stock  Share price x number of shares outstanding
                                          30.28 x 2,000,000  60,560,000.

Q.4 Discuss the difference between the calculation of shareholder wealth and the concept of Market Value added. Which of the two would appear to be more meaningful from the view point of a shareholder
There are a number of ways through which shareholder wealth can be measured, the most common being the calculation of the EPS (Earnings per Share). Shareholder wealth is primarily defined as the return an investor receives per dollar that he or she has invested. The higher the EPS, the better off the shareholder is. Market Value Added or MVA also works along the same lines in the sense that it is the difference between the market value of the company and the capital contributed by investors. A high MVA, therefore, denotes that the company has been doing well in the past and that it has created substantial wealth for its investors.

Both terms are of importance to the shareholder but in my opinion, Market Value Added is off far more importance because it incorporates managerial decisions that have an impact upon shareholder wealth. The EPS is an extremely basic measurement and can be manipulated whereas MVA provides a far better economic perspective of a firm in regards to investment.

Q.5 Briefly explain why some firms are large and others are small. And list components of transaction cost.
In principle, there are inherent differences between small and large firms. However, the most significant reasoning lies in the sort of product or service the company is willing to sell because eventually that is what determines its size. Some firms specialize in providing products and services that have no substitutes therefore they face no competition and can gain profitability at a relatively small structural size whereas amongst industries that have a large number of competitors, firms in order to cater to larger customer base and demand have to achieve economies of scale in order to cut down on costs and achieve profitability.
Therefore, it can be stated with certainty that profit margins at the smaller level are slightly easier to establish.
Transaction cost, on the other hand, is defined as the cost of doing business with other firms including costs such as investigation, enforcement of contracts and negotiations.

Q.6 State the main factors that have contributed to the growth of outsourcing and give three examples.
The main factors that primarily contributed to the major drive towards outsourcing basically included the need to reduce expenses such as labor costs while also saving on operational costs such as administrative, utilities etc thereby increasing productivity and enabling firms to sell their products at a lower price than their competitors while still maintaining profitability. The global internet network has also provided firms with the ability to facilitate the flow of information from anywhere around the world within seconds. Such efficient linkages between nations have allowed them to utilize each others resources in such a way so as to benefit each other.

The three basic types of outsourcing are Information technology outsourcing, business process outsourcing (Call centers etc) and outsourcing production facilities.

Q.7 List the primary economic and non-economic goals of a company.
The primary economic objectives of a firm are to achieve long term growth in order to promulgate profitability for themselves as well as their shareholders who have invested a large amount of capital. The economic existence of every firm revolves around the concept of profitability. However, on the other hand, the non-economic goals include corporate social responsibility which dictates that the firm must also keep under consideration the view of the shareholders as well as the stakeholders in matters concerning the public at large, such as the firms economic activities affecting the environment. The non-economic goals of a company also include the provision of products and services which maximizes the utility function of its consumers.