Economics

A straightforward connection of the US economy and some economic principles that may help aid the downturn of the US Economy, this paper hopes to give justice on some principles that the government may lessen or increase use.

In any decision that involves two or more options, a person deals with an opportunity cost. Often times the cost or value of a given good or service is considered of in monetary terms.

Opportunity cost in a particular decision is rooted on what must be given up as a consequence of that decision. In other words, opportunity cost may be thought of as the benefits or advantages that one could have gotten if an alternative action were taken. This is an important principle to consider in an economy as it helps guide the system in work.

One side of economic models is known as Capitalism. Capitalism is simply the type of social system where the economy is separated from the state. In capitalist systems, governments have no involvement in economic activities at all. Private ownership of properties best describe capitalism and every one are allowed having their businesses in a free market. In a capitalist society, it is believed that the sole purpose of the government is to protect the people from fraudulent activities. Suffice to say, capitalists usually are simply for profit.

On the other hand, socialism is like the exact opposite of capitalism. The government plays a major role since it owns the social properties of the country. Even though most properties are government-owned, the resources in a socialist society are controlled and used by the peopleworkers, not only by the ruling elite. The laborers have the power to control the economic productions that will benefit everyone in the society. The major difference between these two systems is that in capitalism profits are highly regarded whereas in socialism the relationships between the people in order to attain the common good for their society is utmost taken into account.

The distinctions and comparisons between the two, a principle would arise from a capitalist point of view. This principle would not work in socialist construct as explained. The invisible hand principle is quite easy to comprehend. It was coined by Adam Smith who deemed that the market works instinctively like it is being guided by an invisible hand. No central control or direction is necessary. The free will of all those involved in the market (producers and consumers), act according to their own interests but in turn also benefits the society as a whole. This however will be opposed by some, for reasonable explanations as with what the US government faces recently in its economic recession.

The US government faced huge problems as it hit an economic recession coupled by growing budget deficits. The Obama administration embarked on a journey of historic proportions facing what could be the worst economic crisis since the great depression. The government faced problems in all major sectors of the country especially the financial sector. After the first troubling months of this awful economic slump, the US government gets a hold of the situation and slowly shields the other sectors that needed some help. But the increasing budget alterations for the economic reconstruction have its own downside, steadily increasing the budget deficits with the economic stimulus. The economic stimulus was a double edge sword -It slowly but surely made impact on the economy as well. However, the US government was in a place that it chooses between two evils that if failed, would bring about catastrophic economic results.

In theory, it would be the best to create stimulus packages for the economy to slowly blossom once again. The government would need to be invasive in the economic crisis with this response but would help the economy to reduce the slump if not put a brake to it. Though it helped the economy today, if continued, it would then be the cause of another crisis but now caused by budget deficits. The economy must be put in a state of balance between those two or else, the crisis may again hit the biggest economy in the world.

The level of involvement by the government should be controlled. The economys functions will be very much affected if the government would take more control than the fiscal policies and other tax incentives it gives out. The main program that can be controlled efficiently is the tax programs. The use of tax incentives for individuals and corporations should be maintained in a minimal level. That way, it balances with the deficits of government funds.

The US Government is bound to pursue these economic principles as to regain the footing of the biggest economy in the world- rising once again, to be stronger than ever.

Europes Banks Tighten Credit, Frustrate ECB, written by Brian Blackstone and Nina Koeppen at The Wall Street Journal, primarily sheds light upon the prolonged after effects of the recent global financial crisis that has crippled economic growth across various regions. Stock markets across the world dipped sharply, well-established financial institutions either went bankrupt or were sold off while even the most richest and wealthiest of nations were forced to formulate aid packages to help stabilize their national financial systems. This report will attempt to provide a brief economic description of the global financial crisis while simultaneously providing specific reasoning behind the present credit policies of the financial institutions within the European Union.

From an economic perspective, the major promulgator of the global financial crisis was the bursting of the United States Housing Bubble that primarily reached its full status during the period 2005-2006. In accordance with the growth in the prices of residential sectors within the United States as well as a considerably low interest rate, financial institutions initiated the practice of the provision of incentive based loans such as providing easy preliminary terms and conditions as well lower interest rates to entice households to purchase mortgages. However, once interest rates began to rise and housing prices dropped, refinancing of these particular loans became extremely difficult and consequently, during 2007 as defaults and foreclosure became common, major financial institutions and corporations as well as the average consumer who had invested billions of dollars in order to advocate the provision of these loans began to report major losses. From that point onwards, due to the inexplicable linkages of global financial corporations based within the United States in accordance with the large amount of foreign investment, the world entered into a recession of which the impacts are being witnessed even till today in the form of high unemployment, inflation and weakened financial systems across the globe.

The European Union, in accordance with its inherent link with the United States, also fell victim to the financial crisis and consequently had to take necessary steps in order to curb its most adverse impacts. Throughout 2009, the region has witnessed considerably slow recovery compared to other nations hence it is apparent why, even after the valiant rescue attempts of the ECB, major financial institutions and corporations within the European Union are extremely wary in terms of their credit policies. In essence, the article primarily discusses the fact that although the ECB has stressed upon financial institutions to relax their credit policies, private sector lending is still extremely low and this will eventually have extremely adverse impacts upon the economy in the sense that economic growth, specifically in regards to consumer demand and supply, will be lethargic.

The major crux of the ECBs policies, placed in simple explanatory terms, lies within the context of the principle that financial institutions, by relaxing credit policies and providing loans to the private sector, will eventually stimulate the economy in the sense that consumer spending will increase while simultaneously businesses will flourish by producing more goods and services. In this regard, German Chancellor Angela Merkel said The economy can only get going if credit supply is sufficient. (Blackstone and Koeppen) Stimulation of the economy is also extremely important in the sense that, as of December and mentioned specifically within the article, the European Unions unemployment rate reached an alarming 10 (Blackstone, and Koeppen). Considering this from a supply and demand perspective, it is apparent that if consumers will not have the ability to receive adequate financing, demand for goods and services will not flourish and eventually the economy will suffer as whole.

Economic reasoning behind the actions of the financial institutions within the European Union can be found when considering the fact that the recession had resulted in a major dip in global as well as domestic demand for goods and services. Hence, it would make sense for the banks not to provide loans in the face of low demand. However, in depth research of the economic outlook of the European Union as well as other regions of the world has shown that demand is starting to pick up as the recession is nearing an end. Also, in accordance with the information provided within the article, it has been stated that banks have tightened credit because of the new laws of the ECB regarding capital. However, it must be noted that the new laws were specifically designed to initiate a boost in capital reserves in order to stimulate the flow of credit, not to hamper it.

Inflation within the European Union has also been contained, well below target levels, which inherently has kept interest rates low as well. This primarily points towards the fact that the economy at this point in time requires an injection of capital, within the private sector, so that unemployment can be countered, household income can rise which in turn will entice people to spend on goods and services thereby stimulating domestic demand and eventually facilitating the flow of growth within the economy. The wariness of banks, in regards to loans, is understandable especially since global financial links in accordance with major investment in the United States Residential sector led to the recessionary period that impacted almost every nation within the globe. However, it must also be noted that the only way to stimulate the economy and to fund deficits appropriately, is for banks to inject credit thereby inducing the average consumer and private corporations to invest in government T-bills as well as domestic goods and services which will eventually lead to a higher GDP and a significant reduction in the unemployment rate of the European Union.

From the above discussion so far, we can conclude specifically that although the European Union is on its way to recovery, the foreseeable future looks extremely uncertain in the sense that the entire integration of the financial system of the various nations within the European Union will have to work with cohesion. Supportive fiscal and monetary policy will be required as well as the fact that global demand for imports has dramatically dropped and this will inherently impact upon the export sector of the European Union. However, rescue attempts by the government has primarily put a stop to the fall in private consumption, for which the banks have to play their part as mentioned in the context of the article under review. Consequently, though public spending has risen over the last 6 months, household consumption has primarily remained the same.

Unemployment, on the other hand, will remain high though several rescue attempts are being formulated such as private corporations following policies, in accordance with rising costs, of hoarding labor which primarily dictates firms to cut down on worker hours rather than the workforce. This policy, however, will enable firms to maintain the same amount of workforce even when economic growth picks up because they will primarily rely on meeting the possibility of rising demand by the amount of resources that they have already employed.

Consequently, in consideration of the all the factors that have been discussed in this report, we can conclude that lending within the private sector will remain low during 2010 because banks will primarily be recovering whereas unemployment and uncertain economic outlook will primarily weaken the demand and supply of loans. It must also be determined whether, as previously mentioned and supported by the article, financial institutions within the European Union have sufficient capital resources in order to counter default risk for the future. However, it is apparent that banks will need to relax their credit policies and inject money through the provision of loans to the private sector households and corporations in order to stimulate demand and supply of goods and services within the economy.

Federal Reserve System exerts significant influence on the money supply and undertakes steps to alter it as and when an economic need for the same arises. To affect money supply, Federal Reserve System has three tools at its disposals. These tools can help a rapidly growing economy stabilize and also facilitate recovery from economic recessions. This paper describes the three tools used by the Fed to influence money supply. It then examines the modifications Fed would make to the three rules when i) an economy is growing with tremendous rapidity and ii) an economy is slumping in recession. The paper concludes by a discussion of changes the Federal Reserve System should make in view of the present condition of the U.S. economy.

Federal Reserve System changes the money supply using three tools, namely open market operations, adjustments in the levels of bank reserve requirements and modifications in the Feds discount rates. Open market operations consist of sale and purchase of outstanding U.S. treasuries by the Federal Reserve System in the in U.S.As open securities market. Purchase of outstanding securities from public directly increases bank reserves and the money supply. Conversely, sale of outstanding securities to households, businesses and governments reduces money supply. Open market operations alter the money supply by at least the amount of the open market transaction. Secondly, Federal Reserve System can increase reserve requirements to reduce money supply and lower reserve requirements to increase money supply. Finally, the Fed can opt for discount rate alterations. Rise in discount rate raises banks required working reserves while a fall in discount rate lowers desired working reserves making more money available for lending and increasing the money supply.
   
An economy that is growing too quickly can become susceptible to high rates of inflation and requires a lowering of money supply. To lower money supply using all the three aforementioned tools, the Fed will sell outstanding securities in the open securities market, increase bank reserve requirement and increase the Feds discount rate. When securities are sold, money, in the form of cash or check, leaves the money supply and is turned over to the Federal Reserve System. Rise in reserve requirements and discount rate will make less loanable money available to banks, which can then decrease the money supply through less lending.
   
During a recession an economy is slumping and the Federal Reserve System will undertake steps to increase the money supply. It will accomplish this through purchase of outstanding securities in the open securities market, decreasing bank reserve requirements and Feds discount rate. When securities are purchased, money, in the form of cash or check, enters the money supply from Federal Reserve System. Decline in reserve requirements and discount rate will make more loanable money available to banks, which can then increase the money supply through lending.
   
Presently, the U.S. economy is recovering from a turbulent recession and Feds reserve requirements and discount rates are at all time lows. These changes were made to enable the economy to cope with recession. With the economy well on its way to recovery, Federal Reserve System should not opt for any further lowering of interest rates and reserve requirements. Conversely, it should begin to chalk out strategies for increasing them in its next meeting. Though the rates should to be increased immediately to avoid short-circuiting the recovery, their future hikes should be on the agenda of the next meeting. Secondly, it must stop purchase of U.S. treasuries and terminate the program wherein risky securities could be traded for safe U.S. treasuries. To sum up, at the next meeting I would start planning for reversals in open market transactions, discount rate and reserve requirements that were prevalent in the society but did not insist on the modifications immediately. This approach will ensure provision of sufficient recovery time to the economy while removing threats of inflation due to all the increased money supply.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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