Application of Microeconomic Concepts to Daily Life

There are many microeconomic concepts, all which are applicable to my day to day life, however, for this paper, I will be discussing the applicability of choice, opportunity cost and sunk cost to my daily life.

Choice and Opportunity Cost

This is one of the main microeconomic concepts that I have found to be very relevant in my everyday life. Just like other college mates, I have limited time during the school semester. This pushes me to choose what and when to study, and estimating the opportunity cost of every choice I make. The application of opportunity cost concept in my daily life has always been useful in scheduling my study time. For example, I prefer studying on weekdays given that to me the opportunity cost of studying on weekday nights is lower compared the opportunity cost of studying on weekend nights when there are many exciting events taking place. On the other hand, if the only alternatives available to me on a weekend are organizing my clothes or doing my laundry versus studying, I would choose studying because I attach a higher value to studying (a higher opportunity cost). Consequently, the concept of choice and opportunity costs has always come in handy in every decision I make.

In the majority of cases, I have found out that the price of a product or a service best approximates the opportunity cost. Given that the fuel prices have been increasing in the past few years, the demand for Sport Utility Vehicles declined. Consequently, prices for these cars dropped and car dealers gave buyers better deals. I thought of taking advantage of these offers and buy a SUV for myself. However, the concept of opportunity cost made me reconsider my decision because after weighing the alternatives, I noticed that the opportunity cost of having to fuel the car in one year was more than the value of various other alternatives such as renting high quality condos in one of the resorts or purchasing new alpine skis. As a result, I decided not to go for the SUV, and instead spend the dollars on the alternatives.

Similarly, given that I stay close to Beverly Hills, I always feel that prices in my neighborhood are inflated (price discrimination) compared to other parts of the city. As a result, before I make any purchase decision, I evaluate the available alternatives to get the best bargains and make better decisions. In many instances, I prefer going to Costco for my shopping, particularly for household goods. Prices for household goods in Costco are far less than what I am willing and able to pay, as a result I end up getting consumer surplus. I prefer to purchase household goods such as liquors, laundry tides, toilet rolls, liquors, and laundry tides in larger quantities to get quantity discounts than buy smaller units of these goods from a store in Beverly Hills and pay more. However, going to Costco for shopping is not the best choice at all times as it involves a five miles drive, traffic jam, and having to wait in the queue before you are served by the cashier. This is the opportunity cost I must pay to benefit from the reduced prices. This experience has taught me that estimating the opportunity cost on monetary terms is not always the best idea as it tends to overlook other important aspects such as the value of time involved.

Sunk Cost

Sunk cost is another microeconomics concept that is applicable in my day to day life. Whenever I visit Costco for shopping, after I am done with my shopping, I wheel my cart toward the checkout counters. Just like other customers, I will always choose the shortest queue. However, in some cases, the line you think is shorter hardly moves for some minutes. On one occasion, I checked around to see if there is another shorter line, and I noticed a new checkout counter that had just been opened. Without considering the time I had already spent in the first line, I decided to go the new checkout counter. I considered the time I had spent queuing in the first line as a sunk cost that I could not recover.

Despite the fact that sunk costs do not affect decision making, my knowledge of the concept has always been useful in making the most out of a bad situation. I recall in 2010, I chose to pay $250 to repair the clutch of my old Toyota car rather than getting a new one. After three weeks of fixing the clutch, the car`s transmission developed major problems that required more than $2,000 to fix. Given that the market value of my car at the time was approximately $2,000, I chose not to spend the money in repairing the transmission; instead, I opted for a new car. Although the earlier decision to repair the clutch did not affect my decision to buy a new car, at the back of mind I still remembered the sunk cost I incurred in repairing the clutch.

In conclusion my knowledge of the concepts of Opportunity Cost and Sunk Cost have been useful, particularly in making informed financial decisions and evaluating various aspects associated with particular alternatives before making a choice.

Article Review.Hacker economics: Opportunity costs and attacker attention spans.

This article contains Michael Callahan arguments of applying opportunity cost in the field of technology to minimize the hazardous aspects of hacking in the day-to-daylife. He tends to approach the aspects of hacking from the hacker perspective and not the technical aspect of hacking. Consequently, he argues that technical security measures which includes;authentication, proxies, query manipulation among others are always counterproductive. However, he suggests employing a human factor perspective by hitting the hackers by their time and money as well as frustrating their plans. In addition, make them believe they would have their time spent elsewhere due to counterproductive efforts.

Opportunity cost is an action, the best alternative action. The author suggests opportunity cost as the value of all the other goods and services foregone in order to acquire or produce a service. Contrary to the notion that cost are numerate figures, opportunity cost is a strategic decision adopted to optimize benefits by considering what must be given up as a consequence to that decision. A factor always contemplated in many economic occasions as giving the best deal for money.

In this view, the author proposes use of economic means in coming up with security measures against hacking.More specifically he proposes a focus to hackers themselves based on the time they spend in the hacking process. From this perception, frustrating their efforts is essential since they are after instant gratification. This is against the focus of technical approaches since its aim is to hurt the hackers with their time and money. Hence, this approach puts the core principle of opportunity cost in action in in trying to minimize hacking threats. However the author has failed to notice that hackers evolve, and that their success is when they conquer the laid down security measures. In this regard, the mechanism to handle in cases where the hacker does not give up needs mention.

In conclusion, I would contradict in this method since setting an evaluation for its effectiveness could be cumbersome. In essence, the results of technical measures are outright and primary essential in response to any security threats. However,I would propose this method only to complement already existing technical measures.

References

Callahan ,Michael. (2014January 06).Hacker economics: Opportunity costs and attacker attention spans.SC, Retrieved from http://www.scmagazine.com/hacker-economics-opportunity-costs-and-attacker-attention-spans/article/327357/.

Managerial Economics

Institution Affiliation

Construction of new subsidized rental houses can arguably be said to improve the surrounding neighborhood and as such, raising property tax revenues. Additionally, construction of this project in a city raises the assessment of blocks that surround it which in turn puts back great deals of money inform of tax.

As a result of this, subsidized rental houses construction has both negative and positive effects. For instance, the project can make use of available land for use like vacant plots, abandoned lands and even boarded up buildings. However it can also make use of recreational land like parks or older buildings which are in good condition. The project may also provide houses at low rent rates which means crowding in subsidized houses and hence a great effect on the unsubsidized houses owned by the private investment firms (Besanko, 2011).

The spillover effect becomes evident in that the national government increases the construction of rental houses, however, over time the houses become more than the occupants depending on the population growth due to the fact that subsidized houses are easy to afford (Besanko, 2011). The private investment houses on the other hand encounter challenges in getting people to occupy their houses since they are deemed costly. In the end the winners are those involved in the construction of subsidized rental houses and the private investment firms suffer the loss (Besanko, 2011).

Question 2

A government should impose tax on goods with inelastic demand. This is because when demand is inelastic, producers can increase their prices without having to incur a loss on the number of sales and by doing so the producer is able to subject the amount of tax levied to the consumer without suppressing the his overall total income (Sexton, 2013).

Tax on a good shift the supply curve but the actual impact depends on the elasticity of demand. When the demand is inelastic the producer passes most of the tax to consumers and hence more tax revenue is earned by the government (Sexton, 2013). When demand is inelastic the producer increases the price and reduces sales volume hence low tax revenues earned by the government. For example, when the price of bread butter is low it encourages more consumption of bread with butter but when high it discourages the sale of bread, this is elastic demand. On the other hand if the transport fees are increased, people will still travel which makes it inelastic demand (Sexton, 2013).

When a good is taxed the consumer ends up paying a higher price for the goods and the producer receives a low price as opposed to what he would have receive if the good was not taxed (Arnold, 2014). The quantity sold also reduces below the amount which would have been sold before taxation. The difference between the quantity that would have been sold and that which is sold and the difference between the buyer price and the seller price create a wedge like area referred to as the dead weight loss area. This area in affected by several reasons, for example, whether the tax is large or small and the price elasticity’s of supply or demand (Arnold, 2014).

Free rider problem is a situation whereby a consumer consumes more than what they pay for or more than the expected fair share of public resources. This becomes an economic problem only when it leads to a negative effect in production either non production or under production of a public good (Altrichter, 2007). It can also be a problem if it leads to the over usage of common or public property resources. For example, if government disburses fund to resettle squatter or to help refuges a person may take advantage of the funds yet he/she is neither a refuge nor a squatter.

References

Altrichter, C. (2007). Experimental evidence on the free rider problem. München: GRIN Verlag GmbH.

Arnold, R. A. (2014). Economics. Melbourne, Vic.: South-Western Cenage Learning.

Besanko, D., Braeutigam, R. R., & Gibbs, M. (2011). Microeconomics. Hoboken, NJ: John Wiley.

Sexton, R. L. (2013). Exploring macroeconomics. Mason, OH: South-Western Cengage Learning.

Thinking and discussing questions

Free market versus state-directed economies

Free market economies perpetuate significant economic growth compared to the state-directed economies because they solely depend on the capacity of individuals to proactively buy products and services. A free market economy ensures that rapid economic growth is perpetuated since businesses are able to keep up with the prevailing market trends in order to ensure that they can generate money. The ability to generate money ensures that they can purchase more goods and services, which they can in return sell thereby perpetuating economic growth. Conversely, state-directed economies suppress growth since state authority takes control over economic activities through funneling resources as well as the income to a centralized authority within the government. The states thus assume the central responsibility of allocating resources to those programs that are deemed important. These may ultimately stagnate the economic progress particularly when they may not be profitable.

Importance of a democratic political system in promoting economic progress

Establishing a steady democratic political system is crucial in promoting economic progress as this promotes a stable environment within which economic activities can effectively be carried out. Although there is no statistical evidence to back the argument that democracy is a crucial ingredient for economic progress, it is obvious that rates of economic growth under dictatorship tend to vary compared to those prevailing under democracy. Non-development autocrats like Mobutu Sese Seko can be cited as the most suitable examples of non-democratic leaders that perpetuated significant declines in their countries’ economic growth. Political instabilities emanating from civil war and terrorism are known to violate democracy, which in return affects economic progress. A suitable example can be drawn from Iraq, which has rich deposits of petroleum. Its economic progress has however been pulled back by its unstable political system that has been attributed by terrorism.

The link between corruption and economic growth

Corruption is often perceived to be a severe yet unmitigated evil that tends to disenfranchise poor investors, violate stability within the public services and limit investment. While it is obvious that fighting corruption is always important in order to promote economic development, bribe charges often tend to violate this establishment as it always trigger misallocation of resources, which inhibits positive economic progress. Corruption perpetuates bad management practices that deplete a country’s wealth through channeling money into non-productive activities, which subsequently interrupts investment while reducing economic growth. It is however obvious that corruption is not always bad as it can influence increased productivity and the subsequent expansion of firms seeking to reduce their bribe burden. As firms obtain a high level of productivity, the overall cost for relocating to areas where they will be faced with little or no bribe demands reduces, which eventually contribute to high economic progress. This is particularly because such firms may be able to utilize their returns to invest in less corrupt but highly productive and business friendly region.

Amartya Sen’s views on development

Amartya Sen has given varying reasons that indicate the fact that development cannot be merely evaluated on basis of economic development. Among other factors that he perceives as important hence the need to include them while assessing development include social opportunities, transparency, security, political autonomy and economic infrastructures. He argues that autonomy is the basic determinant of individual as well as social effectiveness as it ensures that individuals are offered with the best opportunity to exploit their capabilities to enhance development. Adopting Sen’s concept can influence the development of government policy as government authorities may seek to put in place favorable structures that would facilitate individuals’ freedom. It obvious that Sen is correct when he argues that development is not merely about economic development. This is particularly because various factors that include political and social stability, technological advancement, and cultural orientation can integrate to influence a country’s ability to pursue progress.

Economic Project

Introduction

One of the most important decisions that the management of learning institutions face are capital investment decisions. These are decisions that have to do with when and how much need to be spent on capital facilities and other long terms projects. In the making of their decisions, management requires advice through capital investment analysis.

The purpose of this report is to outline decision criteria for a college that needs to make a decision on whether to purchase a minibus or to hire. This report will therefore present this decision criteria using cost benefit analysis of the options available. The college is interested in choosing the option that comes with the most cost benefits. Since it is not possible for the college to tell how much it will spend on each option over a five year period, an analysis has to be undertaken to evaluate the cost implications of each of the options by bringing their future costs as close as possible to the present cost. The present worth analysis has been used to do this analysis using the Net Present Value (NPV) analysis tool.

Present Worth Analysis

Capital investment analysis, also known as capital budgeting is the process of making decisions concerning capital investments. This consists of evaluation for the need to make a given capital investment, an analysis of the course of action to be taken to meet the identified need, a report to managers showing the criteria for choosing among alternatives, and allocating available funds among competing needs.

Both cost-benefit analysis (CBA) and cost-effectiveness analysis (CEA) are useful tools for evaluating projects. CBA is an analysis tool that links the costs of a project to its key outcomes in an attempt to compare the dollar value of the costs incurred on a project to the benefits accruing from the project (Davidson and Geoffrey 127).

One easy way of comparing two mutually exclusive investment alternatives is by resolving their consequences as at the present time. Using present worth analysis, we are able to determine the present value of all future receipts and disbursements on an investment. It also enables us to establish the present worth of an income generating project. Where the future income and costs of a project are known, then we can make use of a suitable interest rate to calculate the present worth of the project (Davidson and Geoffrey 128).

The net present value method evaluates a capital project by discounting its future cash flows to their present values and subtracting the amount of the initial investment from their sum. All the proposed capital projects will be evaluated using the same procedure and the project with the highest NPV is selected. One advantage of the NPV method that makes it suitable for this kind of an analysis is that it incorporates the time value of money in the analysis of the proposed projects (Needles, Marian, and Susan 1256). Future cash flows are discounted using the organization’s minimum rate of return to determine their present values. This minimum rate of return is equated to the organization’s average cost of capital.

The Problem

We consider the case for a 17-seater college bus, and compare the cost implications for purchasing the bus or hiring the bus form a suitable company. The data required for this analysis include the cost of a 17-seater minibus, the annual maintenance costs of the minibus such as insurance, servicing and repair, etc.

The following cost data has been obtained (Shetlands Island Council 5).

Indicative Prices
Option 1- Purchasing a Minibus	Amount
Purchase price of a 17-seat minibus	$ 40,000.00
Insurance	$ 800.00
Expenditure (Includes, garage rent and minibus maintenance)	$ 3,400.00
Depreciation	$ 8,000.00
Indicative prices
Option 2- Hiring a minibus	Amount
Annual hiring costs for a 17-seat minibus	$ 9,000.00
Insurance Costs	$ 1,600.00

Using this cost data, we spread out a five year cost plan for the two options. This will enable us to determine the cash flows for each of the options. For option 1, there are plans to dispose the bus after five years at 10% of the purchase price.

Calculations and Results

Calculations for the Net Present Value (NPV) of the two options have been calculated using MS Excel and the results are shown below:

Indicative prices		Cash flows
		Year 1	Year 2	Year 3	Year 4	Year 5
Option 1- Purchasing a Minibus
Purchase price of a 17-seat minibus	$ 40,000.00
Insurance	$ 800.00	800	800	800	800	800
Expenditure (Includes, fuel, garage rent and minibus maintenance)	$ 3,400.00	– 3,400	– 3,600	– 3,800	– 4,000	– 4,500
Depreciation	$ 8,000.00	– 8,000	– 8,000	– 8,000	– 8,000	– 8,000
Cash Inflows (disposal)						4,000
Total cash flows		– 10,600	– 10,800	– 11,000	– 11,200	– 7,700
NPV (purchasing)	$-37,390.55
Indicative prices		Cash flows
Option 2- Hiring a minibus		Year 1	Year 2	Year 3	Year 4	Year 5
Annual hiring costs for a 17-seat minibus	$ 9,000.00	– 9,000	– 9,000	– 9,000	– 9,000	– 9,000
Insurance Costs	$ 1,600.00	– 1,600	– 1,600	– 1,600	– 1,600	– 1,600
Total Cash flows		– 10,600	– 10,600	– 10,600	– 10,600	– 10,600
NPV (hiring)	$-38,210.63

Analysis of the Results

From the above results, the NPV is option 1 is $-37,390.55 while that of Option 2 is $-38,210.63. This means that the present value of the cost that the college would invest in purchasing a minibus for use in five years would be $37,390.55 and $38,210.63 if the college were to go for the option of hiring a minibus.

Recommendations and Assumptions

Based on the above analysis, it would be more cost effective for the college to purchase a minibus as opposed to hiring a bus over a five year period. This is because it will cost less evaluated in terms of present value to purchase a minibus. This recommendation is based on the assumption that the annual maintenance costs for a college owned bus will not fluctuate significantly in such a manner that will alter the costs significantly and that the market rates for hiring a minibus will not go down. It is also based on the assumption that the college will be able to fetch a disposal price of 10% of the purchase price.

Works Cited

Davidson, Forbes, and Geoffrey K. Payne. Urban Projects Manual: A Guide to the Preparation of Projects for New Development and Upgrading Relevant to Low Income Groups, Based on the Approach Used for the Ismailia Demonstration Projects, Egypt. Liverpool: Liverpool University Press for Dept. for International Development, 2000. Print.

Khan, M Y, and P K. Jain. Financial Management. New Delhi: Tata McGraw-Hill, 2007. Print.

Needles, Belverd E, Marian Powers, and Susan V. Crosson. Principles of Accounting. Boston, MA: Houghton Mifflin, 2008. Print.

Shetlands Island Council. Internet Resource. Retrieved at http://www.shetland.gov.uk/community_planning_dev/documents/MinibusInfoPack.pdf

Answer to E

The two basic commodities have pressing demands and can never be postponed. The increase in price of basic commodities does not lead to significant change in their corresponding demands, unless there is existence of substitutes. Basic commodities like shelter can never be forgone, but can only attract less expensive options. In the same way, increase in the price of food does not attract significant change in the the product’s demand. The two commodities exhibit a fairly inelastic demand, since increase in price does not affects their demands. In general basic commodities, which do not have close substitutes will always exhibit inelastic demand curve due to their price increase. On the other hand, basic commodities that have close substitutes will elastically respond to the price increase. For instance, the increase in the price of bread will generate an elastic response if the price of rice, which is its close substitute, remains unaffected. The consumers will shift on the substitute, and this has elastic effect on the quantity of bread demanded. In another dimension, the demand of bread will not be affected if this rise has equal effects on price of substitutes. The demand for house exhibits the same trend as bread, and a proportionate change in the cost of houses will not have significant effects on its demand since people can never do without shelter.

Answer to G

Between price limits of 0 and 10, there is a corresponding quantity change of just one unit. This instance exhibit an inelastic demand curve, since large change in price does not lead to a significant change in the quantity of the product demanded; a condition that is necessary at stabilizing revenues. Principally, revenue limits will be unaffected by the change in the price of commodities since quantity demanded does not change so much. The demand curve is unitary elastic at 50, and this has no effect on the quantity sold, and thus generates no effect on the revenue. Finally, the demand curve is highly elastic between a price of 0 and 90, which corresponds to a quantity change oriented between 0 and 9. Elastic demand curve exhibits immense effects on the revenue, since a small increase in price generates high change in quantity demanded and vice versa.

Greece Debt Crisis

In the past five years, the economy of Greece has been crippled by its huge debt. The country has experienced a reduction in economic activity for the past few years. This is mainly because its two main economic sectors (tourism and shipping) have been affected by the economic crisis. The situation has reduced the government revenue, which is much needed to repay its huge debt. With reducing revenue, the Greek debt continues to grow. Another reason why the debt is so high is that the Greek government expenditure is quite high. High government expenditure needs to be matched by high revenue of which Greece does not have. The political reforms implemented to solve the debt crisis have caused riots all over the country. The restlessness in the country further contributes to the economic condition of the country deteriorating. The situation in Greece warrants another bailout by the European Union. However, the bailout seems to be just a delay of the inevitable default that will be fall Greece.

Introduction

The economic health of Greece is deteriorating at an alarming rate. Since the year 2009, Greece has been haunted by a financial crisis that seems to have no solution. The government of Greece has experienced continuous deficit in its budget causing it to be unable to pay its massive foreign debt. Without funds to clear its current debt and an inflated expenditure, the country’s debt problem seem to be compounding year after year. The public authority has tried to contain the effects of its debt on the country’s economy but all action has been in vain. The situation even warranted the European Union to intermediate between Greece and its creditors. The European Union initiated a bailout program in 2010 and was able to give the government 110 billion dollars to salvage its economy. This action also did not work.

Due to the inability of the country to sustain its key economic activities, restlessness has grown into the country. Greece has been plagued by numerous riots by its citizens requiring the situation to be fixed. The citizens however do not realize that they are only compounding the problem by interfering with economic activities. Furthermore, the citizens refuse to pay their taxes, claiming that they have low incomes. This puts additional strain on Greece revenue causing its expenditure to outweigh its revenue. The table below portrays the growth of Greece debt during the recent years.

This paper will look into the cause of the debt crisis and try to recommend possible ways to solve the crisis with minimal negative externalities.

Causes of Greece Debt Crisis

Financial crisis

Greece is an economy that thrives on two major sectors of it economy. The first sector is tourism while the other sector is shipping. Revenues from Tourism and shipping comprise the largest portion of the Greece economy. This two sectors are however highly sensitive to changes in the economic condition of the international market. Therefore, when the world experienced the 2008 financial crisis Greece major sectors were affected.

With decreased revenue from these two sectors, Greece experienced a deficit in its balance of payment. This change was however mostly due to decreased number of tourist in the country. The financial crisis caused tourist to incur enormous expenses in Greece since the country had increased its prices to fight against the economic crisis. The increase in prices drove tourist to the neighboring Turkey, which was just as beautiful as Greece and way cheaper. This situation worsened the economic condition of Greece causing its financial sovereignty to diminish. When the revenue stream of Greece was cut, it started to experience the current financial crisis.

2004 Olympics

An increase in government expenditure must be supported by an increase in government revenue. For the government to spend more on its citizens it must have a new revenue stream. This otherwise will strain the existing resources currently in country. During the 2004 summer Olympics, Greece underwent a heavy spending spree to restructure the whole country to meet the Olympic standard. Infrastructure development is one a positive thing that every government should undertake. A government should not however incur extra cost to develop its Infrastructure and yet it does not have enough resources to cater for the increased spending.

The above scenario affected the Greek government because it restructured the whole country. The government did not only renovate the old infrastructure, but it embarked on a mission to build new ones. New airports, hotels, roads and stadiums were all constructed during the 2004 summer Olympics. This endeavor left Greece with a huge budget deficit that overflowed to the next year and the year after that. The effect of a huge budget deficit was compounded by the fact that the number of tourist were decreasing in the country. This meant that the country expenditure had increased while at the same time its revenue stream was drying up. Such is a recipe for a financial crisis in any country.

Credit risk

Greece is a country that is populated by individual who were not aware of the negative effects of credit. Greece did not caution its citizens on credit risk and the impact it would have on the economy. The Greek economy experienced a boom between 1980 and 1990s. This was attributed to a high rate of investment in the country because it had a strategic position in the European region. With increased investment in the country, the citizens experience enormous financial opportunities. The country then was affected by a frenzy that made all the citizens borrow huge loans to purchase and build apartments to sell or rent.

At that time, the citizens of Greece saw the above opportunity as a wise investment. This however was not so, and when the economy of Greece entered into turmoil, the citizens bailed out on paying the loans they had acquired. The citizens even refused to pay their taxes and started to protest in the streets. This situation crippled the economy of Greece even further and added to its current debt crisis. With reduced revenue from both the individuals’ taxes and foreign tourist, the government current account deficit continued to grow. This was worsened by the fact that economic activities were at a standstill because of the increased number of protest that the citizens of Greece were having. Therefore, with no economic activity and decrease government revenue, the financial condition of Greece had no option but to deteriorate.

Corruption

Corruption can eat the economy of any country. The reason is that corrupt leaders will only make economic decision based on greed. They will effect policies that will benefit themselves and not for the benefit of the whole country. Corrupt leaders will also misappropriate the funds of the government and even embezzle it. Most corrupt countries find themselves with huge budget deficit because the money was used for personal reasons instead of the development of the country.

The above scenario is what has caused the Greek nation to experience the financial crisis that it is in right now. The debt in Greece is duly influenced by bribery and patronage. The Greek government has been losing an equivalent of 8% of its total gross domestic product each year due to corrupt activities. A loss of 8% of the government funds is quite a huge number to be misappropriated in any government. This means that if the amount is compounded over a period then the government will always find itself in a deficit. Corruption has caused the government expenditure to be more than its revenue year after year disabling the ability of the government to pay its debt. The result of such activities has contributed to the financial crisis in Greece.

Proposed Solution to Greece Debt Crisis

Bail out by the European Union

The European Union can implement measure to reduce the debt owed by Greece. The union can also assist with the Greek government, by providing funds to aid the economy. The union has already bailed out the Greece by providing their economy with 110 billion Euros in the mid months of 2010. Such a strategy will definitely assist the Greek government reduce the debt that is crippling its economy. It is in light with this policy that the European Union constructed another bailout package, which can help eradicate the financial crisis in Greece.

This new bailout package involves injecting an additional 130 billion dollars to the Greek economy. The bailout also involves concession by Greek creditor s to devise new loan agreement that have lower interest rates than the original loan agreements. The union also found a way to bring the Greek lenders to a consensus to shed 40 billion euro over the total debt load of the Greek government. Such measure will drastically reduce the loan that Greek owns even if it will not eradicate it completely.

The bailout package proposed by the European Union is however dependent on various factors. The reason is that if the spending of the government is not monitored then the bailout package will be of no use. This is because the debt will continue to grow instead of shrinking as everyone is hoping.

Steps taken to ensure success of Greece bail out

Drastic spending cuts

:-

in order to ensure that the Greek debt does not increase, the government has to undergo massive spending cuts.

Tax rise

:

–

the citizens of Greece also need to help revive their economic situation. This

will be achieved

through increase in tax so that an increase in the government revenue can be experienced.

Labor

market and pension reforms

Reason against Greece Bail Out

Considering the economic condition of Greece, most economists believe that it is better for the European Union to let Greece default instead f bailing it out. They think that a default will benefit Greece more if the fall out will not trickle to other European nations. Below are some of the reasons why a default is more favorable to a bailout of the Greece economy.

Default is inevitable

Most economists believe that no matter the measures taken to salvage the Greek economy, its default is inevitable. The rationale behind this thinking is because asking creditor to rollover their loans and tae a loss is just the same as bluntly telling them that they will not be paid. This means that even if the Greek tries to be polite and in the process, it will still default on the creditors loans.

Speculation

Creditors who have loaned Greece money already speculate that Greece will default. This means that the creditor have already prepared for the default of Greece and therefore if it defaults there will be no adverse effects on the economy of the world. The world is already prepared because clear indication of a default exists since two year ago. The main reason why investor speculate that a default is inevitable is because the returns that the Greek bonds are currently yielding in the market. A return of 100 percent is a clear indication that no matter the strategy taken to salvage the economy, a default is inevitable. Therefore, preparation by the investors will soften the negative effects of any default. The rationale behind this thinking is that when an individual knows that something bad is going is going and prepares for it, then he will not be affected as the individual who lived in denial. This means that the investors in this case have already prepared for the default of Greek government.

Ineffective bailout

In 2010, the European Union instituted a bailout program for Greece. Since that time, the situation is Greece has only degenerated instead of improving. This indicates that if the first bailout did not work, what makes the European Union think that the bailout this time will work. Due to this reason, it is evident that injecting even more money in the Greek economy is wasting money and resources. Rational investors would not waste their good money to chase after bad money. This means that the loans given to Greece have already disappeared, it would be unwise to use other resources to try to pay a debt that will never be cleared. It is already clear that the first injection of money that the European Union used to bail out Greece had no effect. Since investors are required to base their decision on the present value of an investment or past performance, then investing more money into Greece will be an unwise investment decision. This is because the past has already proven unfruitful and the future of Greece seems to be bleak.

Lack of faith

Investors do not have faith that the Greek government can fix its economic crisis. The proposed tax hikes and spend cuts are insanely impossible to carry out. Further tax hikes and spending cut will further worsen the economy even more. The way events are unfolding in Greece the only best solution is to default and start building their economy a new. The reason individuals do not have faith in the government of Greece is because its own citizens do not believe that the government can salvage its economy. This has caused riots in Greece bringing all economic activities to a standstill. Increased riots and restlessness in the company pose a threat to the conditions set by the European Union for a second bailout. The citizens are already rioting because of high taxes; it is common sense that a further increase in taxes will definably inflame the situation. Due to the mechanism proposed to deal with the bailout, it is evident that it will fail. This has caused the faith of investors and international community to deteriorate.

Better alternatives with the bailout funds

The money that the European Union is intending to use as bailout funds in Greece can be put to better use. The reason is that other scenarios in the European Union can benefit from such funds more than the Greece. The opportunity cost of providing Greece with such funds is higher than the actual benefits that will be derived from bailing out the Greek government. For example, the bailout money can be used to help Italy and Spain whose economies are crucial to future of the European Union.

Social turmoil

The bailout program spells out programs in the social health of the country. The citizens of Greece already feel frustrated with high taxes. Increasing their taxes once more will definitely fuel the already existing riots in the country. Furthermore, the bailout program is aiming at shrinking the Greece economy. This means that unemployment will increase in the country. This is another program since the unemployment rate in the country is already stands at 16%. If Greece is forced to shrink it economy, this means that more people will be forced out of their jobs. The resulting factor will be an increase in the rate of unemployment. The citizens of Greece are already protesting high unemployment rates. Any further increase in the number of unwaged individuals will increase the unrest in the country. Further more if the rate of unemployment increase then the gross domestic product of the company will reduce. The stage at which Greece is in requires an increase in its gross domestic product and not a decrease. A decrease will only worsen the situation of the country. Therefore, if the measures taken to salvage the economy are doomed to fail, then the best option left is to default.

Negative Effects of a Default

Even though most economists believe that Greece should default, it is wise to note that some negative effects exist in defaulting. The reason why most individuals are for a default is that the default is inevitable. It is better to start building the Greek economy now than to wait and hope that it will not default. The sooner the problem is tackled the sooner the economy of Greece can be revived. The consequences of a default of Greece can be approximated correctly. One can only speculate on the amount of damage the amount of damage that the default will cause on the European Union. Therefore, since the exact outcome a default cannot be determined, it is best if all possible outcomes were analyzed. This means that the bad to the worst scenario be analyzed and then the European Union can determine whether it is appropriate to let Greece default or not.

Bad Scenario of a Greek Default

If Greek government defaults in paying its creditors, then it will be cut from the euro zone. This means that Greece will have no option but exit the European Union. The first negative effect of a withdrawal from the euro zone will be Greece will not have any funding from outside. This means that the Greek government cannot run because it requires funding from outside the country to finance its expenditure. The upside of this problem is that the government can redirect the funds it would have used to settle its debt to finance its operations. If the effects of the default only extend to this limit then the European Union would consider this a win for their union.

Worse Scenario of a Greek Default

The above scenario can only work if the citizens of the Greece do not panic because of the default. It the citizens panic and realize that the country is going to remove itself from the European Union; they will withdraw their money from their banks and invest it outside the country. The reason is that a withdrawal from the European Union means that the country will have to print its own money. Therefore, Greece will have to resume using their old currency of which it will be restored at a very depressed value. This means that most of them will lose a big portion of their investments and savings. Therefore, if all the citizens withdraw their money from the banks then the country financial sector will undergo a complete meltdown. If this scenario is the fall back of the default of Greece then the European Union will just hope that the chaos will end there and it will not affect other nation of the European countries.

Worst Scenario of a Greek Default

The worst scenario that can be realized from a Greek default will be if the panic from the citizens of Greece affects the entire international community. A panic will first affect the investors who have invested in troubled European Union countries like Portugal and Italy. If the investors fear that these countries will also require another bailout just like Greece then they will be alarmed at the possibility of this occurrence. The citizens of Portugal can also panic and lose faith in their economy. Just like the Greeks, they will then rush to their banks and withdraw their saving causing another financial meltdown in another European country. This will in turn alarm the investors in Portugal causing them to dump their holdings causing the borrowing cost in Portugal to soar. If the events continue to unfold like this it mean that, the European Union will have to bailout the Portuguese economy. This will cause a panic in other troubled nation like Spain and Italy causing an endless probability of European nations failing.

Unorthodox way to deal with the Greece Debt Crisis

Since more than one country in the European Union is facing a financial crisis, maybe the solution lies in a radical option. The European Union can opt to redraw its boundaries and divide the European Union in two portions. This means that the union can be divided between the southern countries and the northern countries. The union can therefore accord the southern countries the southern euro while northern countries use the northern euro. This means that upon trading the currencies the southern euro will depreciate in value as compared to the northern euro.

This option is advantageous to the southern countries like Greece, Spain and Italy because currency depreciation increases the attractiveness of the country’s investment opportunities. These countries can increase their economic activities because their exports will be attractive in the international market. This means that these countries revenue will increase salvaging their economic crisis. Even though this is an unorthodox option, it might just help the European Union to remain functional otherwise it might fail.

Conclusion

In conclusion, the debt crisis in Greece complicates the nature of the European Union. It places the union in a dilemma of whether it should bailout Greece or let it default. The probability of a bailout reviving the Greek government seems to be low considering there was an initial bailout that did not work. Conversely, the effects of a default by Greece cannot be measured and this makes a decision about what to do to Greece difficult. Since the worst scenario that can arise from a default of Greece is too extreme, the European Union should try to help Greece. The help however should be given with strict condition and policy reforms that will help reduce the debt owed by the Greek government. The citizens of Greece should understand that their country is in turmoil and should assist to revive itself instead of rioting in the streets and worsening the situation. Therefore, a bailout seems like the only option to solve the debt crisis in Greece.

Global Economic Contraction and Employment

Introduction

The global economy is in a ruthless recession that is inflicted by an enormous financial crisis as well as a heightened loss of assurance. The use of wide-ranging and unorthodox polices to response to the recession has made some progress in stabilizing the financial markets. The policies have not yet brought back the assurance and confidence. Global economy normally is built on the context of derivative illusion. Far and wide, it is true that the sharp global contraction as affected the developing countries as well the developed ones. In the year 2008, the Global Industrial Production is estimated to have declined by a value of twenty percent. The hard hit areas were from the Eastern Europe as well as the central Asia. Other countries that produce capital goods were equally affected. The 2008 global GDP decline was the worst because it at slightest percentage points lower than the potential, only the economic effects of World War II can match that. During the recession, there was drop in the commodity prices, the developing countries witnessed a collapse in the tourism earnings; the remittances of workers were halted. The global economic contractions also lead to decreased amount of tax revenues (World Bank, 2009).

The global economic contraction has negative consequences on the employment. It has hit more than half of each nation-working adult in a straight line. Most of the economic sectors of these nations has been pushed into pay cuts, total unemployment, and reduced working hours. According to the International Labour Organization (ILO), the number of the unemployed in the world added to approximately thirty four million between the year 2007 and the year 2009 putting the job loss rate at 6.6 percent. As far as the job losses are concerned, the developing countries and the transition economics were hit most. The global economy contraction led to the increase in the vulnerable employment. The recess caused some gaps in the labour market and it were women who were hit badly because they could either find themselves in the informal sector or totally unemployed (ILO, 2010).

The start of the crisis

The start of the crisis is traced back to the steep contraction in credit as early as august 2008. The step taken by the United States Federal Reserve and other central banks to lower the interest rates so that they could lower the damage brought by economic crisis fuelled the contraction. The low bank rates used by various central banks led to a high mortgage borrowing. It also persuaded more than a few homeowners who had mortgage to refinance them. A financial innovation saw mortgage origination being separated from the lending decisions. The financial industry had expanded their funds so that they increase the mortgage lending. This could enable the mortgage lenders to sell the home loans to investment banks, the investment banks could sell the mortgage to investors who were in for sky-scraping yielding venture products in the low interest environment (ILO, 2009).

When the finance industry expanded rapidly, the quality of the mortgages were deteriorating and it finally became disagreeable when the homebuyers were over leveraged. The impairment rates started to explode in the year 2006 without slowing down the rate at which the lending was done. The involved parties were addicted to the high profits that they could gain because of the selling of the securities. Most of the banks had Structured Investment Vehicles (SIV) to buy and hold the securities in their own accounts so that they could take full advantage of returns. When the era of low interest rates began to end, the mortgage rates were reset and they became higher, it forced more borrowers to default the payment, and the crisis began to unfold (ILO, 2009).

Impacts of global economy contraction on the employment

The global economy contraction had impacts on the employment sector in the financial services and other sectors of the economy.

Financial services employment

The financial services sector has various subsectors including banking industry and the insurance industry. The banking industry comprises of retail banking and whole banking both in both in regional and global financial market. The insurance industry consists of life insurance and reinsurance. It is not surprising to see employment in the financial sector greatly affected. The sector has been the epicenter of the economic and financial crisis. Between August 2007 and February 2009, the total number of the layoffs in the sector was announced to be three hundred and twenty five thousand. This number does not include the layoffs from the self-regulating mortgage brokers as well as the number of contractors that provide the subcontracting services to the financial institutions (ILO, 2009).

Future global economy contraction and the financial services employment

As the global economy is sinking further to the recess, the financial institutions assets are experiencing bigger mutilation. Jobs losses are on the rise, the financial firms are considering an additional round of job cuts. Nevertheless, redundancies are anticipated in front and middle office roles. Moreover, back office roles also anticipating the redundancies. It is more likely to engage occupations ranging from sales, management, office, and administrators as well as the human resource. The information technology workers that were freed from the first redundancy beckon may not survive the clear cut from the anticipated future contraction. The investment bank industry is expected to see more of its jobs cut due to the mergers (ILO, 2009).

The future global contraction economy in the financial sectors will see financial centers like New York and London bear the brunt. The consolidation and bankruptcies will to a considerable financial job loss in these major centres. The employment in credit categories will be reduced. The London status as leading global finance hub will see more people loose jobs when the restructuring takes place. Once the financial institutions are headquartered in other places, the employment impact in the United Kingdom will be negative (ILO, 2009).

Other sectors of the economy affected by the global economy contraction

The quick contraction in monetary growth is translating to redundancies, which are firing mainly to the complete finality of a business. The contraction has also led to the finality of the employee’s work place and diminished necessity for the employees to work for a specific kind in a business. Redundancy is the process that begins when jobs begins to disappear due to economic downturn. During the recess, the employees in a particular organization are considered surplus it may result in termination of their contracts. The only way to avoid the termination of employment contracts is the relocation of the workers to a suitable position within the organization (AAPAM, 2009).

The contraction in the global economy has manifested itself in enormous twists in the labour markets. The contraction has increased the unemployment and the vulnerable employment rates in tourism, mining, construction and other sectors. It has also widened the social gaps in most countries that have been hit by the crisis. Because of the contraction, the unemployment has it indiscriminately the developing and the developed countries. The reasons for the unemployment and the scale of the problem vary form one country to another but the dimension remains the same. If United States is considered as an example, its unemployment rate reached ten percent by October 2009. The figure was a double of the years from 2007 to 2008. The rate had reached its twenty-six year peak. Across the Europe, the increase in the unemployment rate was by more than two percent. The instantaneous impacts of the global recession were seen in the unexpected job loss in the entire export sector as well as the tourism sector (ILO, 2010).

For those countries that are normally linked with the global economy in the case of tourism sector and exports drives in the Commonwealth Independent States (CIS), great in terms of job losses. The rise in unemployment in this Commonwealth Independent States (CIS) was estimated to be up to thirty five percent in the year 2009. In Zambia alone, more than ten thousand workers were from the twenty thousand were retrenched in the mining sector. In Gandasari a small urban community in Indonesia, more than ten percent of the permanent workers lost their jobs. In the same community, more than forty percent of the temporary workers also lost their jobs (ILO, 2010).

The global economy recess saw tens of thousands of those who were working in the automobile industry in Brazil lost their jobs. In turkey, the automobile workers also lost their jobs. Numerous workers in the tourism sector of Egypt lost their jobs; the same situation was seen in the tourism sector of Belize. In china, more then twenty million domestic migrant workers were laid off. The returning migrants aggravated the unemployment problem in some countries. The unemployment rate in Indonesia was high because the economic crisis in the Malaysia forced two hundred thousand workers to come back home because of economic crisis in the Malaysia. Moreover, the statistics of the unemployment may not reflect the real severity of the impact of the global economic contraction on the unemployment because there is a rise in vulnerable employment (ILO, 2010).

The contraction of the global economy led to the deterioration of the social gaps in the labour market. Women who were employed in the greatly affected export leaning segment found themselves either in the informal sector or totally unemployed. These greatly affected export leaning sectors were manufacturing industries that consists of food processing, textile, footwear, and electronics. In general, more than fifteen million women were not employed. The youth unemployment rose from 11.8 percent in the year 2007 to 13.4 percent in the year 2009. Most of the graduates could not find rewarding employment (ILO, 2101).

Several sectors patterns of employment during the global economic contraction

During the crisis, there were employment changes that differed considerably across the major employment sectors. There were job losses in the manufacturing sector, in third quarter of the year 2009, more than nine million jobs were lost when compared ton the other previous years. In the mining sector, jobs were also lost. During the crisis, the public employment in sectors like health and education experienced employment growth. The patterns of employment in different regions differed greatly. The employment in pacific and Asia has shown a great resilience for the economic activities when compared to the America and Europe. The global economic contraction caused a minor employment effects in the mining and construction sectors in pacific and Asia. It is only the manufacturing industries that were hit by the contraction these regions just like the other parts of the world. The global economic contraction has seen more changes in the employment levels when compared to the wage structure changes. For other sectors like the hotel and restaurant, they did not experience employment reductions but there were wage reduction. The contraction forced more sectors to reduce the average weekly working hours (Jansen & Uexkull, 2010).

The Future Global Economy Contraction and Employment

The future of the global economy is likely to be awful with numerous crises that will converge. The global economic contraction will continue to hit the employment sector. According to Chartered institute of personnel and development (CIPD), the job market will worsen in the near future due to the global economic turmoil. The predicted public losses have forced firms to stop their hiring plans. Most of the sectors are adopting the wait and see policy towards the economy through the lowered recruitment and the fewer redundancies. The Chartered institute of personnel and development (CIPD) further asserts that the employment situation may worsen if the euro zone crisis pushes the world back to the recession. It is widely believed that the intentions of recruiting are falling and this raises the unemployment (bbc.co.uk, 2011).

The future global contraction will affect the future employment in different sectors. The different sectors will need to react differently to maintain the situation. For example if we consider the health sector financing contraction, the growth in the number of jobs associated to the health workers will exceed the nation’s average rate for all the jobs. This will follow the moderation of existing trends. The flow of the practitioners into the work force through graduation from education needs to be regulated. Decisions regarding the working of the market in terms of the supply and demand have to be balanced (Institute of Medicine, 1989).

Conclusion

The global economic contraction has brought some serious impact on the economy. The greatest impact has been increasing the numbers of unemployment. The problem has been realized because of depreciation of states currency. This lead to decline and total collapse in many industries ranging from banking sector to construction sector. The recesses lead to high rates, which contributed to the increase in unemployment because many industries could not carry on with their productions. The global economy contraction also hit the insurance industry; there was a rise in the number of beneficiaries from the unemployment insurance benefit. The recess caused much unemployment in the urban areas when compared to the rural areas. The global crisis saw mostly the number of registered workers in the agricultural and the non- agricultural sector increase. The future economy will still experience contraction, the recruitment trends will decrease.

References

African Association for Public Administration and Management (AAPAM). (2009). “The Impact of the Global Economic Crisis on Employment and Labour Markets in African Countries a preliminary Survey” retrieved March 22, 2012 from http://www.kia.ac.ke/images/pdf

Bbc.co.uk. (2011).” Jobs market ‘slow, painful contraction’ predicted” retrieved March 22, 2012 from http://www.bbc.co.uk/news/business-15715460

Institute of Medicine (U.S.). (1989). Allied health services: Avoiding crises. Washington, D.C: National Academy Press.

International labour office (ILO). (2009).” Impact of the Financial Crisis on Finance Sector Workers” retrieved March 22, 2012 from http://www.ilo.org/wcmsp5/groups/public/@dgreports/@dcomm/documents/meetingdocument/wcms_103263.pdf

International Labour Organization, (ILO); Global Employment Trends, Geneva, January 2010, retrieved March 22, 2012 fromhttp://www.ilo.org/wcmsp5/groups/public/—ed_emp/—emp_elm/—trends/documents/publication/wcms_120471.pdf

Jansen, M, & Uexkull, E (2010). “Trade and Employment in the Global Crisis” retrieved March 22, 2012 from http://www.ilo.org/wcmsp5/groups/public/@dgreports/@dcomm/@publ/documents/publication/wcms_141911.pdf

World Bank. (2009). “Swimming against the Tide: How Developing Countries are coping with the Global Crisis” retrieved March 21, 2012 from http://www.un.org/ga/president/63/PDFs/WorldBankreport.pdf

Week 3 Posting

Question one

Correlation is the quantitative relationship between variables that neither translates nor prove two variables cause each other. Conversely, causation refers to the fact that events happening at the same time result to a cause and effect affiliation. Therefore, the strength of correlation does not depend on the direction of the relationship even when directions switch. This is because the two variables ought not to affect, cause or interfere. Zero correlation refers to an un-existing relationship among variables in a statistical measurement. For example, the weight of a person does not affect the amount of income earned. Thus, income levels and weight have a zero correlation relationship as they are not interlinked (Lind, Marchal & Wathen, 2005).

Question two

There are three possible correlation distributions namely; positive, negative and zero. Positive correlation refers to a relationship among variables during which the points are close to a straight line as they slope to the upper right from the lower left. When a variable reduces, it attributes to the decrease of the other and vice versa. For example, during quality control, when tires fall within the acceptable range also referred to as the confidence level, they boost the quality level of the tire resulting to a positive correlation. However, when they fall on the lower end of the production line, it is a negative correlation as it does not guarantee the tire’s quality. Thus, negative correlation occurs when points lie closely to the straight line as they slope towards lower right from upper left. When a variable increases, it causes the other to reduce and vice versa. Zero correlation involves linearly subsequent points in a curve. Thus, they lack a correlation relationship as they are not examined on a straight line but rather randomly on a curvilinear. For example, during hypothesis testing the confidence intervals in a bell shaped curve represent zero or no correlation (Lind, Marchal & Wathen, 2005).

Question three

Correlation coefficient also known as Pearson’s Product Moment highlighted as “r” refers to a statistic applied in measuring the degree of strength in a relationship between variables such as; driving under influence of a substance and the risk of causing an accident. Coefficient of determination highlighted as “r”2 is a prediction of future results based on other variables. Thus, it determines how data points fit in a curve or line in statistical models. Non-linear is a system that fails to satisfy the superposition principle. The outputs are directly proportional to the inputs thus; variables and functions in this system are unknown in an equation. Reliability refers to the ability of a variable being depended or relied on in an equation (Lind, Marchal & Wathen, 2005).

Question four

Least square is a method applied in approximating over–determined systems where equations have multiple unknowns. Least square line of best fit therefore translates to an overall solution being provided in order to decrease errors made in an equation with squares (Orris, 2007).

Question five

The regression equation in the regression analysis as an investigative tool in order to permit estimation of variables based on each other. It has four components; linearity, homoscedasticity as well as normally distributed and independence error terms. Linearity refers to the relation between linearly analyzed variables and their additive effects. Homoscedasticity is the constant variance of error terms. Normally distributed error terms follow a normal distribution while independence of error terms is not a correlation of successive residuals (Doane, & Seward, 2007).

Question six

In the real world, it is possible to utilize the regression analysis. This is mainly because samples used in regression analysis ought to represent a population like the number of people in the world and financial data through independent and dependent variables. Some of the regression analysis values include; unbiased estimates, consistency as well as efficiency with regard to linear estimate samples (Doane, & Seward, 2007).

.

Reference

Doane, D., & Seward, L. (2007). Applied Statistics in Business and Economics, New York, McGraw Hill/Irwin.

Lind, D., Marchal, A., & Wathen, S. A. (2005). Statistical Techniques in Business and Economics, New York, McGraw Hill/Irwin.

Orris, J. B. (2007). Basic Statistic Using Excel and Megastat, New York, McGraw-Hill/Irwin.