1: Basic Concepts of Macroeconomics and how to Measure Economic Performance of a Nation Macroeconomics is the branch of economics that studies economic collections such as, the overall level of prices, output and employment in the economy. It is the way economists measure the behavior and functioning of economies. The key indicators are Real Gross Domestic Product, unemployment rate, inflation rate, interest rate, level of the stock market, and exchange rate. The total economy is varied and is consists of a huge number of goods and services being bought and sold by countless consumers, government, firms, and other economic agents.

Gross Domestic Product can be used to measure the economic performance of a nation. Three approaches to measuring GDP of a nation are the expenditure approach, the income approach, and the output approach. Expenditure approach normally measures the GDP of a nation by adding collectively the expenses of all sectors in the final product market. The expenses are consumer expenditure, firm investment, and government expenditure of goods and services. Expenditure approach can also measure the net of exports and imports. This is the easiest way to calculate GDP of a nation from statistics point of view.

Income approach measures GDP of a nation by adding all the incomes that has been paid by firms and government to households for factors of production. Income approach measure also includes interest on capital, wages and salaries, rent for land and profits. More often than not, GDP is calculated using income approach, even though some figures like income that is earned by the self-employed needs to be imputed because they are difficult to measure openly. Output approach measures GDP by adding jointly the value added of each Sector of the economy. These sectors may be agriculture, transport, manufacturing, finance, and banking. This approach is theoretically easy but it is difficult to calculate.

2: Different phases of business cycles, and the causes and cures of inflation/unemployment and how they affect the economy A business cycle is defined as an alternating rise and decline in the level of economic activity. It may extend for over several years thus destabilizing the economy of the nation.

Phases of business cycle
The ordinary phases of business cycles are recession, peak, recovery, and trough. In the recovery phase, employment and output rise towards full employment. In the trough phase, output and employment bottom out at their lowest levels. At peak phase, business activity reaches a temporary maximum, and in recession phase is a period of decline in total output, income, trade, and income. Inflation is the term used to describe a rise of average prices through the economy. It means that money is losing its worth. The main causes of inflation are too much money at disposal to obtain the few goods and services, high prices of imported commodities, inflation from internal as well as external sources, and inflationary effects of government. The regulatory intervention of government in the economy also causes inflation.

The main causes of unemployment are lack of education, job opportunities, and unequal treatment of employees. The relationship between unemployment and inflation has held the attention of economists for a long time. Low unemployment rate tolerates high rate of inflation. The main effects to the economy are it leads to depreciation in currency value relative to other currencies, reduced capital formation, and unequal distribution of income. In cases of international trade, it affects the balance of trade especially where fixed exchange rates are imposed. It also affects negatively the spending habits of both investors and consumers thus low investment. Inflation can also lead structural unemployment in the economy. Inflation leads to high speculative activities in the economy thus, altering interest rates. High rates of inflation prompts trade unions to demand higher wage rates, which serve to inflate the economy even further.

8A + 6B = 48, If A= 3 B= 4, If A=2.5 B= 3

1.2
Y=MX+C
48=0.5X+1.2
X=93.6
If the income increases to for example 60, then
60= 93.6M +1.2
M=0.63. This means that the budget line will shift to the left
2: Free products
An economist would say the product is not free because a product is free if it can produce all the goods that people want or need it to produce.
3: Importance of ceteris paribus
Ceteris paribus, expresses the requirement that conditions, external to the ones that are subject to the explanatory theory, are steady, and the only the variables under study are thought to vary. When any one of the condition that the clause refers does changes, the test itself will not succeed, but not the theory under test. Ceteris Paribus is important in the formulation of economic theory when forming assumptions. For instance, when formulating theory to show a causal relationship between two economic variables, Ceteris Paribus enables the researcher to hold some factors constant and manipulate other variables in the economic experiment. A case in study is when analyzing theory using national income statistics where the researcher will hold factors affecting market prices constant. In demand analysis, the concept of shift and movement odd demand and supply curve heavily apply the concept of ceteris paribus to analyze factors affecting consumer behavior. 4:
a
 1 2 3 4 5 6 7 8 9
B: Opportunity cost for producing the first unit of planes
Moving from B to A, we have
14-0= 14 and 6-7 = 1
The opportunity cost of 14/14 grain metric tons is 1/14 air planes. This means that the opportunity cost of I grain metric ton is 1/14 airplanes. The opportunity cost of 1/1 airplane is 14/1 grain metric tons. Therefore, the opportunity cost of 1 airplane is 14 grain metric tons.
The opportunity cost of producing the first unit of planes is 14.

C: Opportunity cost for producing the fourth unit of planes
The fourth unit of planes involves moving from E to D.
44-36=8 and 3-4 = 1.
The opportunity cost of 8 grain metric is 1 air plane. This means that the opportunity cost of 1 grain metric ton is 8 airplanes. The opportunity cost for fourth unit of planes is 8.
5: Demand and supply curve


C.
There will be a short of 10,000

6:
P=24-Qd
Equation
P=3 +2Qs
24-Qd=3+2QS
2QS + Qd= 21
Qd-Qs=3
2Qs+Qd=21
Qs-Qd=3
Qs=6, Qd=9
P=3 +2Qs
P=15
The ceiling price the government is $15.

MICROECONOMICS 1

 

 

 

 

 

The Effects of BP Oil Spill

Introduction
BP is a major oil company, which once stood as British petroleum, but currently the initial are intended to stand at their own. The official name of the company has been BP PLC from the beginning of the year 2000. The company is the third largest oil company and the fifth largest worldwide corporation in the world. The company has its headquarters in the United Kingdom with operations in seventy countries. The company financial viability is sustained by petroleum exploration, refining, production, and marketing. Power, gas, and renewable are the businesses that are going to sustain the company futures financial viability. The BP oil corporation is the world-leading supplier of photovoltaic.

Background of the company
BP began its operations as the Anglo-Persian oil Company in 1909 and by 1914, the British government had acquired majority of the shares. After 1935, the Anglo-Persian company was known as Anglo-Iranian Oil Company and it depended mostly on Iran for most of its oil. Anglo-Iranian changed its name to British petroleum in the year 1954 once the nationalization of Iranian industry was done. The company was doing business in Iran and the Iran Oil Participants Ltd had 40% interest in the consortium. In 1965, BP discovered natural gas in the North Sea and by 1970; the company had discovered oil in the same place. The company discovered and developed oil fields in various parts of the world and among them was Prudhoe Bay in Alaska.

In 1977, the British government sold the shares of BP to the public and the company was fully privatized by 1980. During the privatization, the Kuwait Investment Office acquired a considerable stake in the company. Fearing that the Kuwait government could seek board representation because they had a large share, the British government blocked Kuwait from gaining control. In 1987, BP acquired Britoil PLC, which a privatized oil company formed from the formerly nationalized British oil company. Britoil was a significant North Sea producer and accounts for a greater part of North Sea activity. BP merged with Amoco in a deal worth fifty two billion dollars in 1998. In 2000, BP Amoco acquired Atlantic Richfield Company in a deal worth twenty seven billion dollars. The BP Company developed high interests in Russia and in 2003, merged with Tyumen Oil Company creating a TNK-BP joint venture. BP alleged in 2008 that Russian partners were using strong-arm tactics to take control of the joint venture.

Shore drilling
The first oil well to be drilled was in Pennsylvania in the 1859 and was done by Edwin Drake. The well produced fifteen barrels a day and it was sixty-nine feet deep. The area rapidly boomed and it became the father of the modern industry. Offshore drilling was started because of increased demand for the crude oil. Offshore production of oil usually involves superior environmental risks ranging from oil spills from oil tankers and pipes transporting the oil to leaks. Oil recovered from the ocean floor normally contains chemical and toxics that are arsenic. The seismic waves that are used to locate the oil in the sea can harm the sea mammals and cause disorientation whales deep in the sea. Crude oil varies mostly in the appearance and it depends on its composition.

Incidences of oil spill during drilling and transportation
Offshore oil spills occur during various stages of well drilling and repair operations. It can occur when oil is being produced at the offshore wells or when oil is being transported by means of flow line, tanker, or underwater pipe. Offshore drilling contributes up to two percent of waste oil into the ocean while the transportation contributes more than five percent. Disposal of offshore production pollutes the ocean, the oil spilled from ships, and tankers include the transportation fuel that is used by the vessel itself, their cargos or heating oil.

When oil is spilled into the ocean, it spreads into the primary water surface depending so much on the composition and the relative density. In the case of rough seas, the oil slick may break up. The water currents, the waves and wind may force the oil slick to drift in a very large area thus causing impacts to the open ocean, coastal areas, and the terrestrial habitats that is found in the path of the drift. If the oil contains more volatile organic compounds, it will partially evaporate thus becoming more viscous and dense. If the oil reaches the shoreline, it will interact with sediments like boulders, sand, and gravel and this will cause erosion and contamination. 

Major oil spills that have occurred in the ocean
There are major oil spills that has been witnessed in the world among them are, Ixtoc 1well of Mexico in the year 1979, the deepwater horizon well in United States of America in 2010, and the Amoco Cadiz tanker of France in 1978. The Nowruz field well in Gulf in the year 1983 and the Castillo de Bellver tanker in South America that occurred in 1983 have also been considered as major oil spills. Other major oil spills are Torrey canyon tanker of United Kingdom in n1967, the Atlantic empress tanker of Trinidad and Tobago in 1979 and the Odyssey tanker of Canada that occurred in the year 1988.  See Exhibit 1

BP oil spill
BP deepwater horizon rig station is located forty miles off the Louisiana coast in Gulf of Mexico (see exhibit 2 for the drilling rigs). Tuesday, April 2010 saw the company get some accident. The accident began when there was a well integrity failure. The failure was later on followed by a loss of control of the pressure of the fluid in the well. The device that could normally seal the well in the event that a loss control failure occurs commonly known as the blowout preventer failed to fit into place. The hydrocarbons shot up the well at a rate that was uncontrollable. The hydrocarbons ignited and there were a series of explosions on the rig (see exhibit 3 for explosion). This is because the cement and the shoe track barriers that were used at the bottom of the Macondo well did not contain the hydrocarbons within the reservoir. After the well flow was in the rig, it was routed into mud gas separator, which made the gas to vent in a straight manner to the rig. It was normal for the rig blow out preventer to be activated automatically after the explosion but it never happened.

The oil flow took so long to be stemmed even after various techniques were applied in the efforts to pug the leak. The lowering of top hat in order to capture the oil spewing from the riser also failed. Even the idea of killing the well by injecting heavy and strong mud into the blowout preventer also failed. Nevertheless, the engineers decided to bolt the sealing cap, which was on the top of the blowout preventer. The efforts provide a temporary fix to the problem, it enabled the engineers to lower the pressure at the wellhead, and it permanently sealed off the flow paths. The size of the area affected by the oil spill was indeed difficult to access. Most of the oil did not reach the shoreline because it was on the surface of the water and more than one thousand miles of the coastline was affected. The coastline was heavily oiled. The clean up process began and there were series of clean up machines that were used (see exhibit 4) for the clean up.

Methods used for oil clean up
The ethical viewpoint of the BP oil spill is seen when methods used to clean up the oil spill is analyzed. The company used several clean up techniques and among them was straw foam. However, the whole idea of using the straw foam backfired because it was noticed that it could make the spill more badly. This could cause more damage to the flora, fauna, and the fowl.  The company used controlled burning whereby the dense oil is collected into a dense pools and then somewhat ignited. The use of skimming involved gathering the oil into a more dense pools then skimmers are used so that the oil is separated from the water. Absorbing technique was applied whereby the oil in the water is soaked up into an absorbing material. The company also applied dispersants that pulled apart the oil particles that are suspended into the water. The chemicals allow easier absorption and promote natural biodegrading.

Hypothesis
If an oil spill is replicated and the different clean up methods are applied and a comparison between straw foam and absorbing is done then it is necessary to conclude that absorbing is effectual method. This is because it soaks up the oil as opposed to straw foam that gums the oil and causes more harm to the water as well as the entire ecosystem. When clean up efforts makes things worse, then the demand of clean up from fishers from the other companies apart from the oil companies goes high.

The effects of BP oil spill
The BP oil spill in the Gulf of Mexico killed eleven people and it unleashed the worst environmental disaster in the United States history. It is believed that more than two hundred million gallons of oil become fueled into the coastlines and ocean. The Center for Biological Diversity revealed the illegal activities and the lax offshore drilling regulations and the center study shows that more than eighty-two birds were harmed by the oil spill and its aftermath. The center also believes that about six thousand sea turtles and almost twenty six thousand marine mammals from the unknown to dolphins, fish, and other invertebrates were severely harmed and affected by the oil spill and its aftermath. It is also believed that the spill oiled more than one thousand miles of the shoreline. The accident lead to over two million gallons of toxic dispersants being dispersed into the Gulf and it is still making the water in the gulf more toxic for all the species that live there.

Amount of oil spilled
The BP disaster is the worst disaster of oil in the United States. The company did not allow scientists to get the necessary information so that they could determine how much oil was really spewing to the Gulf but the government estimates it to be around 2.6 million gallons in each given day thus more than two hundred million gallons in total. The Exxon Valdez oil spill leaked more than thirty six thousand tones of crude oil on the shores of Alaska but the BP oil spill as the worst.
Affected areas
Sheens and surface oil slicks are associated with the BP spill. The spill also affected thousands of square miles along the shores of Alabama, Florida, Louisiana, and Mississippi. The BP spill flooded the ocean surface and ocean depths with more than two million gallons of dispersants. Dispersants are harmful chemicals that had already been banned in the United Kingdom. The chemical is believed to make the oil more dangerous to the ocean life. The dispersants are causing underwater oil plumes along the Gulf that is twenty-two miles long and six miles wide. The spill also affected coastlines of Texas, and the wetlands around New Orleans.

Species harmed
The oil spill greatly affected the fragile and productive marine ecosystem of the United States. Mexico gulf is the home of endangered and threatened species that include the crab and commercially significant fish. The offshore ecosystem was equally affected and dolphins together with the planktons suffered a lot. The endangered sperm whales passed through the slick oil. The response team also rescued brown pelican and oiled gannets. The oil spill soaked the queen Bess Island displacing the nesting site that was present. The imperiled species that include sea turtle, Atlantic blueifin tuna, and piping plovers were also affected and they migrated to the other sides of Gulf since there was nowhere they could go. Most marine mammals died of the oil spill because the oxygen level in the water was below the normal levels of two parts per million.

The economic effects of the oil spoil to the company
There is a major uncertainty in the degree and timing of costs as well as liabilities that related to the oil spill incident, the impact the incident can have on the reputation, and the likelihood of accessing new opportunities. The uncertainty of possible change in regulations and the operating environment also are the risks that the company is exposed to and it will increase the costs in the company. All the uncertainties continue to impact on the business of the company, the competitive position of the company, the financial performance of the company, and the cash flows of the company. Liquidity and shareholder returns are also affected by the incident. 

The company used more than forty one billion dollars for charges and compensation in the year 2010. The money was used to pay for obligations that directly and indirectly relates to the incident. All the charges related to the incident have been take has non-operating costs and not included in the taxable income. The company is using an amount more than twenty billion United States dollars in the escrow account to promise the legitimate claims raised by Independent Gulf Coast Claims Facility (GCCF). The money has been distributed for litigation settlement, local and state response cost, and the cost that accounts for natural resource damage. The company is using five hundred million dollar to finance a ten-year research program that studies the impacts of the oil spill and the associated response on the marine and shoreline ecosystem. The company is using three hundred million dollars to fund the Louisiana barrier islands project. See exhibit 5 for the financial impacts of non-operating charges.

The economic effects of the oil spoil to the affected area
There are negative economic impacts because of the spill. There was lower economic activity in the region. Tourism and commercial fishing decreased drastically in the region. The asset values diminished due to the spill because people anticipated future lost prosperity because the damage ruined their income-producing sources. The well-being of inhabitants of the place is lost because visitors and other people will no longer value their natural assets. The massive tourism industry in the Florida decreased on the contrary to the expectations that were to be seen once the Gulf of Mexico loop project was complete. The local residents experienced losses because their environmental amenities were damaged. Visitors were no longer planning for vocational travel to the place. This is because there were fears that the oil spill could reach shores and this lead to the reduction in the number of visitors thus low income. Seafood processors in the region stopped their businesses because people were thinking that they were no longer processing quality sea products.

The oil spill had some positive economic impact to the region. Through the clean up process, the residents were employed and the businesspersons remediated their businesses. The income flows for the remediation process boosted the business in the environment. The spill has made the tourist development tax to be levied on a short term basis but the government increased taxes to cut spending a fact that made the local residents shoulder more burden. The oil spill has seen more than one thousand three hundred jobs lost in the fishing industry due to the fact that most of the fish have died thus there nothing to fish.

Analysis and results of the oil spill to the economy
The fact the oil spill was offshore and had an impact on the on the coastal areas, it is expected that the oil spill have its impacts directly on tourism. The tourism industry consists of water transportation, recreational fishing, and commercial fishing. The impacts of the oil spill can be determined using several economy-wide methodologies. The commonly used techniques are econometric, computable general equilibrium, economic base and input-output model. In the BP oil spill the input-output model was used because it could provide for economic activities for interest. This model focuses on the economic interaction in all the industries and all the economic transactions for a specific region. See exhibit 7: Macroeconomic impacts of BP oil spill on the regions of Alabama.

The impact of economic costs suffered by the company to the public
The explosions on the deepwater horizon that caused the oil spill was considered terrible event and most people regret that it happened. The oil spill killed eleven people and injured several others; the spill has affected the health of the public. Members of the public are consuming contaminated seafood. The clean up workers are also affected by the spills. The public are not allowed to go and swim in the areas that had the spills because the water may not be safe for swimming. Coastal areas generally attract recreational activities and facilities that are related making it to be thickly with population. The developed facilities in the coastal region include boating fishing, snorkeling, swimming, scuba diving, nature parks, beaches, and preserves. The oil spill invaded and polluted these areas. The impacts were negative and it affected human activities. The effects from the oil spill can affect long-term effects to the local economy and society as it makes the future investment to be risky. At the local hospitals, there are many complaints from the response workers. Majority of them are complaining of skin irritation, eye irritation, and respiratory complications. Most members of the public have suffered from mental illness, maybe those who were affected directly or those that working in the clean up process.

The impact of economic costs suffered by the company to the consumers
The prices of gas have sky rocketed too much since the BP oil spill incident occurred. Millions of gallons of the crude oil were spilled. The oil reserves that were in stock threatened to run of stock and since the company was one of the largest manufacturer of the crude oil and other products its operations were affected as it could be left for some time. Most consumers have preferred to change there gases because the company is charging higher prices to compensate for the losses they got as well as for the damages they are paying.

The impact of economic costs suffered by the company to the business in the area
The oil spill caused several damages to businesses and seafood suppliers. Majority of the corporate businesses have laid off many workers since the amount of products as well as production unit has dropped too much. The government was collecting more than one billion dollars annually from the seafood companies. The fact that there are few employees and less money means that the government is getting less money. Most of the businesses have put in some signs indicating that they are selling no more Gulf seafood. The seafood industries have had more than a few problems since the spill. The seafood in the restaurant has seen their prices rise up steadily. The oil spill has made the companies in the abroad take advantage of the situation export the seafood to the people of the affected areas. The imported seafood is sold at very higher prices.

Environmental effects of the BP oil spill
Oil spills normally affects the environment in many ways and this includes, food chains, death of animals as a result of ingestion oil, destruction of shorelines, suffocation of animals and death of animals due to hypothermia. The environmental damage is taking place in four ecosystems, which are the offshore waters, the shoreline, the beaches, and seabed. In onshore waters, the oil becomes distributed all over the water column and the inshore seabed sediments. This region consists of menhaden and coastal shrimp populations, which are the largest fisheries in the region. The birds that are nesting in the place were heavily oiled. One of the areas affected was the State of Louisiana, which had more than six hundred species of fish, mammals, reptiles, amphibians, and birds. The oil spill washed the coastal organisms to sandy beaches, salt marshes, mangroves and mudflats. The organisms were exposed to the oil through filtration and inhalation and others were exposed through ingestion. The heavy oil and the slipper water hindered the movement of the marine animals. See Exhibit 6 for the Environmental cost.

Analysis of how marine life was affected by the BP oil spill
Oil is highly toxic to wildlife and has some toxic effects to the marine life. The effect begins as soon as the oil hit the water. See exhibit 8: Emblematic image of a sea bird covered by oil.
Snapper and grouper: They are reef fish that support fishing communities in the Gulf coast. The spills took place at a time when there was spawning peak for the commercially significant species thus affecting the stocks.
Atlantic Bluefin Tuna: The Gulf is one of the only two nurseries of the overfished species. The fish larvae and eggs are vulnerable to negative effects of oil and since the generation is endangered species, the oil spill caused a great harm to the species.
Bivalves: Bivalves are usually filter feeders and most of the time they pull toxic substances like oil out of the water while feeding. The substances may accumulate in the flesh of the Bivalves and humans consume the Bivalves leading to poor health. Oil spills causes a long-term contamination because it becomes trapped in the sediments. 

Fragile habitats: Most habitats like wetlands, coral reefs, marshes, mangroves, sea grass, and canyons are common in the Gulf. They provide breeding, feeding, and spawning grounds for the numerous species. These habitats are vulnerable to spills and the BP oil spill devastated the habitats. 
Laws and regulations regarding the offshore drilling
Regulations and legislations that regard oil exploration, development, and production in the United States offshore lands was developed long time in response to the disputes over offshore activities. In 1950, the government of United States decided to response to the concerns about the offshore jurisdiction, economic factors, safety, and the environmental impacts of offshore activities. Regulatory initiatives and key legislatives were enacted so that there could be a balance between the need of reliable and safe energy supply together with the minimization of environmental impacts to all parties at a very fair price. The legislative action ranges from imposition of wide numerous requirements regarding the operations of offshore activities. 

The Federal Oil and Gas Royalty Management Act
The Federal Oil and Gas Royalty Management Act was passed in 1982 to ensure that all the federal lands within the offshore should have proper enforcement mechanisms and accounting. The laws included the proper ways of collecting as well as auditing fees and the comprehensive way of conducting inspections and better way of enforcing penalties.
National Environment Policy Act of 1969
The National Environment Policy Act was passed in 1969 and it requires the federal government to check on environmental impacts from proposed actions and the reasonable alternatives to the actions. Environmental categorical exclusion reviews, and environmental impact statements should propose projects along the offshore that can help in managing Environmental Consequences.

Clean Air Act
The Clean Air Act was passed in 1970 by congress. The Act proposes that the existing oil facilities need to prepare a detailed emission data showing their development plan and reporting procedures that comply with the clean air act. The amendments of 1990 ensured that the jurisdiction of offshore regions that regulate the air quality was followed. 
Coastal Zone Management Act of 1972
In 1972, the Coastal Zone Management Act was passed to preserve, develop, protect, and enhance resources in the United States coastal zones. Through this act, coastal states are encouraged to complete their coastal zone management plan to protect their coastal areas. 
Endangered Species Act of 1973
In 1973, the Endangered Species Act was enacted to promote and protect the conservation of all species of animals in the coastal region. Within the Act, animal and plant species are listed facing extinction after a thorough officially permitted process.

Clean Water Act of 1977
The 1977 Act is essential law that governs the discharge of all the pollutants that to go into the United States surface water. The law requires that that a National Pollutant Discharge Elimination System permit has to be obtained before realizing any pollutants. The Act established strict standards regarding direct pollution and discharge into waterways. 
The future laws
The importance of the deepwater disaster signals the need to consider the national patterns of energy production and use. The future policies of offshore drilling will be greatly shaped by pace of technology and economic and security.
Offshore Safety Authority
The new agency will oversee all the non-economic features of structures and operations that that practice drilling and production of pipelines, oil, gas, and other technologies that are renewable. This new safety and environmental authority will lead a coordination role as far as offshore gas and oil activities are concerned. The key responsibilities of the body are to review and approve permits for exploration and development plans. The body can also review and approve permits for the production plans. The body is to send expert teams to inspect the offshore operations by unannounced inspections. The will be required to audit and demand certification of operators health and environmental management systems. 

The body will do the evaluation of lessees based on the environmental and safety qualifications. This Act will provide technical review of spill containment and response plans. All the safety and environmental mitigation activities that are prescribed by the national environmental policy act as to be reviewed and approved by the Offshore Safety Authority. The authoritative body will collect and analyze the leading as well as the lagging indicators from all the parties so that risk evaluation is done. The body will be promulgating all the structural integrity as well as workplace safety rules so that they can create foundation of dictatorial regulations that can complement safety case regulations. Offshore Safety Authority will investigate any accident that may occur and other important events that may turn catastrophic.

Improvements to spill prevention and response
One of the lessons of the BP oil spill is the response and prevention ability of the Gulf of Mexico through various ways. The company should apply the best available technology to get the best protection. The company should develop a regulatory methodology that can be use to rate the best achievable equipment as this can encourage it acquisition for immediate use while responding to spills. The company should encourage the professional spill response contractors to make best use of the efficiency of system. The management of the company should ensure that recovery system and vessel operations are performing safely and should be effectual for the twenty-four hours a day performing the spill assessment as well as oil recovery operations.

Effect of BP oil spill on the water transportation industry as a whole
When oil is spilled, they will accumulate on the water surface. The spill from offshore drilling normally moves upwards to settle on the surface of water. Water currents and waves disperse the oil spills over large areas. This affects the water transportation industry greatly. There are businesspersons in the water transportation sector that provide water transportation to passengers as well as cargo using boats, ships, and barges. The industry consists of deep sea, great lakes, and coastal lakes. There is also inland water transportation. The BP oil spill changed the economic structure of the residents around the affected area and this lead to the few people travelling using boats. More transport routes were closed to allow for the clean up and recovery process. The polluted water scared many people from using the means of transportation for their personal health concerns. More pirates were present in the sea in the name of backing up the clean up process and in the end; it exposed the security of the passengers. This reduced the demand of the water transport.

Effects and duration to which Exxon Valdez and Titanic sinking affected laws
Exxon Valdez
Exxon Company experienced spills in 1989. The Exxon Valdez tanker hit a reef in Prince William Sound found in Alaska and spilled in the region of eleven million gallons of crude oil. This was the leading spill in U.S. waters until the deepwater horizon incident. The oil spill from the Exxon Valdez tanker enclosed thousand miles of pristine waters as well as the coastal areas. The spill killed marine mammals and fish without forgetting the seabirds. The spill also damaged the source of revenue of the people who were living in the region. Moreover, the incident damaged the livelihood of people working in the region. An overworked and fatigued crew with insufficient protection escort vessels caused the Exxon Valdez tanker incident. The Exxon Company spent more than $2.1 billion because of in cleanup and settlement. 

Because of the spill, the government policies and industry practice were changed spectacularly.
Oil Pollution Act of 1990 was enacted by congress and the Exxon Company established its Operations Integrity Management System (OIMS). Safety as well as environmental performance of the company improved and were very impressive. By the year 2009, the company received rating of ten out of ten from Governance Metrics International. 
Titanic sinking
The sinking of titanic is considered the most known in the history. The sinking caused a terrible loss of life. There are many theories that have been developed from the sinking to account fort the events occurred in that historic night. It is believed that the breakdown of the hull steel was because of fragile fractures due to high contents of sulphur in the steel. Once the Titanic hit the iceberg, there was a continuous crack from the hull plates that by then they were open. The low water temperatures coupled with high collision because of overload made the breakable malfunction of the rivets very easy thus enhancing the sinking.

Poor design of transverse bulkheads in the watertight section worsened the titanic sinking .this poor design allowed water to flood and damage the compartments of the hull and it made the ship to pitch forward. The water in the broken compartments spilled all over into adjoining compartments. The compartments did not control the flooding because they contained the water and this increased the rate of sinking. The titanic sinking as lead to the change of laws that govern the way in which the design and building of ships is done. More double-sided hulls were introduced during their manufacturing so that they can easily prevent inconsequential hull punctures that in the end can cause a great damage. Moreover, the sloping dividing walls of the watertight compartments needed to be raised to prevent water from spilling over the tops once the ship is pitched at a slight angle. There were numerous safety regulations that were introduced immediately after the sinking incident. These regulations range from the use wireless in large ships to lifeboat capacity that are just equal or more to than the number of passengers and crew that are present in the ship during any given journey. Introduction of ice patrol police that warn ships of nearby ice field was evident.  From the incidence of titanic sinking, the laws were changed and they still hold on today.

Conclusion
BP is a major oil company and has its headquarters in the United Kingdom with operations in seventy countries. The company financial viability is sustained by petroleum exploration, and refining, production. The BP oil spill is worst environmental disaster in the United States history. To create and implement on national policy, it requires that the nation should have huge political efforts and leadership. This will help direct the nation towards an economy that is sound and safe in the decades to come. Regulations and legislations regarding oil exploration, development, and production in the United States offshore lands was developed long time in response to the disputes over offshore activities has to be respected.

Regulatory initiatives and key legislatives were enacted so that there could be a balance between the need of reliable and safe energy supply together with the minimization of environmental impacts to all parties at a very fair price. The BP oil spill revealed out that the companies involved in the offshore drilling are not following the lied down regulations. The legislative action ranges from imposition of wide numerous requirements regarding the operations of offshore activities. The new agency will oversee all the non-economic aspects of structures and operations that that practice drilling and production of pipelines, oil, gas, and other technologies that are renewable. This new safety and environmental authority will lead a coordination role as far as offshore gas and oil activities are concerned. The key responsibilities of the body are to review and approve permits for exploration and development plans. The body can also review and approve permits for the production plans. The body is to send expert teams to inspect the offshore operations by unannounced inspections. The will be required to audit and demand certification of operators, health, and environmental management systems.

 

Bibliography
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Basset, Vicki, causes and effects of the rapid sinking of the titanic, n.d., derived from http://www.writing.eng.vt.edu/uer/bassett.html
Bp.com. corporate governance, derived from http://www.bp.com/sectiongenericarticle800.do?categoryId=9036184&contentId=7066896
Bryant, Ben. “Deep water horizon and the Gulf oil spill- the key questions “the guardian (2011, April 20)
Center for Biological Diversity (CBD), Catastrophe in the Gulf of Mexico devastation persists (n.d.) derived from http://www.biologicaldiversity.org/programs/public_lands/energy/dirty_energy_development/oil_and_gas/gulf_oil_spill/index.html
Channel 4 news, BP oil spill: Environmental impact, 2010 derived from
http://www.channel4.com/news/articles/science_technology/bp%2Boil%2Bspill%2Benvironmental%2Bimpact%2Btwo%2Bmonths%2Bon/3689987.html
Department of Labour (DOL), identifying, and addressing workforce challenges in America’s transportation industry, 2005, derived from
Ellison, Mishana, an investigation into the factors affecting the dispersion of oil in water ecosystem, derived from http://oas.uco.edu/11/papers/Ellison,Mishana.pdf
Fisher, Emily, 10 ways the oil spill could affect Marine life. 2010, derived from http://oceana.org/en/blog/2010/05/10-ways-the-oil-spill-could-affect-marine-life
Harper, Rick, The economic impact to northwest Florida of the deepwater horizon oil spill, derived from http://www.frbatlanta.org/documents/rein/southpoint/harper_economic_impact.pdf
Houdet, Joel, and Germaneau, Charles, The financial impacts of BP response to the deepwater horizon oil spill (n.d.), derived from http://www.synergiz.fr/wp-content/uploads/2011/04/Case-study-BP-gulf-oil.pdf
http://www.doleta.gov/brg/pdf/Transportation%20Report_final.pdf
Jennings, Marianne. Business: Its Legal, Ethical, and Global Environment. Mason, OH: Southwestern Cengage Learning, 366. 2010.
Kinver, Mark, BP oil spill: The environmental impact one year on, 2011 BBC News derived from http://www.bbc.co.uk/news/science-environment-13123036
Krisberg, Kim, U.S. Gulf Oil Spill Poses Public Health Threat: Response Targeting Workers, Residents, Food, and Air Quality. American Public Health Association (2010, Vol. 40 No. 6) para. 1
National Research Council (U.S.). Environmental Information for Outer Continental Shelf Oil and Gas Decisions in Alaska. Washington, DC: National Research Council, 160-1. 1994.
Oil Spill Commission (OSC), BP deepwater: the Gulf oil disaster and the future of offshore drilling, 2011, derived from http://www.oilspillcommission.gov/final-report
Repanich, Jeremy, The Deepwater Horizon Spill by the Numbers, 2010, derived from http://www.popularmechanics.com/science/energy/coal-oil-gas/bp-oil-spill-statistics
Snider, Julie, Environment’s rebound from oil spill clouded by unknowns, 2010, derived from http://www.usatoday.com/news/nation/environment/2010-08-04-oil-spill-environmental-impact_N.htm
Vassiliou, M. S. The A to Z of the Petroleum Industry. Lanham, Md: Scarecrow Press, 94. 2009.

Appendix
Exhibit 1: Major oil spills into the ocean.

Adapted from (Kinver, Mark, para. 12)

Exhibit 2: BP deepwater horizon drilling rigs

Adapted from (Oil Spill Commission p. 1)
Exhibit 3: The explosion

Adapted from (Bryant, para. 1)

Exhibit 4: The clean up

Adapted from (Repanich, Jeremy, para. 1)

Exhibit 5: The financial implications

Adapted from (Houdet, and Charles, n.d., p. 2)

Exhibit 6: Environmental cost

Adapted from (Snider, Julie, 2010, para. 3)
Exhibit 7: Macroeconomic impacts of BP oil spill on the regions of Alabama

Adapted from (Addy, and Ahmad, 2010, p. 7)

Exhibit 8: Emblematic image of a sea bird covered by oil

Adapted from (Fisher, 2010, para. 1)

 Vassiliou, M. S, The A to Z of the Petroleum Industry. (2009, Lanham, Md: Scarecrow Press) 94
 Vassiliou, p. 94.
 Vassiliou, p. 95
 Ellison, Mishana, an investigation into the factors affecting the dispersion of oil in water ecosystem, derived from http://oas.uco.edu/11/papers/Ellison,Mishana.pdf
 National Research Council (U.S.), Environmental Information for Outer Continental Shelf Oil and Gas Decisions in Alaska (1994, Washington, DC: National Research Council]) 160.
 National Research Council (U.S.), p. 161.
 Kinver, Mark, BP oil spill: The environmental impact one year on, 2011 BBC News derived from http://www.bbc.co.uk/news/science-environment-13123036

 Oil Spill Commission (OSC), BP deepwater: the Gulf oil disaster and the future of offshore drilling , 2011 derived from http://www.oilspillcommission.gov/final-report
 Bryant, Ben. “Deep water horizon and the Gulf oil spill- the key questions “the guardian , 2011
 Bryant, para. 2
 Jennings, Marianne, business: its legal, ethical, and global environment. (2010, Mason, OH: Cengage Learning) 366.
 Center for biological diversity (CBD), Catastrophe in the gulf of Mexico devastation persists (n.d.), derived from http://www.biologicaldiversity.org/programs/public_lands/energy/dirty_energy_development/oil_and_gas/gulf_oil_spill/index.html
 CBD, para. 8.
 CBD, para. 9.
 CBD, para 10.
 Bp.com. corporate governance, 2012, derived from http://www.bp.com/sectiongenericarticle800.do?categoryId=9036184&contentId=7066896
 Houdet, Joel and Germaneau, Charles, The financial impacts of BP response to the deepwater horizon oil spill (n.d.), derived from http://www.synergiz.fr/wp-content/uploads/2011/04/Case-study-BP-gulf-oil.pdf
 Harper, Rick, The economic impact to northwest Florida of the deepwater horizon oil spill, derived from http://www.frbatlanta.org/documents/rein/southpoint/harper_economic_impact.pdf
 Harper, p. 2.
 Harper, p. 4.
 Addy, Samuel and Ijaz, Ahmad, BP oil spill preliminary macroeconomics impacts on Alabama, 2010, derived from http://cber.cba.ua.edu/Prel_MacroEcon_Impacts_on_AL_of_2010_BP_Oil_Spill.pdf
 Krisberg, Kim. “U.S. Gulf Oil Spill Poses Public Health Threat: Response Targeting Workers, Residents, Food, and Air Quality”. American Public Health Association (2010, Vol. 40 No. 6) para. 1

 Channel 4 news, BP oil spill: Environmental impact, 2010 derived from
http://www.channel4.com/news/articles/science_technology/bp%2Boil%2Bspill%2Benvironmental%2Bimpact%2Btwo%2Bmonths%2Bon/3689987.html
 Fisher, Emily, 10 ways the oil spill could affect Marine life. 2010, derived from http://oceana.org/en/blog/2010/05/10-ways-the-oil-spill-could-affect-marine-life
 Fisher, para. 2.
 Fisher, para. 3.
 Fisher, para. 5.
 Fisher, para. 11.
 Energy Information Administration (EIA), overview of U.S legislation and regulations affecting offshore Natural gas and oil activity, 2005, derived from http://www.eia.gov/pub/oil_gas/natural_gas/feature_articles/2005/offshore/offshore.pdf
 EIA, p. 8.
 EIA, p. 9.
 EIA, p. 9
 EIA, p. 10
 EIA, p. 10.
 EIA, p. 10.
 OSC, n.d., 258
 OSC, n.d., 258.
 Department of Labour, identifying and addressing workforce challenges in America’s transportation industry, 2005, derived from
http://www.doleta.gov/brg/pdf/Transportation%20Report_final.pdf
 OSC, n.d., 232.
 OSC, n.d., 232.
 Basset, Vicki, causes and effects of the rapid sinking of the titanic, n.d., derived from http://www.writing.eng.vt.edu/uer/bassett.html
 Basset, para. 13.

The Effects of BP Oil Spill 18

 

Economic Principles

Oligopoly is one of the four market structures that drive most of the world economies as seen in its prevalence. Such a situation arises when there are few companies or firms within an industry providing certain essential services or products, a situation that makes each of the companies control a large market share. Other market structures are monopoly, perfect competition, and monopolistic competition. Verizon wireless is a perfect example of a company that operates under oligopoly as seen in the number of operators involved in the same business within the United States (Colander 288).

Characteristics of Verizon Wireless
Verizon Wireless can be termed as an oligopolistic company due to the number of other competitor companies involved in the wireless communication business in the United States. To be exact, there are only three other companies in this economy that are involved in this business, namely T-Mobile, AT&T Mobility, and Sprint Nextel. In total, the four companies control 89% of the US wireless communication market share, something that makes Verizon Wireless control a large share of the same. Another important characteristic is the fact that all these companies provide the same services to the consumers (Oligopoly 1). There are really no differences in terms of the products provided by the four companies. Moreover, it is prudent to note that one of the most important characteristics comes from the large size of Verizon Wireless, something that explains the reason for the few players in the industry. Setting up such a company would need very large capital, which is economically scarce (Perloff 445).

Application of the Game Theory in their Price Strategy
Due to the small number of the players that Verizon Wireless are competing with for the market share, price strategy plays an important role in the manner in which the consumers demand for the available services. Game Theory is one of the methods by which this company ensures that prices are set well in relation to the competitors (Colander 288). To achieve the best price strategy, the company analyzes the effect that can be caused on the products by varying the prices. First, increasing the price would lead to less demand for their services, something that is not required.

Therefore, the best way is to collude with the rest of the players to set a price or decide to reduce their prices to attract more demand away from the other industry players. Nash equilibrium shows the reaction that another company develops in terms of the choice by Verizon wireless (Oligopoly 1).
Why Firms in an Oligopoly Industry tend not to use Price to Compete
Price tends not to be the best method of competing among the Oligopoly Industries due to the fact that services are provided on more stable prices and competitors can only respond to the price decreases and not increase. Because of this, these firms never gain much as required on price changes, leading to the strategies that do not involve price changes like adopting advertising strategies, product differentiation, and influencing the establishment of more barriers to entry into the industry (Vives 87).

Effectiveness of the chosen Industry’s Non-price Competition Strategy
The inability of gaining more market share through price changes makes firms in Oligopoly to adopt non-price strategies as indicated above. Such competition strategies seem to be more effective in the end as they lead to more demand of the goods and services offered in the market. For instance, advertising is an important tool that tends to influence the consumers’ preferences from one service or product to the other. Therefore, the price may remain the same but appeal can drive demand towards a given firm. On the same note, the ability for a given firm to come up with a differentiation in the product produced has the ability to influence demand towards it, thus increasing the market share and revenue (Samuelson & Marks 415).

Works Cited
Colander, David, Microeconomics, McGraw-Hill, 7th ed., 2008. Print.
Oligopoly, AmosWEB Encyclonomic WEB*pedia (n.d). Web. July 11, 2013
<http://www.AmosWEB.com, AmosWEB LLC, 2000-2013>
Perloff, John, Microeconomics Theory & Applications with Calculus, Pearson, 2008. Print.
Samuelson, William & Marks, Sam, Managerial Economics, Wiley, 4th ed., 2003. Print.
Vives, Xexerus, Oligopoly pricing, MIT Press, Cambridge MA, 1999. Print.

Surname 4

 

Consultancy

Question Three: Barriers of high entry to the market effect on long-term productivity
Barriers of entry change the competitive climate of an industry. Strong government regulation on the administration of industries such as banking will limit entry of lack of sufficiently capitalized firms, which have the potential to collapse with savings of citizens. However, even in industries that require strong government regulation due to their nature of business the goal of government should be to promote better management practices. Otherwise, the regulation will limit expansion of organizations, constrict capital growth and inhibit shareholder returns. Furthermore, it will limit ability of firms to operate with fluidity to embrace emerging business opportunities.

Continual improvement of efficiency through reduction of costs while achieving higher output results in higher returns to shareholders. Barriers of entry that affect sales such as high sales taxes limits profit making opportunities as it reduces ability of consumers to purchase products of the affected firm (Tragakes, 2011). Stringent government wage policies such as high minimum wages increase administrative costs. Additionally, high taxation rates will reduce the profitability of organizations long-term profitability directly. This can be in the form of Profit Taxation Rates and royalties (especially for mining companies). Furthermore, increasing capital expenditure on entry of the market will reduce the ability of firms reach profitability or achieve high returns on assets and equity.

Barriers on the market opportunities available to organization will limit business expansion. The inability of businesses to expand can be due to high capital required such as purchasing land, building factories and building infrastructure. The businesses will be strapped, as they will be unable to expand beyond their current operations, which may suffer dismal failure when firms with enough capital to overcome barriers of entry take over the industry as it is.

Question four: competitive landscapes of industries with high barriers of entry market
Administration is the initial competitive differentiator among industries with high barriers of entry. Firms have to operate in excellence of administration of its assets. This is due to firms with high barriers of entry requiring a large size of operation with sizable assets as per requirements of entry of the market; therefore, creating the potential of mismanagement of assets. Firms that are able to overcome this hindrance develop an edge over their competitors. This is the notion behind the privatization of government businesses across the world.

The next competitive challenge is operational challenges. Developing efficiency sets competitors apart as the market rewards organizations with higher efficiency from production or/and administration. Ability to deliver higher outputs such as produce more cars than competitors with a same plant size will enable a firm to achieve productivity thus providing opportunity to charge cheaper on its sales than competitors. Additionally, it will increase quality of products a critical differentiator.

Price in industries with higher barriers of entry has lower competitive advantage than industries with lower barriers of entry (Fraser Institute, 2005). This is due to firms charging similar level of prices; change in prices is gradual and occurs as a result of firms increasing efficiency and scale of operations. Product quality and service delivery have higher priority by consumers. However, in the airline industry for example firms are working to push the limit of this envelope by providing basic services on flights, operating aircraft with higher fuel economies and generating low administrative costs; these savings are passed on to consumers as a such firms present themselves as budget carriers.

Question five: Explain the price elasticity of demand in each market structure and its effect on pricing
Perfectly competitive markets have a perfectly elastic market curve. This is due to buyers having full information on available products in the market place as well as their prices. The buyers while monopolies have inelastic price elasticity as the firms are the price determinants of the market. The demand curve is referred to as a downward sloping demand curve (Besanko, Braeutigam & Gibbs, 2011).

Oligopolies have a kinked demand curve (Besanko, Braeutigam & Gibbs, 2011). This is a unique from of a demand curve comprising of both a price elastic and a price inelastic demand curve. The prices are elastic before the kink and inelastic after the kink. Monopolistic firms like perfectly competitive firms have a more elastic demand curves than oligopolies or monopolies; this is due to having multiple number of suppliers and multiple number of purchases. The multiple numbers of consumers has considerable impact on the ability of producers to set prices thus the consumer is the driver of the marker. However, unlike perfect competitive markets, monopolistic firms demand is not perfectly elastic but elastic.

The differences in the elasticity of the demand curve of the different markets, makes the prices of these markets act differently. In a perfect competitive market, a change in price will have a small effect in the demand derived in the market. In a monopolistic market, a change in price will have a high effect in the demand of goods. Depending on the point on the kinked demand curve, a change in price in an oligopoly might either have a low or high effect on the demand of goods. In a monopoly, a change in the price will have very little change on the goods demand in the market (Besanko, Braeutigam & Gibbs, 2011).

Question six: Government role on market structure pricing
Most monopolies have governments as primary shareholders, especially monopolies that operate on a national scale. Through this direct influence of the government, prices will be set to match government policies. In this regard, government can produce goods and sell them at discounts to uplift the citizenship. This depends on form of industry, which affects among others the profit motivation. The government may set high prices to earn more from mining unlike a healthcare monopoly. Monopolies owned by government may attract lower taxation, which affects prices.

Apart from utilization of government monopolies to expand government policies, the government may operate them competitively. In this position, government monopolies may be attract similar price restrictions and taxation than if they were privately owned. Private monopolies may suffer the brunt of taxation laws among other operational regulation consideration. This may include restrictive taxation practices and government royalty schemes. The firms may also incur socialist policies by government through price ceilings.

Barriers to entry through government regulations will result in high capital requirements for market entry by oligopolies. These costs are passed on to consumers through high prices on products sold (Gottheil, 2013). Additionally, stringent market regulation will increase costs of operations, which are also passed down to consumers. The government taxation policy for oligopolies can target the kinked demand curve: low taxation under the price elastic stage and charging high taxation in the price inelastic stage of firms’ demand.

Unlike perfect competitive firms, which is a market that does not attract government influence monopolistic firms attract government control. Depending on the taxation policy of a government, the government may uniform across firms of all sizes. Generally, however, small firms attract low taxation rates. It is in this category that monopolistic firms operate as well as some monopolies and oligopolies such as a supermarket in a small town can be a monopoly.

Question seven: effect of international trade on market structure
International trade provides an opportunity for firms to sell products or even operate across their regional borders. This can be a rallying call for firms across different market segments to expand their production to meet international demand. The increase of operational scale economies, efficiencies and quality of production will benefit the firm’s consumers whether local or foreign through better products that are competitively priced. Additionally, it can be an opportunity to learn from other organizations on market operations thus increase management productivity such as Kaizen (continual Improvement) management policies. This benefit is enjoyed across the board regardless of market structure with the exception of perfect competitive markets.

International trade imports to the country will affect different markets with different impact depending on the country’s import structure. If the country has protectionist policies, such as imports quotas and tariffs as well as banning of imports in given industries firms will be protected regardless of their operational framework.

Monopolies in an industry occasioned by market operations factors rather than government regulation can attract competition from international trade. Additionally, oligopoly can be sufficiently challenged in the same regard. This will change the structure of a market from pure monopoly and pure oligopoly (Taylor & Weerapana, 2012). Monopolistic firms on other hand are duly affected by the market competition of international trade. The firms receive competition from international trade but its ability to permeate the industry will depend on the product, consumer preference for local products price, quality and service delivery among other critical factors that determine consumer choice.

References
Besanko, D., Braeutigam, R. R., & Gibbs, M. (2011). Microeconomics. Hoboken, NJ: John Wiley.
Fraser Institute (Vancouver, British Columbia). (2005). Studies in entrepreneurship and markets. Vancouver, BC.
Gottheil, F. M. (2013). Principles of economics. Mason, OH: South-Western Cengage Learning.
Taylor, J. B., & Weerapana, A. (2012). Principles of microeconomics. Mason, OH: South-Western Cengage Learning.
Tragakes, E. (2011). Economics for the IB Diploma. Cambridge: Cambridge University Press.

CONSULTANCY 2

Running head: CONSULTANCY 1

Using Macro-economics to describe the Current Situation in the USA

In 2007 and 2008, shocks of the global financial meltdown were felt in all countries around the globe. The crisis began in the USA and it had a catastrophic impact on the economies of many countries. USA is a major trading partner of many countries and therefore the crisis was detrimental not only to the USA, but also to all her trading partners. The aim of this paper is to provide a critical analysis of USA’s current economic situation in light of macro-economics and the economic policies undertaken to counter the effects of the crisis.

To attain this aim, the paper is organized into several sections. The first section offers a general discussion of the macro-economic concept. This is to ensure understanding of the basis for analysis. The other section discusses the current effect of macroeconomic variables on people and businesses in the USA. It also gives an account of the macro-economic variables adopted in the last two to three years and offers a comparative analysis of the macro-economic effects in both periods. The third section critically analyses the policy stance and actions taken by the USA and European governments and financial institutions.

Macroeconomics
Macro-economics is concerned with economics of multiple economies of different entities that have common features as opposed to microeconomics which focuses on the economics of individuals. Macro-economics is mainly interested in the whole economy which is composed of many firms. Micro economics has two very important variables that concern growth and changes or fluctuation in the economy Micro economics may for instance be concerned with assessing an individual company’s profitability in regard to its production. Macroeconomics on the other hand may be concerned with broader issues that affect the availability of resources such as how to determine interest rates and reasons behind fluctuations in economic growth over the years (Eachern 20). Macro economists may be concerned with advising governments on economic policies to address growth, inflation and unemployment while micro economics may deal with assessing consumer behaviour.

Essentially, macroeconomics concerns itself with three major elements. These elements are measurable to enable governments to monitor and adjust the macro economy of a particular country. One of the elements has to do with the total production of goods and services within a country and this is commonly referred to as aggregate output. Employment is also another important outcome. It is related to aggregate output because total production is directly related to the employment rate. However, employment is an independent factor of macroeconomics because the rate of employment or unemployment is an indicator of the wealth of individuals within a particular country. A macroeconomic examination would look at how to increase employment and reduce unemployment. The other one is the general price level which has a lot to do with inflation which is a result of change in price level (Arnold 25). Macroeconomists may focus on creating an understanding of what causes inflation and how to reduce it.

The governments of respective countries can control the direction of a particular economy using tools such as the fiscal policies and monetary policies. Fiscal policy may involve change in tax level and change in government spending. Governments use fiscal policies to affect the macro economy in times of crisis in order to adjust the economy. Some examples of fiscal policies utilized to affect the economy may include reduced government spending through layoffs of civil servants and spending through stimulus packages for boosting financial institutions. Another way of affecting the macro economy is through monetary policies which uses adjustment of interest rates. When interest rates are manipulated, there is a direct effect on employment, price level and aggregate output (Eachern 23).

Effects of macroeconomic variables on people and businesses in the USA
The inflation rate in the US has significantly reduced between 2010 and 2013. The rate of inflation is derived from the consumer price index-CPI (Trading Economics n.p.). Consumer price index is important as it is used to assess variations in a particular country in regard to the cost of commonly consumed goods and services in average households. Inflation is determined by computing the CPI percentile change over certain durations in comparison to a preceding time frame. According to trading economics report in February 2013, the index for all goods rose by 1.6% over the last 12 months. This index was computed from a 1.9% increase for food and energy while indexes for shelter and clothing had contributed to the difference in the index (Trading Economics n.p.).

As the US recovers from the great recession, minimal changes are notable in lending by banks, growth of incomes of ordinary citizens, reduction of unemployment and growth of employment. The gradual change is as a result of the heavy debt load that businesses and individuals have and due to the damage to the country’s financial system by the housing market crisis. There is also a notable decrease in confidence about the banks and financial systems.

After some banks begun recovering from the recession, they have reduced their lending margins on the credit cards. There has been a decrease to $2.69 trillion down from $3.04 trillion and there has been a change for home credit card lines from $ 1.33trillion to $1.15 trillion (Hilsenrath and Dougherty n.p.). In the year 2011, the interest rates had plummeted drastically and were below the one per cent mark. The government’s efforts to purchase mortgage bonds leading to a treasury debt failed to stimulate growth. In 2009 the US economy had lost over 4.5 million jobs but by early 2010 over 3.5 million jobs were created under the American recovery and reinvestment act (Ciro 29).

36,000 jobs have been created over the last month and records suggest an unemployment rate of 7.7% which is the lowest the US has seen since 2008 (Rushe n.p.).
During the crisis, the economy experienced less spending on imports as the players begun to cut down on cost. This is usually followed by a reduction in interest rates which consequently also lowers the exchange rate. The lowered exchange rates become detrimental to a country’s exports as they become increasingly cheaper while the imports become more expensive. The correlated factors lead to negative balances of payment creating a deficit.

The US government reduced the interest to almost zero in order to encourage businesses and households to spend. This was done with an intention to support the pricing of assets such as stocks and housing. However, the move has been negatively affecting banks profitability. This also had a negative impact on depositor’s interests as they made little from bank deposits. The economy’s gradual road to recovery is slowly contributing to small spikes in the in the interest rate.

The balance of payment deficit is gradually reducing as interest rates begin to spike. This is good news for US as it indicates recovery of the economy. It is important to note that with these changes in the macro economic variables, individuals and business shall begin to thrive. The deterioration of these variables had a negative effect on businesses whereby cuts in spending by individual contributed to reduction in enterprise and loss of jobs. It is expected that as the improvements continue, upward growth shall be experienced.

The crisis
Between 2005 and 2006, investment in housing in USA had reached its peak. Many local and foreign investors opted for investment in the real estate projecting that profits and the value of housing sector would continue to rise. Financial institutions were key players in the investment in real estate indirectly by providing subprime loans (Burns and Price 25). The institutions had made a wrong forecast of an upward curve growth in the housing industry and they anticipated that great profits would be made by real estate investors.

There was high uptake of loans for housing throughout the country as they were easily accessible. The consumer base also became highly serviced through debt (Dolezalek 13). The period was also characterized by many investors around the world investing in the US housing market. Towards the end of 2006, there was a sharp decrease in value of the housing sector and prices continued on the downward trend. This resulted into huge losses for all the entities and individuals that had invested in the market. The banks experienced huge losses when many defaulted on payments and investors admitted to foreclosure. The banks had to repossess the lands whose value had plummeted.

The subprime loans given to many had a significant effect on lowering the prices of housing as the competition became stiff among competitors in the overcrowded housing market. The decrease in value of property eventually led to the collapse of the housing business and this is commonly referred to as the bursting of the housing bubble (Ciro 36).Consequently it became harder and expensive for financial institutions to offer loans and this reduced the rate of economic growth in the country.

The crisis that emerged from subprime loans was partly influenced by the move by banks to pool their loans and package them into assets that could be sold off. This move was made to ensure that banks were able to off load themselves of the burden of losses in the event that the loans diminished in value. This move however meant that in the event that the said assets gained in value, the buyer of the asset would be the one to earn from the loan. The move to pool the loans into a sellable product to willing buyers by financial institutions is commonly referred to securization (Burns and Price 52).

Securities would be rated according to the housing pricing at the time of sale. Securization became so popular that banks went spiral on borrowing in order to create as much securization as they possibly could. Some banks even started buying securities from others so that they could sell them off at projected profits. Others like Lehman Brothers even started buying mortgages with the intention to trade them for better profits (Burns and Price 54). When the housing pricing began to plummet, so many financial institutions had many securities waiting to be sold. This resulted in major losses.

Inevitably, the downfall of financial institutions began. When the people realized that the value in the real estate assets had begun to plummet, the rate of lending begun to slow down at the time, many investment banks had in their possession some of the most risky loans that would not be sold off to other investors. At the time many banks wanted the customers who had borrowed for investment in housing to return the borrowed money. Some banks had even ran out of deposits and they began to quickly collapse (Ciro 35).The banks became cautious of lending and instead aimed to suck money from the entire economy and minimize lending. The result was that general lending to businesses that depend on loans slumped and the businesses began to crumble (Dolezalek 28).

The investment banks and hedge funds had thought that securization was an ingenious way to guard them against the risk of lending. When they initially made good returns from the securities, their faith in getting returns from securization was reinforced. This prompted further investment in securities (Burns and Price 56). It is quite clear that their basis for investment in the housing sector was driven by wrong assumptions about the market. They had relied on speculative and inaccurate statistics, theories and probability as well as an irrationality to make much money easily and faster (Dolezalek 40).

The US, UK and European countries governments responded to the crumbling financial institutions by pumping loads of money into their deposits. These were bail out moves to rescue the big banks and financial institutions (Ciro 47). Governments made frantic efforts to assure investors and the savers of the safety of their investments and money. Some countries in Europe even went to the extent where they could fully guarantee savings made by depositors. Some other banks became socialized in order to ensure that the profits, losses and costs were shared across the population (Ciro 43).

Effects
Banks are important players in the economic system and when they are hit by a crisis all the different economic classes are affected-both the rich and the poor. Since the financial system is extensively interlinked, economic shocks are widespread and they are felt around the globe. This is what happened leading to a global financial crisis (Dolezalek 49). The major banks shored up their deposit reserves and made it extremely hard to access loans and credit in general.

Businesses that survived on loans were affected due to scarcity in loans and the fact that those that could be obtained were far much expensive. This led to a spiralling loss of jobs all over the country and the major US trade partners. As the economic times became harder, people started cutting down on consumption leading to a general all time low activity in businesses and their eventual collapse.

How the US A’s and European’s government and financial institution’s responded
The US government in an effort to assist troubled banks declared that it would acquire shares in those banks. After 2008, the Fed and US treasury started implementing the Emergency Economic Stabilization Act. The Fed and treasury also failed to inject money into Lehman and Brothers a major investment bank in the US. There followed an injection of money into financial institutions in return for shares and equity stakes that were common. Treasury and Fed also bailed out AIG which is one of the world’s biggest insurance investor. Fed also deliberately manipulated the interest rates such to almost zero in order to pump liquidity. The Fed also bought security mortgages and treasury bills. The government also developed a plan which assisted the homeowners that were struggling to refinance their mortgages. The Securities and Exchange Commission was also temporarily suspended from short selling financial institutions (Ciro 51).

The then president of the US Bush offered to the financial institutions a bail out of $700 billion (Soros 15). It is notable that the general population was reluctant to embrace the move as it was derived from the ordinary taxpayer. The tax payers and economics critics were apprehensive about the bail out as it meant that the tax payers were to bear the brunt of the mistakes of the financial market. In addition to this, they were sceptical about its feasibility because from history, IMF and other forms of bail outs in Korea, Argentina, Thailand among other countries over ten years ago had not worked (Ciro 60). Bush was seen to be popularizing a socialist welfare ideology in a predominantly free market economy (Soros 20).

There started a nationalization of banks in Europe. United Kingdom and Ireland suffered the financial crisis with the failure of their financial institutions. In an effort to save her crumbling economy, Iceland’s policies were directed towards borrowing from the Bretton woods and neighbouring countries. In 2009 support to financial institutions amounted to EUR 3 trillion in schemes aimed at recapitalization, bailout and restructuring assistance to banks and financial institutions (Dolezalek 68).The idea behind this support to the banks was that the state’s recapitalization ensured that banks would continue to offer loans as they serve an important role in investment stimulation. The assumption was that access to loans would assure sustenance of jobs as well as creation of new ones. At the same time, the European central bank lowered the interest rate to less almost zero just like Fed in the US.

In the UK, the bank of England also injected £75 billion into the economy following the first attempt to ease the economy that was implemented between 2009 and 2010. This move injected £200 billion into the economy and it stimulated minimal gains for the ailing UK economy.
It is notable that the first response to the global financial crisis was the injection of capital into the major financial institutions. Both the US and Europe had settled for a similar decision. The move was fuelled by the policy stance that injecting capital would ensure that the most businesses continued their operations by accessing loans from the banks and financial institutions. The governments also lowered the interest rate to almost zero per cent to allow the businesses to borrow and maintain their employees and where possible create more jobs.

The crisis had been caused by the same policy that the governments were contemplating. Banks and financial institutions had ventured into offering loans at reduced interest rates even to individuals that were unworthy to access credit. The institutions became reluctant on assessing the risk involved. It beats logic that governments would use the same logic that brought about the crisis to lift the economies from the crisis. Additionally, in as much as the policies appeared to be helping the general population, on flip side, this was a double burden on the taxpayer. The taxpayer had already been stretched by the pressure that resulted from the economic instability and they were undoubtedly unstable and now an extra debt was being placed on them.

The governments were making frantic efforts to draw the economies back to the situation that was there before the crisis hit the institutions of finance. The crisis also led to an all-time low in the exchange rates and had a negative impact on the respective countries exports. US and the Europe were the most affected by the crisis although many countries around the globe were also significantly affected though not as much as these two trading partners.

The ordinary citizens were already bearing the injurious effect of the collapse of the financial institutions through loss of jobs, the cutting of available credit on credit lines leading into frantic cost cutting measures. The governments then added to their bag of misery by using taxpayer’s money to bail out these institutions. The ordinary citizen life became harder as they shouldered the burden of the financial institutions.

Conclusion
What the governments were doing was that they had a policy that pointed towards placing the burden of the loss on the taxpayers. The governments of the two regions practiced this despite the countries being proponents of capitalistic ideologies. The crisis has formed an important precedent for future investment in securities by major financial institutions and the general population. People are now more cautious about easy money formulas and it is important that proper assessment of investment windows be practised before engagement investment booms of the same nature in the future.

Works Cited
Arnold, Rger A. Macroeconomics. Natorp Boulevard: South Western Cengage Learning, 2010. Print.
Burns, R.Nicholas and Jonathan Price. The Global Economic Crisis: The Implications for Foreign Policy and National Security. Washington DC: Aspen Institute, 2009. Print.
Ciro, Tony. Global Financial Crisis: triggers Responses and Aftermath. Fanham, 2013. Print.
Dolezalek, Holly. The Global Financial Crisis. Minneapolis: ABDO, 2011.Print.
Eachern, William A. Mc. Macroeconomics: A Contemporary Introduction. Natop Boulevard: Joe Sabatino, 2012. Print.
Hilsenrath, Jon and Conor Dougherty. The Wall Street Journal. 5 July 2011. Web. 10 March 2013
Rushe, Dominic. “Dow closes at new record high after US unemployment falls to 7.7%.” 8 March 2013. The Guardan. Web. 10 March 2013.
Soros, George. Financial Turmoil in Europe and United States. New York: PublicAffairs, 2012. Print.
Trading Economics. United States Inflation Rate. 22 February 2013. Trading Economics. Web. 10 March 2013.

11

Economic Development and Revenue Increases in USA

Description of the Issue
The US federal government uses tax and tax revenues of different categories to finance most of the economic development programs. Imposition of direct taxes, indirect taxes, tariffs and individual taxes all aim at making the US public sector to grow in a way that would enhance provision of public utilities to the population. At macroeconomic levels, tax reforms, as means of generating national revenues are sometimes touted as indication of growth effects depending on the positivity and the level of commitment the collecting body has. In this investigation, we use three approaches to determine the level of economic performance and the impact of tax and tax revenue on US development policies. Initially, we consider some of the impacts of US tax reforms. That is, a 5 percent point cut in marginal tax rates and the subjections the US government and the citizens go through in order to realize the long-term growth rates and stability of economic indicators (Chand, 2005, p. 141).

In connection to this investigation, the first approach would revolve around the determination of the historical record of the U.S. as far as economic progress is concerned in relation to incorporation of tax cuts. The main objective here is to recognize the impact of tax cuts, whether tax cuts have resulted into positive economic growth or whether creation of tax policies negates some important economic policies created by the government and the private sector. The second area involves providing evidences on taxation and economic growth using a large sample of counties in USA and comparing the provided samples to the actual economic growth index. The final stage incorporates some microeconomic elements such as the impact of taxation on labor supply, public and private investment demand, industrial productivity and general economic growth. Preliminary studies of this paper reveal the modest effects. The perfection area relies on the sequential application of 0.2 to 0.3 percentage point tax differences (Chand, 2005, p. 141). The sequential application of order 0.2 percent to 0.3 percent tax point becomes a measure of growth rates and a response to a major tax reform in USA.

Why you Selected this Issue
Tax and tax revenues are some of the means used by the US government to control industrial production and consumption levels of every individual. Main point here is that industrial production relies extremely on the purchasing level of consumers which would reduce significantly as a result of a unit tax increment. With reduced consumption levels, the industrial sector is observed to reduce output levels, which again results into a negative growth in national GDP and GNP. Alternatively, one would rightfully argue that small economic effects can have large cumulative impacts on people’s living standards and social sensitivity (Clift, World Bank, International Monetary Fund & World Bank Group, 2010, p. 119). The issue at hand becomes important in determining some of the important reformations made by the US government as far as revenue collection are concerned and the impact on economic progress. Tax reformation is one of the policies geared towards creating jurisprudence, accountable and non-dynastic government.

Background Information on this Issue
As the case stands, any presidential campaign in America would not be complete without mentioning one proposal for tax reform. The American society believes that through taxation, the national economy creates a breathing space to the minor groups or those recognized to have lower income levels (Clift, World Bank, International Monetary Fund & World Bank Group, 2010, p. 126).

Recent proposals suggested that by reducing marginal tax rates, or by altering current federal income tax and replacing income tax with a consumption type tax, the US government can possibly experience increased work force from the existing labor, improved levels of saving and high levels of investment, which would result into faster and proficient national economic growth. With perfection needs, Steve Forbes mentioned briefly the American political limelight and the impact on population.

This discussion was based solely on US advocacy of a flat tax rate which would cut nearly every individual’s tax bill. The tax bill as a way of ensuring economic balance would remain the stimulation force as well as ensuring complete balance of national budget thus stimulating economic growth. Having in place independent regulatory bodies, like Kemp Commission, suggested that the US general principles of revenue generation and tax reform would have a positive impact in realizing some of the national growth objectives (Clift, World Bank, International Monetary Fund & World Bank Group, 2010, p. 122).

The main objective in revenue creation and proper allocation of finances is to double US economic growth rates. The period of growth is to overlap for the next one decade. In 2012, presidential candidate Barak Obama proposed 15 percent tax cut on household income. This tax cut followed from the need to develop strategies that would realize proponent halving of tax on total national gain on capital as a prediction for increase in Gross Domestic Product (GDP) from 2.5 percent to about 3.5 percent at point economic injections. Several challenges become prominent in the execution stage and other policy makers remained opposed to such growth strategies questioning whether tax reform would replicate into such pre-determined beneficial effects as far as economic growth is concerned. The connection between tax, revenue and economic progress underlie the fact that if in case the proposed tax cuts fail to generate the projected national boost in economic performance, tax revenues would significantly decline, and as observed from practical aspects, the decline in national revenues would put upward pressure on financial deficits, worsen levels of national saving as well as resulting into retarded future economic growth. In other words, lower revenues collected would impede USA economic progress.

Current Policies/Practices that Should be Taken to Address this Issue
Some of the issues that remain pivotal to US economic development process underlie the concept of national growth indicators. In various ways the federal government should put in place those strategies that will ensure equal economic participation. The social disparities and economic groupings are some of the factors that derail individual participation and output level. The second area that will always remain important in every aspect of economic production revolves around creation of training institutions (Preuß, 2004, p. 166).

The US government today works on the basis of giving individual household the basics in terms of education which for a long time has remained neglected and provided through private coaching. Establishment of higher public learning institutions contributes in nurturing potential labor force hence facilitation of industrial output, an injection into the national economy. Looking forward to future national economic progress is an initiative of the federal government and is inclined towards policy projections (Preuß, 2004, p. 167). The government has to remain transparent in all her allocation programs alongside giving equal opportunity and a democratic platform for the public to air their views on some of the factors hindering progress in revenue collection an allocation.

Recommendation for the Future
Several policies created by a government majorly aim at improving current economic situations alongside ensuring that the population participate towards value creation in various development programs. The recommended platform in realizing equality in economic participation and improved means of revenues collection may include the following:

Making every participant realize the importance of economic policies put forward as a way to elevate economic production. This may involve facilitating education programs to familiarize the US population with some of the newly developed tax policies.

Developing mechanism to ensure proper revenue collection, apportionment and allocation in some of the most sensitive areas of national development. Here, the need to create an independent regulatory body remains critical in the history of US public expenditure. With this recommendation in mind, the objective is to ensure that revenues collected from the public perform the intended functions.

The procedures involved in revenue collection must as well take into consideration the interest of the public and concentrate on social progress and welfare. The government must therefore come up with procedures of revenue collection that give credit to the wholeness of the society.

Other than application of taxes, the government should put into practice other means of raising funds like looking for gifts and donations from willing persons and private organizations. Inclusion of gifts and donations are some of the ways the government reduces tax burden.

Conclusion
In general, USA policy makers must remain logical and considerate in their strategic plans that range from revenue collection to expenditure in different areas of national growth. Imposition of various levels of taxes as a means of revenue collection remains the determining factor of economic participation (Preuß, 2004, p. 167). Thus, households and industries will always remain very sensitive to slight changes in tax rates and to any other policy that directly affect their level of income or revenues. Even though revenue collection and allocation has direct impact on national progress, other factors may still play significant roles in providing the most required applicable tools for economic growth. For example, the industrial areas remain sensitive to changes in technology as a means of production.

References
Chand, S. (2005). Pacific Islands regional integration and governance. Canberra: Asia Pacific Press at the Australian National Unuiversity.
Clift, J., World Bank., International Monetary Fund., & World Bank Group. (2010). Finance and development: Volume 47, no. 3. Washington, D.C: International Monetary Fund.
Preuß, H. (2004). The economics of staging the Olympics: A comparison of the Games 1972 – 2008. Cheltenham [u.a.: Elgar.

ECONOMIC DEVELOPMENT AND REVENUE INCREAES IN USA 2

Running head: ECONOMIC DEVELOPMENT AND REVENUE INCREAES IN USA 1

 

EC 313 (F)

Chapter 4: Macroeconomic Coordination

Macroeconomic coordination involves two major processes: funding adjustments and output-price adjustments. Funding adjustment occurs whenever ASF and ADF differ while output-price adjustments occur whenever APE and GDP become unequal. The former can be implemented rapidly but output price adjustments are time-consuming processes. Potential purchases of the prevailing domestic output can be categorized into those with insufficient money to buy what they need (Group 1), those with just enough money to fund their planned purchases and (Group 2) and those with surplus money to buy what they need (Group 3). It is rational to assume that Group 1 and Group 3 will opt for borrowing and lending respectively.

Funding Adjustments when ADF = ASF, ADF > ASF and ADF< ASF

Whenever ADF=ASF, the amount that Group 1 will be willing to borrow equals the amount that Group 3 will be willing to lend. As a result, financial institutions will see no need to adjust interest rates. Whenever ADF>ASF, the total amount of money Group 1 will be willing to borrow will exceed the total amount of money available for lending from Group 3. In response, financial intermediates will charge borrowers higher interest rates. This will increase ASF and decrease APE while ADF may decline. The interest rates will keep rising until ADF=ASF. Whenever ADF falls below ASF, the outflow of funds from Group 3 will exceed the funds needed by Group 1. The financing bodies will respond by lowering the interests they charge borrowers and that they pay to lenders until ADF=ASF.

Output-Price Adjustments

Imbalances resulting from funding adjustments (GDP<APE =ASF or APE <GDP=ASF) trigger output-price adjustments as the nation’s producers react to their own situations independently. Producers can be categorized into those that face: insufficient demand (Group X), an average demand (Group Y), and excess demand (Group Z). Firms move from one group to another as their output and sales behaviors change throughout the year. With GDP=APE=ASF, producers in Group Z will increase output and prices. Producers in Group X reduce output and cut product prices. When GDP=APE, the insufficiency in demand faced by Group X = the excess demand faced by Group Z. This leaves the average level of output (GDP) and Prices unchanged. Consequently, ADF = ASF hence no change in interest rates. In summary, when GDP=APE=ASF, output, employment, prices and interest rates remain unchanged.

If GDP<APE=ASF, producers in Group Z will increase output and prices. Producers in Group X will reduce prices and cut down output. The excess of APE over GDP will be equal to the net demand of Group Z and Group X combined. This will lead to a net increase in GDP and prices. At the same time, the interest rates will increase but this is an intermediate stage rather than the overall impact of the output-price adjustment. The increase in prices and output by Group Z will result in increase in economic profits. Therefore, firms in Group X where economic profits are negative will move out while Group Z will grow. Since Group Z was initially much larger than Group X, the net impact of price and output changes in both groups will be positive economic benefits. Entry into Group X will continue until the net economic benefits reach zero. Output will continue to grow until prices are restored to initial levels.

The final output-price adjustment scenario would be APE<GDP=ASF, meaning that current output exceeds combined demand. When this occurs, producers in Group Z will be unaware of the net excess output hence respond by increasing output and prices. At the same time, produces in Group X will reduce output and prices to respond to insufficient demand. The magnitude of the excess of GDP over APE will be exactly equal to the amount by which total insufficiency in demand experienced by Group X firms exceed the excess demand experienced by Group Z firms. This means that the decrease in price and output by group X firms will exceed the increase in price and output by Group Z firms. Hence, the net impact will be a decrease in GDP and prices. Therefore, the overall impact of an APE<GDP=ASF scenario will yield lower output, interest rates and employment.

The prices will decrease initially but will be restored to original levels if no external factors emerge to interfere with the GDP contraction process. A less likely outcome of this scenario is a pure deflation in which the GDP remains at initial levels as prices fall. This will result in lower interest rates and lower prices while output and employment remain unchanged. It is important to note that the MCP discussed so far occurs automatically when imbalances among GDP, ASF, and APE emerge. In other words, none of the participants is aware of these imbalances. Instead, participants respond to their own situation independently. Despite these adjustments, creeping inflation (<10 percent annual inflation rate) is a common experience for many economies. Creeping inflation may result from presence of obstacles that hinder entry into the more profitable Group Z industries and the tendency of production costs to increase gradually with time.

Chapter 5: Macroeconomic Shocks: Excess Demand Cases

Among the shocks that may trigger a MCP include increase in ASF, increase in APE and a decrease in GDP. The effects of these shocks can be understood within the initial assumption that at the time the shock hits, the three parameters (GDP, APE & ASF) are at equilibrium with APE=ASP=GDP. An increase in APE will lead to an increase in demand due to foreign or domestic factors (demand-caused expansion). The increase in demand will stimulate efforts to generate more funding to take care of the excess demand hence increasing interest rates, increasing funding (ASF) and reducing aggregate APE until APE=ASF. At this point, the GDP will be lower than both APE and ASF. The overall result of this scenario is that demand will exceed supply, meaning that producers will increase output, prices and employment. Increase in prices will lower the ASF while increase in supply and employment will raise the APE and GDP to the point that a temporary macroeconomic equilibrium (GDP=APE=ASF) will be obtained. Output and employment will keep on rising, pushing the profits and prices down. At some point, interest rates, output, employment, and prices will reach a stable equilibrium provided the economy does not suffer another shock.

Increase in ASF (Money-and-Credit-Caused Expansion)

The second consideration is an increase in ASF. The initial funding adjustment will push the level of interest rates down. However, the resultant price and output adjustment will result in an increase in interest rates. Similarly, prices, employment, output and prices will continue to rise until GDP=ASF=APE. Output and employment will keep on rising until profits and prices fall. The resultant effect of this process is an increase in output and employment, decrease in interest rates and unchanged levels of profit and prices. The new levels of output, employment, prices, and interest rates will be maintained until the economy is subjected to another shock.

Cost-Induced Expansion/Deflation

The third scenario would be generated when the cost of operating businesses falls. The industries experiencing reduced cost of production will increase output and employment while prices will fall. GDP will rise due to the increasing output and employment in many industries. This means that APE, ASF, and GDP will increase. Economic profits will eventually reach zero hence halting the expansion in employment and output. Overall, a decline in production cost will push employment, profits, and output up while decreasing prices and interest rates. The higher profits will keep the employment and output on an upward trend while suppressing interest rates until the profits fall to zero due to falling prices. The new levels of output, employment, prices, and interest rates will be maintained until the economy suffers another shock.

Decease in GDP

Another case would be an increase in inflation due to changes in supply. Several factors including war, natural calamities such as floods and earthquakes, sustained labor disputes and insufficient raw materials can push the level of GDP down. A decrease in GDP will cause an immediate but a slight drop in interest rates. However, the interest rates and prices begin to rise rapidly until the levels of ASF and APE fall to the lowered levels of GDP. Although this situation is temporary, it may take a while before restoring GDP to its initial levels. Once the factors that initially triggered a decline in GDP are reversed, the output, employment, prices, and interest rates will return to their initial levels. Clearly, increase in APE and ASF creates jobs and increases productivity. Both the increase in APE, reduction in production costs and falling GDP share the fact that they raise prices. The prices increase automatically since more money is available yet goods are few. Sustained APE and ASF shocks can cause a prolonged increase in prices, otherwise referred to as sustained inflation.

Chapter 6: Macroeconomic Shocks: Insufficient Demand Cases

This chapter discusses the impact of falling APE, falling ASF and rising GDP on the economy. These three shocks will have insufficient demand following initial funding adjustment (APE< GDP= ASF). The first case is called demand-caused recession and entails a decrease in total demand (APE) due to factors such as tax increases, falling government purchase of GDP, and reduced demand for locally produced goods in the export market. As a result, producers will decrease output, employment and prices leading to establishment of a temporary equilibrium with GDP=APE=ASF. However, this process will lower economic profits and decrease the GDP further. Meanwhile, output and employment will keep rising until profits and prices are sufficient to offset the negative economic profits. The overall result is lower levels of output, employment, and interest rates and unchanged levels of profits and prices.

Decrease in ASF (Money-and-Credit-Caused Recession)

The second scenario is generated when ASF falls. This produces a lower product of money supply (M) and money velocity (V) relative to the price index (p). Reductions in MV can result from attempts by lenders to lower their outstanding volume of loans or excessive capital outflows from the country. ASF decline will be accompanied by a rapid increase in interest rates as potential buyers push for more funding (increase in ASF). The APE will keep falling while Interest rates and ASF will rise until ASF=APE. At this point GDP>APE=ASF. The excess of GDP over ASF will continue to attract more funding until GDP and ASF become equal. APE will decrease further due to rising interest rates resulting in an APE<GDP=ASF scenario with output and employment down, higher interest rates and unchanged prices and profits. This equilibrium will remain until further disruption by another shock.

Cost-Push Inflation

Increase in production cost can result in another scenario called cost-push inflation. Increase in production costs will trigger an increase in prices accompanied by a reduction in output and employment. The net increase in prices and the net decrease in employment and output will lower the ASF and GDP respectively while interest rates will rise. With time, exit from the firms facing high production costs will push prices up to the same level as the increase in production costs. The reversal of the negative economic profits will stop these industries from shrinking further. The increase in prices as well as reductions in employment and output will halt, leading to a situation with lower output and employment and high prices-cost push inflation called inflationary recession or stagflation. The increase in prices is due to producers responding to rising costs rather than increase in demand. Therefore, cost-push inflation can occur at any time regardless of whether or not money is in excess supply. If the cost-push increase in prices is not accompanied by a corresponding increase in money supply sufficient to keep ASF levels high, a recession will occur.

Increase in GDP (Growth Problem)

The last scenario is generated when GDP increases due to increased production. The accompanying rise in APE will be lower that the increase in GDP hence rendering demand insufficient. This is one of the main components of the growth problem. The other component is the funding problem. A GDP increase does not always translate into increase ASF by it creates a need for funding increment. Failure of ASF to increase to the extent that GDP increases will render the new levels of GDP unsustainable. GDP growth usually exceeds the growth in APE. As funding increase to push up APE, ASF increases. However, the increasing need for funding will trigger rapid increase in interest rates, which is accompanied by loss of some demand. Overall, APE will fall to levels lower than its initial level while ASF and interest rates will keep rising until ASF=APE. This results in a GDP>APE=ASF scenario. Additional funding will push ASF and interest rates upward until ASF equals GDP. The rising interest rates will lower the APE further resulting in APE<GDP=ASF situation.

At some point, the existing demand will be unable to sustain the rising production. As a result, interest rates as well as employment and output levels will fall to their initial values. The net change in price will be zero. The economy goes back into a demand-caused recession characterized by lower levels of output, employment, and interest rates while prices remain unchanged.

Supply and Demand Simulation

Increasing the interest rates attracts investors. As a result, it becomes more expensive for the companies to borrow within the markets. Therefore, the supply starts to shrink. In short, interest rates are the price of money. Higher rates discourage consumption.

The microeconomic factors that affect the demand and supply include income and wealth. Income influences demand. As individuals’ income changes, their willingness as well as their ability to buy product changes. Some of the factors that cause changes in the income include employment and other individual investments.

Microeconomics refers to the behavior of individual households as well as firms in making decisions concerning the allocation of the limited resources. On the other hand, macroeconomics focuses generally on the countrywide or global economics. This involves studying the sum total of economic activity (Marthinsen 433). Basing on these definitions, income and wealth fall under microeconomics while interest rates and inflation are macroeconomic factors.

Attending this class has equipped me with sufficient knowledge as far as demand and supply simulation is concerned. I can apply the concept of demand and supply learned here in setting equilibrium prices for the new products. These will be the prices, which the buyers will be willing to use in the market. At the same time, the seller will be willing to supply their goods and services at the same prices.

The concept of macroeconomics helps me in understanding the factors that affects the shifts in supply and demand. Macroeconomics also helps in understanding the concept of equilibrium price and quantity. These factors affect the whole country. They include factors such as inflation, interest rates, changes in the value of the currency, and other more factors. They affect the supply and demand greatly.

In economics, elasticity is used to refer to how the demand as well as the supply of a product may change in relation to the changes in the price (Tucker 311). For an elastic demand, whenever there are outward shifts in the supply, the prices will fall. This will cause large increase in the quantity demanded. In order to determine the elasticity for a given product, the proportionate changes of one of the variables is placed over the proportionate changes of the other variables. The Elasticity is the calculated using the formulae E = percentage change of supply or demand / percentage change in price (Artis 82).

Price elasticity has a big influence on the purchasing power of the consumers. Goods are elastic are very sensitive to the changes in prices. Therefore, the changes in their prices will greatly affect the consumers’ purchasing power. On the other hand, the changes in prices for the inelastic will not affect the consumers’ purchasing powers greatly.

Works Cited

Artis, Michael J.. Demand management, supply constraints, and inflation. Manchester [England: Manchester University Press, 1982. Print.

Marthinsen, John E.. Managing in a global economy: demystifying international macroeconomics. Mason, OH: Thomson South-Western, 2008. Print.

Tucker, Irvin B.. Survey of economics. 7th ed. Mason, OH: South-Western Cengage Learning, 2011. Print.

Macroeconomic Performance in Netherlands and Vietnam

 

Just as in the past years, various European countries dominated the 2011 to 2013 top 10 positions in macroeconomic performance. This year, Sweden, Switzerland, Netherlands, Finland, United Kingdom and Germany dominated the top ten competitive economies. The Asian economies were represented by three nations; with Singapore taking the second most- competitive position globally (Alberto and Arsène 34). Hong Kong and Japan took the 9th and 10th positions respectively. Nevertheless, this paper will not cover all the ten economies. It will compare and contrast the macroeconomic performance of Vietnam and Netherlands during year 2011, 2012, and 2013.

 

Vietnam’s economy is both market economy and planned economy. Currently the country experiences a period of integration into the worldwide economy. More so, the country has enterprises that are medium and small. It has also integrated itself as one of the leading exporters of agricultural products (Zanden and Arthur 88). Indeed, it serves as a foreign investment destination among the Southeast Asian countries. Nowadays, the country’s economy is dependent on FDI (Foreign Direct Investment). The latter assist the country in attracting capital from other nations to help in its economic growth. The country’s nominal gross domestic product in 2011 was $121.6 billion. It had a gross per capita of approximately $1328.6. Inflation rates stood at 18.58 in year 2011 but reduced to 7.5% by end of the year 2012 (see fig. 2)

 

The finding of Vietnam global competitiveness index for the year 2012-2013 ranks Vietnam in the 75th position. In the previous two editions, Vietnam lost 16 places. It is currently ranked second last in the ASEAN (Association of South East Asian Nations). It lost ground in nine out of the 12 pillars outlined in the global competitive index. In addition, the country is greatly below the 50th position in all the pillars. In fact, it is close to 100th position compared to majority of the members (Cline 99).

 

As an indication of the county’s extreme vitality and fragility, it falls under 41 places in an environmental pillar of macroeconomic to 106th position. This was after it had a record of 20-place gain in the edition that was done previously. The inflation was around 20% in 2011, which was twice that of 2010 (see fig. 2). This worsened the country’s rate of sovereign debt. In a bid to curb the incurred inflation, its State Bank tightened their monetary policy, something that made their credit difficult to access (Phillip and Bentzen 188). Infrastructure was ranked 95th.

 

Due to strains and swift changes in the country, economic growth in the Vietnam has been a drawback irrespective of improvements done in the recent past. More concerns, however, has been on the quality of roads that rank 120th position in the GCI, and the port which rank in the 113th position. There is massive corruption in the public institutions and inefficiencies of all types. Respect of the rights of property, which lies in the 113th, and security of intellectual property in the 123rd position are not enough according to the business community of the country.

 

However, among the ASEAN countries, Vietnam has strengths such as an effective labour market, which lies in the 51st position. More so, the country has a large market size, which is in the 32nd position. In addition, it has reasonable performance in its basic education pillar and its public health in the 64th position. In terse, the country faces numerous challenges of heading forward that will need conclusive policy actions so that the growth performance of the country is enhanced and a better stable footing attained.

 

Conversely, Netherlands is currently among the top twenty largest economies globally. Its gross domestic product per capita is around $42,000 and is among the top 10 richest nations globally. However, today the economy of Netherlands is in recession. Its economy declined by 0.5% in year 2012. Apparently, Netherlands has an inflation of around 2.9 (see fig. 1). Its unemployment rate has also increased drastically over the last three years. In fact, in May 2013, its unemployment rate was 8.3% (see table 2).

 

The country has sustained its AAA rating until end of July 2013 according to three credit rating agencies. Its rate of unemployment reduced to 5% in 2011 (see table. 2). However, its unemployment rate increased sharply to 8.3% by May 2013. The budget deficit of the country in 2011 was 4.7%, which was larger than the anticipated figure and much greater than the mandated maximum of EU. According to OECD (77), the mandated maximum of EU is usually 3%. The government of Netherlands implemented austerity measures in year 2011, though the turn–down of the economy in mid-2011 could not allow another chance of austerity measure to take place. Apparently, the cabinet has a plan to cut the new budget by 6 billion.

 

According to the GCI, Netherlands has improved its ranking. Indeed, it was in the fifth position in this year. This improvement is a reflection of continuous strength of the county’s innovative capacity. Its heightened stability and effectiveness of the financial market has also contributed in attaining the fifth position. Unlike in Vietnam, Netherlands enterprises are more sophisticated and innovative, ranked in forth and ninth positions respectively. Furthermore, the country is rapidly harnessing sophisticated and new technologies to be utilized in improving production in the country (Gainsborough 202).

 

Moreover, Netherlands has an effective education system, which is ranked fifth for primary education and health and sixth for its training and higher education. Its effective market is ranked sixth. In fact, the markets are supportive to the business activities of the country. More so, even though Netherlands registered a fiscal deficit in the past years (e.g. 5% of gross domestic product in the year 2005), the country’s macroeconomic environ is stable compared to various other advanced economies (Furnivall 56). Its infrastructure is one of the best globally. In fact, the infrastructure is a reflection of the excellent and efficient facilities for railroad transport, air and maritime, ranked ninth, fourth and first respectively.

Appendix

Table 1: The unemployment rate in Vietnam from 2011 to 2013

Labour	Last		Previous	Highest	Lowest	Forecast		Unit
Employed Persons	51.71	2012-12-31	50.40	51.71	23.50	53.04	2013-12-31	Million Persons
Population	88.78	2012-12-31	87.84	88.78	34.74	88.78	2013-12-31	Million
Unemployed Persons	0.90	2012-12-31	1.00	2.30	0.80	0.69	2013-12-31	Million Persons
Unemployment Rate	2.22	2013-09-30	2.28	4.50	1.81	2.37	2013-12-31	Per cent

Table 2: the unemployment rate in Netherland

Labour	Last		Previous	Highest	Lowest	Forecast		Unit
Employed Persons	7252.00	2013-09-15	7272.00	7551.00	6851.00	7249.57	2013-10-31	Thousand Persons
Job Vacancies	96.80	2013-05-15	97.10	256.70	81.80	88.53	2013-09-30	Thousand Persons
Labour Costs	134.27	2013-05-15	111.15	134.27	75.40	111.48	2013-09-30	Index Points
Productivity	25.11	2013-05-15	25.33	108.91	25.11	25.03	2013-09-30	Index Points
Wages	132.20	2013-09-15	132.20	132.20	76.60	132.27	2013-10-31	Index Points
Wages in Manufacturing	132.80	2013-09-15	132.70	132.80	74.80	132.98	2013-10-31	Index Points
Youth Unemployment Rate	11.70	2013-09-30	11.40	13.50	4.80			Per cent
Unemployment Rate	8.60	2013-09-30	8.60	8.70	3.40	8.70	2013-10-31	Per cent
Population	16.73	2012-12-31	16.66	16.73	11.49	16.74	2013-12-31	Million
Minimum Wages	1477.80	2013-12-31	1469.40	1477.80	1064.20			EUR

Fig. 1: the Inflation rate in Netherland

Figure 2: the inflation rate in Vietnam in 2011 to 2013

Work Cited

Alberto Bagnai, Arsène Rieber. Economic growth and balance-of-payments constraint in Vietnam “World Development (2013): 4-5. Print.

Cline, Willy. Can the East Asian Model of Development be generalized? World Development: (2013) 10(2), 84–90. Print.

Furnivall, J. S. Netherlands India: A Study of Plural Economy. New York: Cambridge University Press, 2012. Print.

Gainsborough, Martin. Changing Political Economy of Vietnam: The Case of Ho Chi Minh City. London: Rout ledge, 2013. Print

OECD. Economic growth and balance-of-payments constraint in Vietnam. New York: OECD Publishing, 2012.

Phillip, Abbott, and Bentzen, Jeanet. “Trade and development: Lessons from Vietnam’s past trade agreements” World Development (2009): 37(2), 341-353. Print.

Zanden, J. L. van, and Arthur van Riel. The Strictures of Inheritance: The Dutch Economy in the Nineteenth Century. 3rd. New Jersey: Princeton University Press, 2011.Print.

Deviations in UK’s Inflation Targets

 

Since the early 1990s, developing countries have adopted the inflationary target system to ensure that the economy has a sustained stability encouraged by mildly fluctuating consumer spending, financial markets and other financial factor. The UK adopted this system in 1992 at a time when inflation had hit the 8.2% mark (Hammond, 2011, 123). Thereafter, the targets helped in the analysis and implementation of monetary policy that has ensured a stable economy, currency, and growth. However, following the 2007 global recession, the target inflation rate of 2% (with a margin of = or – 1%) has surpassed its target by more than 0.5% basis points. This deviation has been influenced by various factors, which still influence the current deviations. This paper will analyze some of these deviations and some of its causalities, as well as its influence to the UK economy and monetary policies.

 

The primary cause of the deviation in inflationary targets was the financial crisis that rocked the global community. This crisis resulted in a reduction in world’s output and trade, coupled with low consumer and investor confidence. This resulted in a rise commodity prices especially in the energy sector and the agricultural production and prices (Brazier, Harrison and Yates, 2008, 240). This reduced savings and increased costs of basic commodities, which led to an increased consumer price index (CPI) and retail price index (RPI-X). Therefore, during this period, this lasted for more than three years, the value of the inflation maintained above 1% of set target with this margin increasing to 2% (Gertler and Kiyotaki, 2010, 41).

 

The banking crisis also precipitated a rise in inflation. The UK banking sector had been cushioned from any financial instability in the host country. However, these banks held vast foreign accounts and interests (Beechey, Johannsen & Levin, 2011, 116). Therefore, following the global collapse of the financial sector after the recession, the UK banks that held massive foreign trades were heavily affected by the weakening of different currencies thus heading into debt. This had the ultimate effect of increasing borrowing from the Bank of England, which increased liquidity and a weakening of the British Pound, and finally an increase in the inflation rates (Woodford, 2003, 212).

 

The Bank of England had always relied on interest and exchange rates to maintain a stable inflationary target. This analogy was faulty since inflation was dependent on other external shocks such as global oil and food prices (Barker, 2012, 16). However, following the 2006 financial crisis, the inflationary rates increased but the base lending rates were not adjusted accordingly in a manner that would have controlled this inflation. This move is because the Bank of England believed that the crisis and inflation deviations were temporary. Therefore, they based the interest and exchange on a future value that would ensure its stability and strength respectively in the end.

 

The inflationary deviations that have characterized the UK economy in the past six years have been marginal as compared to other countries and thus the UK believes that its monetary policies are steadfast and comprehensive. However, analysts contend that this target inflation rates should be adjusted to at least 3%, which would be in line with the recent inflationary trends. Between 2007 and 2012, the inflationary rates have averaged about 3.2% and thus the Bank of England should highly consider readjusting their targets (Dale, Proudman & Westaway, 2010, 8). Conversely, because of the financial crisis and inflation deviations, the bank has constituted measures that are aimed at controlling the inflation in spite of any external forces such as a meltdown in the global financial markets. These measures, though temporary, would help stabilize the country’s economy (Macallan and Taylor, 2011, 105).

References

Barker, K., 2012. Macroeconomic policy: too much autonomy and too little coordination”, Centreforum. Available at www.centreforum.org/assets/pubs/macroeconomic-policy.pdf

Brazier, A. R., Harrison, M. King, and Yates, A., 2008. The Danger of Inflating Expectations of Macroeconomic Stability: Heuristic Switching in an Overlapping‐Generations Monetary Model. International Journal of Central Banking, 4(2), 219‐254.

Beechey, M. J., Johannsen, B. K., & Levin, A. T., 2011. Are Long-Run Inflation Expectations Anchored More Firmly in the Euro Area Than in the United States? American Economic Journal: Macroeconomics, 3(2), 104–129.

Dale, S., Proudman, J., & Westaway, P., 2010. The inflation-targeting regime in the United Kingdom: a view from Threadneedle Street. Oxford Review of Economic Policy, 26(1), 3–14.

Gertler, M., and Kiyotaki, N., 2010. Financial intermediation and credit policy in business cycle analysis, in Handbook of Monetary Economics, Vol. 3A, Amsterdam: Elsevier.

Hammond, G. 2011. State of the art of inflation targeting– 2011, Handbook No. 29. Bank of England Centre for Central Banking Studies.

Macallan, C., and Taylor, T., 2011. Assessing the risk to inflation from inflation expectations. Bank of England Quarterly Bulletin, 51(2), 100–110

Woodford, M., 2003. Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.