Essay Writing Service

1 Star2 Stars3 Stars4 Stars5 Stars (No Ratings Yet)
Loading...

How Apple Incs Strategy Is Affected After Globalization Economics Essay

n this twenty first century, globalisation has an impact in every economy. World of today is considered to be united as a bunch countries with no boundaries. Raw materials from different countries are being processed in another country to manufacture goods & products are being marketed in another country. It is the modern concept of the globalisation. A company goes international for so many reasons like, small domestic market, adverse government policy in home country, high demand of the product in foreign market etc. FDI across the globe had a fixed upswing with a sharp growth in the second quarter of 2008. Even it was not affected so much by financial crisis during recession in 2008. FDI is mainly originated from the advanced economy like USA [ Peter Dicken]

In this essay we have chosen famous electronic gadget manufacturer APPLE as our company, which is mainly based in USA, has expanded its production unit in EUROPE and ASIA. It is manly famous for introduction of a new age in mobile phone industry by brining iPHONE & MACBOOK in pc section. Recently they have launched iPAD in the market which turn to be a great success. How their strategy has been affected when they go global by the main three factors (1.Technology.2.geography.3.goverment policies ) has been described below.

TECHNOLOGY:

For a product to become more acceptable by quality, implied technology of production plays an important role. Foreign direct investment prospects can be propelled to a new level if the quality of production can be retained in a cost effective manner. Hence, investment opportunity of a country is significantly influenced by its internal development, technology and growth. These intrinsic developments are always in the lamplight of MNCs and are effectively made use by them.

Apple has met its investment prospects in China as this country maintains the unique work quality in assembling the inputs for final production. As a part of corporate global strategy, company has given outsourcing more importance at the same time imparting mandate high control over product integrity. When apple produce iPods in China, it is not produced in a factory owned by Apple. It is been contracted with third party to produce IPods with the specifications Apple provides.

Moreover from outsourcing, Apple is sourcing quality products for assemblage from foreign countries and some even from China itself by fragmenting its supply chain very effectively. The standard of factors of production is set to meet the requirements set by Apple Inc. If the company is not successful in monitoring the strategy which is being implemented in a country, it will eventually destroy company’s reputation. The subtle implementation of internationalisation strategy is been spawned in such a way that Apple products are leveraged to its maximum utility. For leveraging the products to its maximum levels, sophisticated research and development is being carried out through international investments and intrinsic ground-breaking technologies.

Trade theory gives light by how much proportions the various factors of inputs needed at each stage of a production process, together with various inputs’ at comparative costs, influencing the investment proposal. As technology is one of the important input of production, while framing up an international strategy it has to be dealt well while investing in a foreign country. The comparative cost of the technology brought forth for production is very significant as it contributes to the international pricing strategy. The quality technology which is been generated in China holds cost advantage when it is compared to the same technology implemented in US. Advanced technology is pioneer to production of any innovative products but this technology has to be accessed in a cost effective manner to produce competitively priced product. Skilled labour is another requisite which should be considered in quality production. High cost of labour in United States of America can be a down beating factor in home country which can be eliminated through foreign direct investment. Hence, advantage is been derived in the host country in terms of technology implementation through skilled labour force at low cost. Apple Inc’s business establishment in China is a subtle example for their tactical part in internationalisation strategy.

GEOGRAPHY:

The geographical dispersion means that company’s activities are not concentrated to a single country rather it is dispersed between different countries. The production in foreign country can be commenced in two ways namely Merges & acquisition and Greenfield investment. Greenfield investment means setting up a new plant and physical assets in the foreign country whereas Merges & acquisition means merging with a foreign firm or buying existing assets in a foreign country. The cost of geographical dispersion can be of three types which is firm level, plant level and the economies of integration foregone.

Almost 54% company’s geographical market place is situated in United States. Final assembly of company’s product is mainly done in Ireland & by external vendors in California, Texas, China, Korea, etc. Manufacturing & supply of many critical components is executed by sole sourced third party vendors from Taiwan, Germany, US, Germany, Korea, Netherlands etc. But main assembly part is done in China by sole sourced third party vendors. That means its production input has been divided into sub category & situated in different countries. So it is an example of centralized vertical Foreign Direct investment by apple where it’s headquartering is situated in US.

The benefit of geographical dispersion for the company is that, it is able to reduce the cost of primary input as the price for inputs varies in different locations. It also helps the company to lower operating cost and reduces the company’s direct control over the production and distribution. This also helps in lowering the trade cost and enables it to capture the markets. For example, the investment decision to manufacture the products from China helps the company to have a better control over the Asian markets. Also the cost incurred in exporting the products from United States to Asian market is much lower when it is from China. The firm also enjoys economies of scale as the cost of production is less due the dispersion and the company is able to employ skilled and cheap labor.

In spite of its benefits, it’s uncertain what negative effects will this have on the company. The diminished operational control may have an effect on the quality of the products or services or its flexibility to respond to changes. This may adversely affect the reputation of the company. Another problem is that, if the manufacturing or providing logistical services in the other country is disturbed for any causes like natural disaster, war, political issues, public health, failure in information technology system, financial crises may materially affect the company’s financial condition and operation.

GOVERNMENT POLICIES:

The vertical foreign direct investment strategy of Apple is advantageously and manifestly framed up by the influence of political environment or trade policies that operate within the country. The supply chain is fragmented and for assemblage, the Apple’s input commodities are sourced from special enterprise zones of China where much of import duties and taxes are waived. The government trade policy influences the intricate supply chain management and outsourcing of the company.

Apple being an American multinational propels a strategy that insulates itself from foreign exchange risks. The price the company has to pay for a specific input item in a specific country is influenced by the exchange rates of currencies at the time. The company exhibits a pattern of a good net receiver of currencies except the American dollar. As the US dollars gains strength, it will negatively affect the Apple’s net sales and gross margin articulated in American dollars. Financial innovations are spawned by the international financial flows. The financial innovations are greatly influenced by the monetary and fiscal policy of a government. This level of influence determines the stability of economic performance. As US government tends to maintain very low interest rates to support the demand for housing and promoting the revival of building industry, international capital flows are possible. It may result in more capital outflows and a weaker dollar. An immediate effect can be noticed in the US output as a result of more US exports. Thus for Apple, weaker dollar gives more euro earning and allows it to state an elevated profit rate to it stakeholders. [Linden 2008]

Many financial innovations are spawned out from the introduction of capital flows. There is an economic significance of international financial instruments like forwards or options when Apple deals with it. July 2008 Company reports stated that the Apple inc was willing to enter into forward and option dealings of foreign currencies. This also included some strategically committed transactions, the investment company possessed in foreign subsidiaries, forecasted future cash flows etc. Evidently, practice of the company was to hedge a large number of its material foreign exchange exposures for some months. [Apple inc, 2008]

The progression of this model imparts light into the strategy framed up by Apple in tackling the effect of rising prices too. A developing country like China has remarkable success in controlling the inflation. Apple has a peculiar stake in China where country exhibits success in managing its economy from extreme pressures and creating higher inflation rates. Chinese central bank put forward a straight policy in framing up the exchange rates. Till July 2005, the policy upheld was to fix the rate it levied to exchange Chinese currencies for American dollars. In this context, Apple could assertively forecast the exchange rates weeks in advance. [Apple inc, 2005]

Apple endeavours to do outsourcing in the country where there is minimal legal regulations as the

How are wages determined in India

y can maximise their profits. As the operations are mainly concentrated in China, Apple Company has got relaxation from heavy tax burdens. Vertical specialisation with internalisation keeps the production cost low at the same time company benefits from low trade cost. The company is getting more and more innovative by research and development. Proper caution is taken as the economy breeds the risk of a global financial downturn that could have disastrous effect in their business.

At last , after analysing the all the factors that affects company’s internationalisation & foreign direct investment we can conclude Apple is truly globalised . That means it has stretched its corporate arms in such a way that we can say that for Apple the difference across countries does not matter. They have fragment

employer or by bargaining between employer and individual employee or take-it -or-leave -it- basis or through any other mechanism?

Framework for wage calculation

Organized Sector:-

The `day’, `week’ and `month’ are the basic units for wages calculation. Used in combination.

Normal working week is five days (for government) five half days/ six days.

`Hour’ is generally not a unit for wage calculation. (In newer sectors like IT, ITES hour is becoming a standard).

Wage payment is made monthly.

Unorganized sector:

`Day’ is the common unit of calculation. In certain cases piece rate wages as well as hourly wages.

Methods of Wage Determination in India

Committee on Fair Wages 1946

Minimum Wage: – bare subsistence of worker, enough for health, efficiency and working capability

Fair wage: Above minimum wage

Living wage: male worker not to provide for himself, but for family – not just bare necessities but frugal comfort, education for children, social security etc.

Need based minimum wage

Institutions involved in wage determination

Wages Legislation. (covers organized/unorganized)

Wage Boards (covering select private and public sectors).

Pay Commission (for government/Public Sector).

Collective Bargaining (for covered workers).

Government Directives/Special commissions

Salary Surveys/Compensation Consultants – for private sector, non-officer cadre.

Wages Legislation

Minimum Wages Act 1948

Payment of Wages Act 1936: Introduced to ensure that wages are not withheld, no wrongful deductions made and payment is made in such manner that wage earner will benefit. (Objective was to reduce effects of payment in kind for work done). Agriculture sector not covered.

Equal Remuneration Act 1976: Payment of equal wages for men and women workers for same work or work of same nature. However, discrimination exists in terms of definition as: difficult work (men) and easy work (work) in same workplace

Companies Act 1952.

Other (s):

Payment of Bonus Act:

8.33% minimum bonus and 20% maximum, even for loss making organizations.

Workers earning up to Rs 3500 per month alone eligible.

Calculation of Minimum Wages

15th Indian Labor Conference:

Standard working family of 1 man (earning) + 1 woman (wife) + 2 children.

2700 calories for adult 80% for wife and 60% for child (daily)

72 yards of cloth per annum.

Government rental cost for housing

20% of above for fuel, lighting, miscellaneous.

This formed the basis for calculation.

Minimum Wages: present situation

Idea of National Minimum wages not accepted.

Hence minimum wages determined by center/state government for different occupations. Now total 200 occupations covered.

For same occupation, minimum wages vary from state to state.

Declared on per day basis for 8 hour work

Wage Indexation

The system of DA (Dearness Allowance) to take care of effects of inflation. (Cost of living).

Indexation can be fixed or variable (indexation value decreases as income rises).

Consumer Price Index used as the basis.

Clearly followed in organized sector.

On some states minimum wages revised periodically, so no requirement for indexation.

Un-organized Sector

Inherited worker.

Contract worker.

Casual worker.

Beck and call worker.

Free labor/Help.

Bonded/Child (illegal)

Organized Sector

Permanent worker.

Contract Worker.

Badali Worker (substitute)

Casual Worker (daily wages).

Apprentice/Trainee.Types of employment contracts

The central govt. convened in 1947, and a tripartite conference consisting of representatives of employers, labor and government. Govt. of India formulated industrial policy resolution in 1948 where the govt. has mentioned to items which has bearing on wages

Statutory fixation of minimum wages

Promotion of fair wages.

To achieve 1st objective, the minimum wages act, 1948 was passed to lay down certain norms and procedures for determination and fixation of wages by central and state govt. To achieve 2nd objective govt. of India appointed in 1949, a tripartite committee on fair wages to determine the principles on which fair wages should be fixed Wages and salary incomes in India are fixed through several institutions. These are

Collective bargaining

Industrial wage bound

Govt. appointed pay commissions

COLLECTIVE BARGAINING:-

•Collective bargaining relates to those arrangements under which wages and conditions of employments are generally decided by agreements negotiated between the parties.

•Broadly speaking the following factors affect the wage determination by collective bargaining process

Alternate choices & demands

Institutional necessities

The right and capacity to strike

In a modern democratic society wages are determined by collective bargaining in contrast to individual bargaining by working.

In the matter of wage bargaining, unions are primarily concerned with

General level of wage rates

Structure of wages rates (differential among occupations)

Bonus, incentives and fringe benefits, Administration of wages

Executive salaries have been shooting through the roof , particularly in sunrise sectors like IT, Bio – Tech

INDUSTRIAL WAGE BOARDS:-

Concept of wage board was first enunciated by committee on fair wages.

It was commended by first five year plan and second five year plan also considered wage board as an acceptable machinery for setting wage disputes.

•Wage boards in India are of two types

Statutory wage board

Tripartite wage board

Statutory wage board means a body set up by law or with legal authority to establish minimum wages and other standards of employment which are then legally enforceable in particular trade or industry to which board’s decision relate.

Tripartite wage board means a voluntary negotiating body set up by discussions between organized employers, workers and govt. to regulate wages, working hours and related conditions of employment. Tripartite Wage Boards consists of equal representatives of employers and workers and an independent Chairman.

Wage board decisions are not final and are subjected to either executive or judicious review or reconsideration by other authority or tribunals.

The powers and procedure of wage boards are same as those industrial

Determined the wages and other remuneration to be given to the workers in industries, where wage boards are formed.

Wage bargaining mostly took place at the industry level, and through Government controlled wage boards.

First Wage Board (Divatia Wage Board) was constituted in May, 1956

PAY COMMISSIONS:-

First pay commission was appointed by govt. of India in 1946 under chairmanship of justice vardachariar to enquire in to conditions of service of central govt. employees.

The vardachariar

How Balance of payments affects GDP and growth rate

commission in its report said that in no case should a man’s pay less than living wage

The 2nd pay commission was appointed in Aug. 1957. and commission submits its report in 1959, examined the norms for fixing a need based minimum wage set up 15th session of ILC.

Govt. of India appointed third pay commissions in 1970’s which submit its report in April 1973. In this report commission express its support for a system in which pay adjustments will occurs automatically upon an upward movement in consumer price index.

The main objective of this project is to study balance of payment, understand the various concepts in it, and analyze the various factors affecting it, the importance of it and relevance of it in world economy.

The project has helped me gain great understanding in the field of international finance and trade and which mainly revolves around the concept of balance of payments and various factors affecting. The major factors which have been taken into consideration for the analysis are inflation and exchange rate. Also we would also like to do a small analysis on how balances of payments affect the growth rate of GDP in the economy.

There has also been an analysis on who are the major trading partners of India and the major trading regions of the world and the export, import between the countries and the major commodities between the countries. It also involves a trend analysis of the balance of payments and also the export, import and how the inflation and the exchange rates of the nation over a period of time.

2. OBJECTIVES:

Objectives of the project:

To study how exchange rate affects Balance of payments

To study how inflation rate affects Balance of payments

To Balance of payments affects GDP and its growth rate

To see a trend in the export and import between the various trading partners which dominate the bulk of its trade relations.

To also observe the major commodities, which forms a bulk of the trade between the countries.

3. METHODOLOGY:

Methodology used in the project:

Initially the data for balance of payments (RBI), exchange rates (IMF), inflation rates (IMF), import, export and commodity details (department of trade and commerce), GDP values (CIA fact book) are all obtained.

From there the data is analyzed and is converted to a form where anything can be inferred and only the data required is obtained and rest of the data is removed

Then a trend analysis is performed on the import, export and commodity which form the bulk of the trade between the major trading partners of the country using the derived data.

Using this data the relationship between inflation, exchange rate and the balance of payments is found out using regression and similarly the relationship between balance of payments and the growth rate of the GDP.

Thus overall the balance of payment is regressed and analyzed.

4. INTRODUCTION:

4.1 BALANCE OF PAYMENTS:

A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country’s exports and imports of goods, services, and financial capital, as well as financial transfers. The BOP summarizes international transactions for a specific period, usually a year, and is prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as a negative or deficit item.

When all components of the BOP sheet are included it must balance – that is, it must sum to zero – there can be no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter balanced in other ways – such as by funds earned from its foreign investments, by running down reserves or by receiving loans from other countries.

While the overall BOP sheet will always balance when all types of payments are included, imbalances are possible on individual elements of the BOP, such as the current account. This can result in surplus countries accumulating hoards of wealth, while deficit nations become increasingly indebted.

There are 2 principal divisions of Balance of payments – current account and capital account.

The current account shows the net amount a country is earning if it is in surplus, or spending if it is in deficit. Current account is nothing but the difference between a nation’s total exports of goods, services and transfers, and its total imports of them. Current account balance calculations exclude transactions in financial assets and liabilities

The capital account records the net change in ownership of foreign assets. It includes the reserve account (the international operations of a nation’s central bank), along with loans and investments between the country and the rest of world (but not the future regular repayments / dividends that the loans and investments yield, those are earnings and will be recorded in the current account). The net results includes foreign direct investment, plus changes in holdings of stocks, bonds, loans, bank accounts, and currencies.

In the context of BOP and international monetary systems, the reserve asset is the currency or other store of value that is primarily used by nations for their foreign reserves. BOP imbalances tend to manifest as hoards of the reserve asset being amassed by surplus countries, with deficit countries building debts denominated in the reserve asset or at least depleting their supply. Under a gold standard, the reserve asset for all members of the standard is gold. In the Bretton Woods system , either gold or the US Dollar could serve as the reserve asset, though its smooth operation depended on countries apart from the US choosing to keep most of their holdings in dollars.

Following the ending of Bretton Woods, there has been no de jure reserve asset, but the US dollar has remained by far the principal de facto reserve. Global reserves rose sharply in the first decade of the 21st century, partly as a result of the 1997 Asian Financial Crisis, where several nations ran out of foreign currency needed for essential imports and thus had to accept deals on unfavourable terms.

4.2 EXCHANGE RATES:

In finance, the exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specify how much one currency is worth in terms of the other. It is the value of a foreign nation’s currency in terms of the home nation’s currency. For example an exchange rate of 44 Indian rupees (INR, Rs) to the United States dollar (USD, $) means that Rs 44 is worth the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some estimates, about 3.2 trillion USD worth of currency changes hands every day.

A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply.

Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for money. The transaction demand for money is highly correlated to the country’s level of business activity, gross domestic product (GDP), and employment levels. The more people there are unemployed, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions.

The speculative demand for money is much harder for a central bank to accommodate but they try to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is the interest rate) is high enough. The higher a countries interest rates, the greater the demand for that currency. It has been argued that currency speculation can undermine real economic growth, in particular since large currency speculators may deliberately create downward pressure on a currency by shorting in order to force that central bank to sell their currency to keep it stable (once this happens, the speculator can buy the currency back from the bank at a lower price, close out their position, and thereby take a profit).

4.3 INFLATION RATES:

In economics, the inflation rate is a measure of inflation, the rate of increase of a price index (for example, a consumer price index). It is the percentage rate of change in price level over time. The rate of decrease in the purchasing power of money is approximately equal.

As inflation increases, prices increase also in other countries from which we buy, because their inflation increases their prices and thus the cost of our imports. At the same time prices are likely to increase also because our government may be printing more money to cover its own deficit, to cover the amount by which its spending exceeds its income.

As prices increase so do percentage markups such as profits and dividends which in this way increase automatically in line with increasing prices.

The higher prices are felt by wage and salary earners who demand increases in line with increasing prices, in line with the increasing cost of living. Prices increase as a result, the increase depending both on the extent to which wage and salary demands are satisfied and on how much of the price consists of labour costs.

Our prices have increased, our exports have become more expensive, we sell less abroad, our payments deficit gets even worse. When this condition persists and gets worse then we can devalue our currency, the extent of the devaluation depending on whether we are devaluing: (1)   to stay competitive or (2)   to become more competitive.

As a result of the devaluation our exports become cheaper abroad but we have to pay more for imports. The increased cost of imports in turn increases our own prices but only to the extent to which imports figure in the price. However, this has already been allowed for when deciding the extent to which we devalue.

The devaluation reduces our standard of living relative to others abroad as they find our produce cheaper while we find theirs more expensive. We now have to produce and sell a greater volume of exports so as to earn as much foreign currency as we did before and have to sell even more if we are to improve our position, if we are to benefit from the devaluation.

4.4 GDP:

The gross domestic product (GDP) or gross domestic income (GDI) is the amount of goods and services produced in a year, in a country. It is the market value of all final goods and services made within the borders of a country in a year. It is often positively correlated with the standard of living, alternative measures to GDP for that purpose.

mathrm{GDP} = C + mathrm{Inv} + G + left ( mathrm{eX} – i right )

C – Consumption,

Inv – investment,

G – Government expenditure

eX – exports

I – imports

From the formula it is evident that balance of payments forms a part and chunk of our GDP and when it increases the GDP and growth rate increases and vice versa is also true.

5. ANALYSIS AND PROCEDURE:

The balance of payment data is initially collected from Reserve bank of India. The crucial parameters of current account balance, capital account balance and overall balance of payment is taken from the overall balance sheet. This is the crucial data required for our analysis. This data will then be regressed with inflation, exchange rate (which is obtained from IMF financial statistics) and their effect is observed on the balance of payments. This shall be part of final results. The GDP values are obtained and regressed with the balance of payments and the effect of balance of payments on the GDP and its growth rate is observed and is tabulated as a part of the result.

Here is the balance of payment data obtained for the period of 14 years from 1997 to 2010:

YEAR

CURRENT ACCOUNT BALANCE

CAPITAL ACCOUNT BALANCE

ERRORS AND OMISSIONS

OVERALL BALANCE OF PAYMENTS

FOREX RESERVES

1997

-20883

36605

931

16,653

-16653

1998

-16789

35882

-848

18,245

-18245

1999

-20331

45328

2773

27,770

-27770

2000

-11431

41599

-2506

27,662

-27662

2001

3734

50589

2269

56,592

-56592

2002

19987

58506

3523

82,016

-82016

2003

1,904

5,561

59

7,524

-7524

2004

-12174

125367

2714

115,907

-115907

2005

-46856

108521

4231

65,896

-65896

2006

-20,765

48,035

1,736

29,006

-29,006

2007

-6,301

17,346

155

11,200

-11,200

2008

-9,019

11,135

119

2,235

-2235

2009

4,747

-5,288

841

300

-300

2010

-12,998

16,091

-952

2,141

-2,141

5.1 EXCHANGE RATES

As said before the exchange rates for the 14 years from 1997 to 2010 have been obtained from IMF financial statistics. This data is regressed with the balance of payment data to observe the effect of exchange rates on it. The results are tabulated. This is the data of exchange rates for 14 years:

Year

Annual exchange Rates (Rs/$)

1997

36.2812

1998

41.3294

1999

43.1212

2000

45.0009

2001

47.2255

2002

48.6220

2003

46.5947

2004

45.2766

2005

44.0086

2006

45.1778

2007

41.1977

2008

43.3887

2009

48.3744

2010

45.7300

5.2 INFLATION RATES

As said before the inflation rates for the 14 years from 1997 to 2010 have been obtained from IMF financial statistics. This data is regressed with the balance of payment data to observe the effect of inflation rates on it. The results are tabulated. This is the data of inflation rates for 14 years:

Year

Inflation rates (%)

1997

7.164

1998

13.231

1999

4.67

2000

4.009

2001

3.779

2002

4.297

2003

3.806

2004

3.767

2005

4.246

2006

6.177

2007

6.372

2008

8.349

2009

8.664

2010

9.4

5.3 GDP VALUES:

As said before the GDP values for the 14 years from 1997 to 2010 have been obtained from CIA fact book. This data is regressed with the balance of payment data to observe the effect of GDP values on it. The results are tabulated. This is the data of GDP values for 14 years:

YEAR

GDP (million dollars)

GDP growth rate (%)

1997

1401934

12 %

1998

1616082

15%

1999

1786525

11%

2000

1925017

8%

2001

2097726

9%

2002

2261415

8%

2003

2538171

12%

2004

2877706

13%

2005

3275670

14%

2006

3790063

16%

2007

4138749

9%

2008

4511236

9%

2009

4845068

7%

2010

5276279

9%

5.4 MAJOR EXPORT AND IMPORT BETWEEN THE TRADING PARTNERS:

As per the objectives the export and import between the major trading partners is obtained from the department of trade and commerce. Also a trend analysis is performed to see who is the leading the trade relations over a period of time. Also we can see the major commodities dominating the trade relations between the trading partners and which commodity is being exported more and which is imported more between the trading partners.

5.4.1 EXPORT BETWEEN THE MAJOR COUNTRIES:

The trend analysis of the export of India with its 15 major trading countries in 14 years of data from 1997 to 2010 as displayed by the bar chart is shown as follows:

5.4.2 IMPORT BETWEEN THE MAJOR COUNTRIES:

The trend analysis of the import of India with its 15 major trading countries in 14 years of data from 1997 to 2010 as displayed by the bar chart is shown as follows:

5.4.3 EXPORT BETWEEN THE MAJOR TRADING REGIONS:

The trend analysis of the export of India with the major trading regions of the world in 14 years of data from 1997 to 2010 as displayed by the bar chart is shown as follows:

5.4.4 IMPORT BETWEEN THE MAJOR TRADING REGIONS:

The trend analysis of the import of India with the major trading regions of the world in 14 years of data from 1997 to 2010 as displayed by the bar chart is shown as follows:

5.4.5 MAJOR COMMODITIES EXPORTED:

The major commodities exported over the last 2 years i.e. from 2009 to 2010 are shown as follows and the percentage of the commodities exported is observed over this period:

Commodity

2009

2010(P)

A)  PLANTATION

324.22

375.04

B)  AGRI & ALLIED PRDTS

4,997.70

4,908.14

C)  MARINE PRODUCTS

568.72

618.74

D)  ORES & MINERALS

2,787.17

5,798.21

E)  LEATHER & MNFRS

984.68

1,179.22

F)  GEMS & JEWELLERY

9,139.30

9,227.88

G)  SPORTS GOODS

47.09

63.18

H)  CHEMICALS & RELATED PRODUCTS

8,042.11

10,203.19

I)  ENGINEERING GOODS

14,116.28

13,916.60

J)  ELECTRONIC GOODS

2,332.88

1,680.99

K)  PROJECT GOODS

177.48

8.77

L)  TEXTILES

6,977.81

8,206.78

M)  HANDICRAFTS

67.15

83.57

N)  CARPETS

237.1

353.25

O)  COTTON RAW INCL WASTE

273.67

892.63

P)  PETROLEUM PRODUCTS

7,592.28

12,462.32

Q)  UNCLASSIFIED EXPORTS

3,790.08

6,907.09

Total

62,455.71

76,885.62

5.4.6 MAJOR COMMODITIES IMPORTED:

The major commodities imported over the last 2 years i.e. from 2009 to 2010 are shown as follows and the percentage of the commodities exported is observed over this period:

Commodity

Apr-Jul  2009

Apr-Jul  2010(P)

%Growth

%Share

A)  BULK IMPORTS

34,849.65

49,192.37

41.16

46.01

B)  PEARLS, PRECIOUS & SEMI-PRECIOUS STONES

3,925.85

8,632.88

119.9

8.07

C)  MACHINERY

11,317.04

10,744.05

-5.06

10.05

D)  PROJECT GOODS

1,392.10

2,157.83

55.01

2.02

E)  OTHERS

32,670.77

36,189.15

10.77

33.85

Total

84,155.55

106,917.11

27.05

100

6. FINDINGS AND OBSERVATIONS:

Here are the findings and observations that could be deduced at this point of the project:

India has always had current account deficit post liberalization except from 2001 to 2004 and in 2009.

Our balance of payments has always been a healthy amount till 2007 when recession struck and we are recovering from it.

It is also to be noted that we have always had capital account surplus post liberalization except 2009 when most MNC’s were still reeling from the aftermath of recession and were withdrawing money invested in our markets through FII’s. It is also to be noted that we had a current account surplus that year and hence thankfully we did not face balance of payment crisis. This was mainly due to our strong financial regulation thanks to which we withstood recession due to government spending and strong domestic demand and our regulator RBI got applause world wide for the steps taken.

It should also be noted that for most part current account forms a very limited part of balance of payment till 2007 and capital account and overall balance of accounts almost overlap with each other. Only after recession struck have steps taken by the regulator to reduce dependency on overseas inflows and to increase the domestic demand and overall exports.

The rupee has steadily depreciated from 1997 till 2003 after which strict enforcements have ensured that the rupee hovers only around the fixed band with. In 2007 when recession struck the rupee appreciated so much despite the regulation ensured by the RBI. Post recession rupee is just hovering only around the band with set in order to ensure the interests of both importers and exporters are protected.

During 1997 and 1998 India suffered heavy inflation mainly due to the south East Asian crisis and we faced heavy losses during this period. However post crisis we had only an inflation rate of 3 – 4 % till 2006 for a period of 8 years which was amongst the lowest ever recorded world wide during that period. In 2006 we had rampant growth rate due to which we had a steady inflationary trends in the year till 2007. However in 2007 when recession struck there was a natural reduce in inflation because FII’s withdrew their money. It should also however be noted that due to strong domestic demand that inflation has rose to 8 % which is still under permissible limits till 2009. In 2010 we have shown a growth rate of 9 % which has led to high inflation in early 2010 when it reached double figures. Once again thanks to steps taken by RBI the inflation is still under control but experts say more steps needs to be taken to further bring it under control to advance to levels like capital account convertibility.

With respect to GDP we have always had consisting growth rates above 8 % from 1997 except in 2009 when we the recession was just over and we were coming out of it. It should also be noted that 7 % in the period was above par and it should be credited to the sound financial structure of our country, and due to the huge domestic demand that should be satiated.

We can notice that our major trading partner has taken a gradual shift from USA in 1990’s and 2000’s till recession struck and our major partner shifted to china. It should also be noted that initially we were completely depended on USA for our exports which formed up to 1/5th to 1/6th of our total export. Gradually we have started diversifying our exports and imports and thereby we have reduced our overall risk.

The last point is further supported when we see region wise trading partners than country wise. In early periods we can see that European union and North America accounted for up to half our exports but we could see observe that towards 2010 our trade relations with NE Asia and West Asia and North Africa which has ensured that our trade is well diversified thereby preventing over exposure by depending completely to a single region.

In the commodities exported we note a very significant increase in petroleum products, ores and minerals, chemical and related products which is bound to fetch higher margins and also are non renewable resources which give us a higher level of power in world economy. It

How Equilibrium Occurs Using The As Ad Framework Economics Essay

should also be noted that recently 2 or 3 reserves of petroleum have been found in Rajasthan by Cairn Energy (which is to be taken over by Vedanta for one of the biggest take over world wide) which is likely to bring more money flowing into our economy. In the import front import of precious stones have tripled, though its partly for polishing and exporting it as some of the business men do in India or its for domestic consumption as jewelry is a part of culture and tradition and plays a huge role in it. It should also be noted that these also make a good investment than expenditure alone because their value rises over a period of time. It is also a good sign that our import of furniture has reduced considerably which is signs that we are depending on our own infrastructure and technology and foreign dependence is reduced

7. LIMITATIONS:

This essay will explain the concepts of aggregate demand, aggregate supply and explore how nominal, real and potential gross domestic product are calculated, It will then…

Jain and Sandhu (2008) define aggregate demand as the sum total spent on all goods and services produced in a national economy over the period of time. The components of Aggregate Demand are; the expenditure from the consumption of collective households (C), that of capital investment (I), government expenditure on public services (G) and finally and the expenditure created from interactions between other economies; where imported goods and services (M) are subtracted from those that are exported (X). Therefore;

AD = C + G + I + (X-M)

When this is transposed onto an Aggregate Demand the y-axis represents the price of goods at different levels and the x-axis is real GDP. The price levels in both aggregate demand and aggregate supply are The price levels used in both aggregate supply and aggregate demand are themselves aggregate price levels; representing that as while inflation may occur in some prices in the economy, deflation may be occurring in others therefore the price level used is an average of all prices in the economy (Sloman, 2006)

The curve is aggregate demand curve is downwards sloping, which means that there is an inverse relationship, as the price level of goods and services fall the nation is able to buy more represented in real GDP

Gross Domestic Product (GDP) is defined as ‘the value of output produced within a country over a twelve month period’ (Sloman, 2006, p373). It can be meassured by calculating national income, expenditure or production, all three values should be equal. (Sloman, 2007)

Nominal GDP is the result of this calculation using the current prices for goods within the year and is the same value as aggregate Demand. Real GDP (rGDP) allows for inflation by comparing the nominal GDP for that year with a base year. This is because inflation may make it appear that a country was producing more goods whereas it may be that production had fallen but the price of goods had increased. It is therefore rGDP which is on the x-axis of aggregate supply and demand curves. (Kroon, 2007)

The aggregate demand curve is downwards sloping for three reasons all of which assume that the money supply remains constant in the economy. The first is the wealth effect; when the cost of goods and services are higher, the economy experiences lower levels of consuming as individuals and businesses feel less wealthy and are therefore are more frugal with their resources. This means that purchasing power is decreased when prices are high and increased when the price levels are low. The second is the net exports effect means that as the price level of goods in the economy fall, the goods imported seem relatively more expensive, so therefore decreases while the number of goods exported increases causing an increase in rGDP. Finally, the interest rate effect; as the price level decreases people need to borrow less money so their consumption increases, reflected in increased aggregate demand and higher levels of rGDP (Tucker, 2009)

Turner (1993) defines aggregate supply as the sum total of national output. It is considered in both the short run and the long run because there are different factors of the labour market which show their effects over the two periods.

In the short run potential GDP, the wage rate and the price of the factors of production are all ceteris paribus. A change in any of these would mean that a new demand curve would need to be created. The only variables represented are the overall price level of goods are services and the amount that is produced and real GDP for that year.

In the short-run there is a positive correlation between price and the quantity produced. That is to say that as price levels increase, caused by an increase in aggregate demand, so too does the amount of goods and services produced in order to meet this increased demand. At lower price levels however, there is less aggregate demand and therefore less produced.

The LRAS curve is formed at the point on the short run aggregate supply curve where potential GDP is the same as real GDP and the labour market is in equilibrium. The points on the short-run aggregate supply curve to the left of the LRAS curve are when potential GDP is lower than real GDP and to the left show when potential GDP is higher than real GDP.

The long-run aggregate supply curve represents the relationship between price level and output at a level in the economy where full-employment output is occurring and the labour market is in equilibrium; the number of jobs is equal to the number of people seeking them. Although there will still be some frictional unemployment while individuals perhaps search for a better job and structural unemployment where those seeking employment are not able to meet the criteria or location of available work. The natural rate of employment is the level of unemployment that exists when the labour market is in equilibrium. This level of full-employment output is also known as potential GDP (Parkin, Powell and Matthews, 2008)

However, a change in price level or wages is not enough to move national output away from this level of full employment in long-run aggregate supply hence the curve is a vertical line rather than a slope showing a positive correlation as it does in short-run aggregate supply. (Kroon, 2007)

Equilibrium in the short run aggregate curve supply occurs when the aggregate supply curve crosses the aggregate demand curve; this gives the equilibrium price level and the equilibrium level of real GDP.

The Business Cyc

How Globalisation Has Harmed And Benefited The World

le [FIG >>>] depicts potential GDP or trend growth as the dashed line continuously rising as technological advances occur, the productivity of labour stocks improve or grow and capital is further invested. In the short term real GDP fluctuates around potential GDP which is characterised as four periods in the business cycle;

causing periods of expansion when the economy grows, recession when economic output falls and stagnation where little or no growth or decline occurs, contraction when economic growth slows down. (Sloman, 2007)

The reasons for fluctuations in real GDP are because of either an increase or decrease in aggregate demand or aggregate supply. http://welkerswikinomics.com/blog/wp-content/uploads/2008/01/businesscycle_1.jpeg

This essay deals with various aspects of the globalisation process and the ways in which it has benefited or harmed different regions, nations, organisations and peoples.

Globalisation is a complex process that concerns the progressive integration of people, goods, finances, thoughts, concepts, and ideas across nations on account of a range of political, economic, social and cultural drivers (Perrons, 2004, p 16). Whilst it has been an ongoing process since the beginning of history, the history of the world has been distinguished by specific periods of high and low globalisation. Globalisation in historic days occurred primarily on account of conquest, travel, and trade between nations, but was perforce slow because of the numerous constraints that existed in areas of travel and communication (Perrons, 2004, p 16). Its pace increased rapidly in the 18th and 19th centuries on account of numerous technological developments, the Industrial Revolution in England and other western countries, and the growth of colonialism across the world (Went, 2002, p 41). Whilst the period between the First and the Second World Wars saw marked contraction in economic and other interactions between nations, the years after the closure of the Second World War have experienced phenomenal increase in the globalisation process (Went, 2002, p 41).

Globalisation has profound effects on the economies, societies, and cultures of nations. Whilst the social and cultural aspects of globalisation are undoubtedly extremely important, the financial well being of people is primarily affected by the economic consequences of the globalisation process (Beresford, 2000, p 54). It has often being seen that whilst globalisation improves the economic health and financial wealth of certain nations and specific segments of the global population, it also reduces the economic capacity of other countries and peoples (Beresford, 2000, p 54). The globalisation process of the 18th and 19th centuries, for example witnessed an enormous increase in the wealth of western colonising nations like the UK, France, Spain and Portugal, even as it impoverished hugely affluent nations like China and India, pushing them from being vastly wealthy civilisations to terribly poor societies (Horton & Patapan, 2004, p 23). Although the ongoing process of globalisation has undoubtedly enhanced the economic well being of many nations, organisations, and peoples, critics of the process assert that it has also resulted in the growth of income inequalities and has harmed the economic conditions of millions of people, more so in the developing and poorer countries (Horton & Patapan, 2004, p 23).

This essay focuses on the positive and negative impact of globalisation on different nations, organisations and peoples. With globalisation being a huge subject, this essay focuses on the ongoing process of contemporary globalisation and on those who have won or lost out on account of its effect and implications.

Commentary and Analysis

The ongoing process of globalisation commenced after the defeat of Germany and Japan and the victory of the UK, the USA, Soviet Russia, and their allies in the Second World War (Mikic, 2000, p 287). The cessation of hostilities led to the demarcation of new political boundaries and to the division of the world into three specific political segments, namely the western nations led by the United States, the Soviet bloc and the non aligned nations (Mikic, 2000, p 287). Whilst the globe was broadly divided into these three groups of nations in the 1950s, the years succeeding the war saw the independence of India and rapid decolonisation in Africa and Asia (Mikic, 2000, p 287). The 1980s witnessed the collapse of the Soviet Union, the disintegration of the communist bloc and the reunification of Germany. The following years also witnessed a wave of liberalisation and the implementation of economic reforms across developing countries, and the consequent economic emergence, first of China, and then of India and other countries in Latin America, Africa and Asia (Nesadurai, 2003, p 63).

The world is also experiencing the development of astonishing advances in areas of technology and communication in the past few decades, which in turn are making it possible for people to interact across nations and even continents, despite political barriers and geographical distances (Nesadurai, 2003, p 63). These developments in geopolitics, economics, and communication have had and are having an enormous, reinforcing, and multiplying effect on globalisation and are resulting in greater economic and financial interactions between different nations (Kiely, 2005, p 76). Multinational corporations are exploiting low cost regions to install production facilities. Business organisations are using relaxed trade barriers to export their goods to previously closed markets (Kiely, 2005, p 76). The formation of the European Union has resulted in free movement of people within Europe in search of employment. The growth of the Internet is making it possible for people to work from distant locations and service others in remote areas of the globe (Kiely, 2005, p 76).

Such globalisation has resulted in tremendous growth in global business and trade. This increase in economic activity has primarily been driven by multinational corporations, (MNCs), who have used globalisation opportunities to (a) install production capacities in low cost regions with skilled workers and (b) to exploit the huge markets that have emerged, primarily in the Middle East and Asia, as also in Latin America, Russia and East Europe (Clark, 1999, p 78). Such growth in economic activity has obviously benefited the multinational corporations. These organisations now account for more than one third of world output and more than two thirds of global trade (Clark, 1999, p 78). Apart from boosting the economic fortunes of these organisations, the growth in economic activity has also most certainly helped in increasing the real wages and economic conditions of many people (Eschle & Maiguashca, 2005, p 92). It cannot however be denied that (a) this period has witnessed growing inequality between nations and peoples, and that (b) the benefits of globalisation have eluded millions of global inhabitants. Growth in production, consumption, and travel has also resulted in environmental degradation and in the destruction of the natural habitats of thousands of humans (Eschle & Maiguashca, 2005, p 92).

The economic impact of globalisation is visible first and foremost in the enormous increase in volumes of trade, industry and business (Munck, 2004, p 55). The increase in economic activity during the period after the Second World War is far more than what occurred in the years between the two World Wars. Numerous studies also show that countries with higher levels of globalisation achieved greater levels of growth in this period than others (Munck, 2004, p 55). Global economic activity has furthermore grown much faster than the increase in global population, thus implying a significant increase in the real per capita income of the world’s inhabitants. Such economic growth has certainly helped the financial well being and wealth of nations, organisations, and individuals (Munck, 2004, p 55).

The greatest beneficiaries of globalisation have undoubtedly been the larger international corporations, mostly from the west but also very substantially from other countries in Asia and certain parts of Latin America and Africa (Saskia & Appiah, 1999, p 44). International corporations have been quick to spot the substantial opportunities for reducing production costs in shifting production activities to low cost locations in the developing economies. China has experienced dramatic increases in its production facilities, even as smaller countries like Indonesia and Bangladesh have also become production centres for global corporations (Saskia & Appiah, 1999, p 44). Whilst China has truly become the production centre of the world, Indonesia and Bangladesh are now home to numerous textile factories whose products are sold in the best stores in the advanced economies (Saskia & Appiah, 1999, p 44).

The development of huge facilities in China for manufactured products has been accompanied by a similar growth in India’s services sector. Call centres in Indian cities like Delhi, Mumbai, Chennai, Hyderabad and Bangalore employ thousands of employees who work for western corporations engaged in marketing, banking, finance, and insurance sectors. The shifting of production activities to low cost locations has helped international corporations significantly in achieving scale economies and reducing production costs.

Ongoing globalisation is also helping global corporations by providing them with access to huge new markets in growing economies like those of China, India, Brazil, Russia and East Europe. MNCs are rapidly expanding their presence in these markets in order to increase sales and profits and enhance organisational growth. UK retailers like Tesco and Marks and Spencer now have strong presences in numerous countries across the world (Micro Focus, 2007, p 1). Jaguar Land Rover’s third largest market, right after the UK and United States, is China (HT Media, 2010, p 1). McDonalds has more than 1200 outlets in China and is planning to add 600 more in the course of the coming decade (Yan & Jones, 2010, p 1).

Apart from enhancing the fortunes of MNCs, globalisation has also helped in the dissemination of knowledge and technology across the world. Western universities are accepting increasing numbers of students from the developing economies, even as universities like Harvard are opening centres for higher learning in distant countries (Perrons, 2004, p 73). The Internet is making academic interaction between people far easier. Indian coaching organisations are helping thousands of American students to improve their academic performance in mathematics and sciences (Perrons, 2004, p 73).

Expansion in economic activity has specifically helped a number of states to improve their national production steadily from year to year (Horton & Patapan, 2004, p 47). China is of course the foremost example of this facet of globalisation. The country shed its insular policy in the late 1970s under the leadership of Chairman Deng and adopted various policies for liberalisation and furtherance of export oriented growth (Horton & Patapan, 2004, p 47). The Chinese economy has expanded at a rate of approximately 10% for more than 25 years, making it the second largest in the world today. Apart from China, globalisation has also resulted in positive economic benefits for Brazil, India, and South Africa and for the countries of South East Asia, all of whom have continuously achieved plus 5% economic growth for years (Eschle & Maiguashca, 2005, p 109). Countries like Taiwan and South Korea have emulated Japan by developing world class products and penetrating sophisticated markets in the developed countries. Huge increases in exports have radically altered the economies of these countries, and both Taiwan and South Korea now have per capita GDPs that are approaching those of the western nations (Eschle & Maiguashca, 2005, p 109). The GDP growth rate of Bangladesh has accelerated in recent years on account of the growth of the textile industry and repatriation of monies from emigrant Bangladeshis (Osmani, 2004, p 5).

“The readymade garments (RMG) industry has registered phenomenal growth in recent years. Starting from a low base in the mid-1980s, it has by now become both the leading industry and the leading export item of Bangladesh. By the mid-1990s, it was contributing somewhere between 20 and 25 per cent of total value-added and employing between 40 and 50 per cent of the workforce engaged in large and medium scale manufacturing. Its share in total export has risen from barely 4 per cent in 1983/84 to over 75 per cent by the year 2000.” (Osmani, 2004, p 7)

Supporters of globalisation and neoliberal economics argue that the advantages of economic growth, achieved from globalisation, are bound to trickle down into the economy and improve the economic conditions of lower segments of society (Kiely, 2005, p 76). Whilst it may be too early for such trickle down effects to be clearly visible, there is no doubt of the very substantial improvements that have occurred in the employment levels of developing countries that have received foreign investment in production facilities (Kiely, 2005, p 76).

China, easily the largest recipient of production FDI among the developing nations, has seen huge migration of labour from the countryside to the towns, with agricultural workers leaving their fields in hundreds of thousands to take up jobs in new factories. It is estimated that approximately 150 million Chinese have been able to escape poverty in the last two decades on account of the country’s integration with the global economy (Kiely, 2005, p 76). Countries like Bangladesh and Indonesia, as well as the countries of east Europe, have also witnessed significant increases in employment figures. The Indian call centre industry provides employment to hundreds of thousands of graduates, who would have had very little chances of remunerative employment in the pre-globalisation era. Such increase in employment has certainly changed the lives of millions of people around the world. It has helped them to grow out of lives of poverty and to provide better life chances to their families (Nesadurai, 2003, p 68).

Critics of globalisation point out that the benefits of globalisation are not as rosy as they appear to be. The net increase in global economic production and wealth indicates it to be a net benefit process, even as critics argue that its continuing progress is generating numerous losers; who are being adversely impacted, economically, socially, and culturally, by its spread (Horton & Patapan, 2004, p 47). The globalisation process has in the first place enabled multinational corporations to seek out low cost production centres and to transfer much of their production and service facilities to such locations. Such movement of production facilities from the developed countries to low cost environments has resulted in significant reduction of jobs in the advanced nations, primarily in the strongly market driven economies like the UK and the USA, and also to some extent in the more worker friendly societies of West Europe (Eschle & Maiguashca, 2005, p 109). Such losses of jobs have resulted in the creation of significant social and political tensions and to subsequent protectionist actions, like those being considered and taken by President Obama to stem the movement of IT services jobs to India (Kiely, 2005, p 76).

The opening of trade barriers and liberal import norms has also had significantly adverse impact on local producers, many of whom have not being able to respond effectively to savage competition from low priced Chinese goods. The indigenous fire cracker industry in Europe has practically been demolished by large scale imports of Chinese fire crackers at a fraction of their local cost. Imports of Chinese silk by Indian importers have resulted in severe economic consequences to Indian silk growers and weavers (Went, 2002, p 44). The production of Rare Earth Metals (REMs) has been discontinued in the United States because of Chinese exports of these metals at prices that were fractional of their manufacturing costs in the United States. With REMS being vital for production of important defence products, the US now finds itself vulnerable to Chinese plans to reduce supplies, on account of various reasons, of these metals (Areddy, 2010, p 11).

It is also seen that whilst movement of production facilities are leading to the creation of jobs in low income countries, the majority of such jobs are poorly paid and involve exploitative working conditions. Studies on banana growers in Brazil, coffee growers across Latin America, and textile industry workers in Bangladesh reveal that the overwhelming majority of these workers are paid low wages, sometimes less than the minimum wages of these countries, and are forced to work in difficult working conditions (Osmani, 2004, p 6). The readiness of investing companies to take their investment and the associated jobs elsewhere, if their work is obstructed in anyway, leads to the inevitable acceptance of their demands by the governments of developing countries, who do not wish to lose out on their investment and presence. Studies on Indian call centres in Mumbai, Bangalore, and Madras reveal that the employees of these call centres are made to work extremely long hours, given short breaks, and not allowed to leave their seats even to go to the toilets. They are castigated and ill treated in public for minor irregularities in work (Perrons, 2004, p 82). Critics of globalisation argue that whilst unemployment in these countries may have reduced to some extent, the quality of employment that has been provided is poor and essentially degrading to the concerned individuals.

Globalisation has also resulted in immense environmental degradation. The environment can in fact be considered to be one of the biggest losers of the globalisation process. Multinational corporations, especially those dealing in natural resources, have engaged in numerous anti-environmental activities in order to satisfy increasing global demand for such products. The mining of REMs in China for example has resulted in severe environmental degradation across large tracts of the Chinese countryside (Areddy, 2010, p 11). Mining companies in India have driven tribals out of their natural habitat and destroyed thousands of acres of forests. Oil companies have engaged in unsafe drilling practices and, as evidenced by BP’s oil well episode in the Gulf of Mexico, have caused enormous loss to ocean life and to the coastline (Raines, 2010, p 1).

It is very clear that

How Pvrs Will Affect The Demand Economics Essay

globalisation, whilst causal in improvement of global economic activity, has certainly not been even handed in its largesse. The enrichment of some has been accompanied by the deprivation of others.

Conclusions

This essay focuses on the winners and losers of globalisation.

Globalisation, it is evident, is bringing about immense economic, social and cultural change across the globe. With MNCs from the western world driving the process to a large extent, much of the benefits of the globalisation

As the PVR sales will go up the demand from advertisers will come down. As the viewers who have PVR sets will tend to skip the commercials. Whereas the advertisers earn from the viewership of the advertisements and not the viewership of the show in which they are advertised. With this the demand in the market will go down drastically, it therefore will have no impact in the market if the people buying the pvr start skipping the commercials, the efficiency level of the advertisement will be droped.Whereas on the other hand if the pvr’s are not there then the demand from advertisers will not go down. Hence we can see the inverse relationship of both of them.

Suppose you are in charge of setting the price for commercial advertisements shown during Enemies, a top network television show. There is a 60-minute slot for the show. However, the running time for the show itself is only 30 minutes. The rest of the time can be sold to other companies to advertise their products or donated for public service announcements. Demand for advertising is given by:

Qd = 30 – 0.0002P + 26 V

where Qd = quantity demanded for advertising on the show (minutes), P = the price per minute that you charge for advertising, and V is the number of viewers expected to watch the advertisement (in millions).

All your costs are fixed and your goal is to maximize the total revenue received from selling advertising. Suppose that the expected number of viewers is one million people. What price should you charge? How many minutes of advertising will you sell? What is total revenue?

We can see from the demand curve that as the price increases the quantity demanded will come down. And as the number of viewers increase so will the quantity demanded will also increase.

As we want the revenue maximization, we bring in the concept of marginal revenue. As for maximization MR=0

From the demand curve we have: Qd = 30 – 0.0002P + 26 V

Taking out the value of P from here and substituting the value of V, the number of viewers which is 1 million.

P = 280,000 – 5000Qd

We know that the MR has the same intercept as the Price equation but the slope is doubled therefore:

MR = 280,000 – 10000Qd

For revenue Maximization: MR = 0

Qd = 28 minutes

The Price at which the 28 minutes will be charged is: 140,000 million/minute. Since TR = Qd * P

TR = 3920, 000

Suppose price is held constant at the value from part (a). What will happen to the quantity demanded if due to PVRs the number of expected viewers falls to 0.5 million? Calculate the “viewer elasticity” based on the two points. Explain in words what this value means.

Keeping price P constant:

Qd = 30 – (0.0002*140,000) + 26 (0.5) = 15

The optimal quantity has changed to 15 from 28 when the volume changed to 0.5 million from 1 million. Hence,

Q1 = 28, V1 = 1

Q2 = 15, V2 = 0.5

The elasticity is percentage change in the demand / percentage change in the viewers. Therefore elasticity becomes: 0.91.

Therefore we can say that 1% increase or decrease in the viewers will cause a subsequent 0.91% increase or decrease in the Quantity demanded.

As more viewers begin using PVRs, what happens to the revenues of the major networks (CBS, NBC, ABC, and FOX)?

As and when the popularity of the PVR will grow, the revenue of the major networks will come down since TR = Qd * P.

In this case the price remains constant but the quantity demanded will come down, hence bringing the TR also down. As with usage of PVR, people will skip the advertisements and the demand for the advertisement going down. The networks are dependent on the advertisers for their revenue coverage as a show of 60 minutes includes 30 minutes of commercials. Now if there will be no viewership of advertisements, there will be less advertisements on air and hence affecting the revenue of the major channels also.

Discuss the long-run effects if a significant proportion of the viewer’s begin adopting these “advertising snipping” systems.

The long run effect of more number of people start adopting the advertisement skipping systems will be very deep and harmful for the advertising agencies and the major channels. As with

How Realism caused the Global Financial Crisis

increasing number of people buying the pvr the decreasing will be the viewership of the commercials which can lead to the major channels into losses as they will not be able to cover their costs efficiently. Some alternative should be adopted by the major channels that could cover the costs and lead them to some profits. The major source of the major channels to gain profit is through advertisement. Now since the advertisement option is very fading they can directly charge from the end user, the people who are watching the channels. As this might lead to some profits to the major channels.

What advice would you give the major commercial networks and producers of programming for these networks as more consum

“The global financial crisis is commonly believed to have begun in July 2007 with the credit crunch, when a loss of confidence by US investors in the value of sub-prime mortgages caused a liquidity crisis. The housing market in the United States suffered greatly as many home owners who had taken out sub-prime loans found they were unable to meet their mortgage repayments. As the value of homes plummeted, the borrowers found themselves with negative equity. With a large number of borrowers defaulting on loans, banks were faced with a situation where the repossessed house and land was worth less on today’s market than the bank had loaned out originally. The banks had a liquidity crisis on their hands. The housing collapse in the United States is commonly referred to as the trigger for the global financial crisis.”

“Liberalism is built on the fundamental assumption that human nature is rational and thus good. Humans are capable of cooperative behaviour, and destructive behaviour is a result of bad societies, institutions and/or governments. As such, the Liberal school of thought has a strong belief in progress, particularly the notion that humans are perfectible. Thus all humans deserve basic rights, liberty and equality. Consequently, Liberalism has a deep concern with improving the welfare of all people.” In a highly developed nation like the USA, many would argue home-ownership is a vital aspect of welfare. In the modern world, constant economic growth is essential for progress of this nature.

“Liberals believe the optimal way of achieving economic growth is through free trade and markets. There must be freedom for private powers (business) at the expense of public power (government.) Free markets and trade will organically synchronise the supply and demand of resources and government attempts to control or regulate the market will only make that process less efficient.”

Free trade enables the execution of other core Liberal beliefs, such as the concepts of cooperation and integration. Through economic interdependence based on mutual benefit, the possibility of conflict between nation-states is reduced. Furthermore, economic cooperation creates wealth, development and growth for all involved. This process of rapid cross-border movement of goods, services, technology and capital is known as globalisation. However, with the positives of economic interdependence come the risks – financial toxicity in the USA economic system spread world-wide like wildfire.

“Realism, created as a response to Idealism, is currently the dominant school of thought in international relations. The premise is that nation-states are the dominant actors in a value-free system of international relations, which take place in an environment of permanent international anarchy and revolves around power. The main tenets of the theory are statism, survival, and self-help.”

“Realism accepts the power of the free trade, but not only rejects the notion that government intervention causes market inefficiency, but believes that public power exerting regulatory control leads to the optimal outcome. Realism favours the use of high tariffs to protect infant or venerable domestic industries from foreign competition until they have built up the capacity to compete on the world market. “The Realist hijack (through intervention) of the Liberal free-market has undermined the Liberal system overall and is the primary cause of the global-financial-crisis.

Other views of international relation schools of thought in the context of global economics include the Marxist view and the Constructivist view. “Marxists believe that only vigorous application of strong public power can check the innate tendency of private power benefiting the elite at the expense of the population at large. Constructivist’s trust that a unit, in addition to its material interests, will also act based on political and economic identities and values.”

According to Realist’s, the global-financial-crisis was a result of the Liberal free market enabling Wall Street to act upon its greed unchecked. “And today we see how utterly mistaken was the Milton Friedman notion that a market system can regulate itself. We see how silly the Ronald Reagan slogan was that government is the problem, not the solution. This prevailing ideology of the last few decades has now been reversed. Everyone understands now, on the contrary, that there can be no solution without government.”

The classical Liberal perspective is quick to point out that Realist public policy, hoping to control the market in order to achieve optimal outcomes (in this case a push for greater home ownership), distorted the natural market feedback loops of profit and loss. “Capitalism is a profit and loss system. The profits encourage risk taking. The losses encourage prudence. When taxpayers absorb the losses, the distorted result is reckless and imprudent risk taking.”

The governments Realist policy to push for greater home ownership led to government-sponsored enterprises to, in essence, guarantee mortgages. “In the US, householders can hand their property over to the bank and walk away if they cannot pay their mortgage.” As the aforementioned government intervention significantly reduced the risk of underwriting mortgages for banks, they began to underwrite mortgages to anyone, even unqualified borrowers – who were getting mortgages for houses they could never afford.

“As many of the sub-prime borrowers got behind in their repayments, they were evicted or they walked away. But with so many houses now coming up for sale, prices fell sharply.” With so many borrowers defaulting on mortgages, the supply of houses far outweighed the demand. Consequently, the banks’ repossessed houses were worth less on ‘today’s market’ than when the banks had originally loaned them out. This liquidity crisis triggered the global-financial-crisis. “Public-policy decisions have perverted the incentives that naturally create stability in financial markets and the market for housing. Over the last three decades, government policy has coddled creditors, reducing the risk they face from financing bad investments. Not surprisingly, this encouraged risky investments financed by borrowed money. The increasing use of debt mixed with h

How Sequential Games Can Be Solved By Backward Induction Economics Essay

ousing policy, monetary policy, and tax policy crippled the housing market and the financial sector.”

Liberals argue that this is the reason the markets must be free of government control. As long as Realists believe that interfering with the market can make their nation-state better (i.e. greater home ownership for Americans), there will be opportunity and incentive for corporate lobbyists (in this case from Wall Street) to attempt to manipulate government for its own advantage. Free-markets work because they align the individual greed of man (ironically a fundamental aspect of Realism) with the common good of the nation-state. Realism intervention corrupts that alignment by creating a system that can be ‘gamed.’

Realists often accuse Liberals of being idealistic to a f

Game theory has been widely acknowledged as an important tool in many fields. Its attraction is prominent and its importance is explained by Robert Aumann and Oliver Hart in the following way:

“Game theory may be viewed as a sort of umbrella or ‘unified field’ theory for the rational side of social science…it develops methodologies that apply in principle to all interactive situation” (Aumann and Hart, 1992).

It is not difficult to understand the enthusiasm towards theories of games developed from various game types and game-solution analyses. This essay will focus on a particular sort of games, namely, sequential game and the solving method of backward induction.

Sequential games are those in which players take turns moving or make moves at different times. This means that players moving later in the game have additional information about the course of others’ actions. This also means that players who move first can often influence the game. Each player makes decisions conditional on what other players have done.

Consider a sequential game where there is an incumbent (Macrosoft) and an entrant (Microcorp). Macrosoft decides on a marketing strategy for its new software game. It can choose either a slick campaign or a simple campaign. Macrsoft faces potential competition with “legal clones” of its game from Microcorp. It moves first and Microcorp observes its action. Regardless of what Macrosoft chooses, Microcorp then has two options: entering the market, or staying out of the market. The two firms’ payoffs are displayed in table 1:

Table 1: The payoffs for software game

Macrosoft’s ad campaign

Slick Simple

(-$250, $380)

($100, $400)

($0, $430)

($0, $800)

Payoff (in $1,000s)

Microcorp’s entry decision

Stay out

Enter

Figure 1: The game tree for software game

($380,000, -$250,000)

($430,000, $0)

($400,000, $100,000)

($800,000, $0)

Microcorp’s entry decisionIn order to establish the set of strategies for either firm, it is important to identify clearly not only the players’ moves but also the order in which these moves are chosen and the information available to players when they make decisions. An effective way of organizing this information is by using a game tree. A game tree will depict a path of play in addition to the players, actions, outcomes and payoffs. The game tree for the software game, thus, appears as follow:

Payoffs:

(Macrosoft, Microcorp)

enter

b

simple

slick

Macrosoft

Microcorp

enter

stay out

stay out

Microcorp

a

c

Macrosoft has two strategies: choose slick or choose simple. Microcorp, however, has four strategies since there are two nodes to consider, b and c, and two possible actions at each node, enter or stay out. These strategies are:

Choose to enter regardless of which campaign Macrosoft chooses (enter, enter).

Choose to enter if Macrosoft chooses slick, otherwise choose to stay out (enter, stay out).

Choose to stay out if Macrosoft chooses simple and vice versa (stay out, enter).

Choose to stay out in both cases when Macrosoft chooses slick or simple (stay out, stay out).

Table 2 shows the strategic form of the game:

Table 2: Strategic form of the software game

Macrosoft

slick simple

(- $250, $380)

($100*,$400*)

(- $250, $380)

($0, $800*)

($0*, $430*)

($100*, $400)

($0*, $430)

($0, $800*)

(Payoffs in $1,000s)

(enter, enter)

Microcorp

(enter, stay out)

(stay out, enter)

(stay out, stay out)

There are two pure strategy Nash equilibria to this game which are {slick, (stay out, enter)} and {simple, (enter, enter)}. These are the optimal outcomes of the game as no player would wish to deviate from his chosen strategy given the other’s choice. However, the question is which of these equilibria is more reasonable. The best outcome can be found through a procedure called backward induction. This process assumes that players act rationally at each node. This means that they will act in their own best interests. Knowing this, a player working to solve a game tree can confidently remove suboptimal actions to his rivals until only the most likely path remains. By doing this, an opponent’s possible moves from the initial node to the payoff can be depicted; allowing the player to devise a strategy for each of those probable moves and eventually finds the equilibrium. The software game can thus be solved using this method of reasoning:

Figure 2: Game tree of the software game

($380,000, -$250,000)

($430,000, $0): A

($400,000, $100,000): B

($800,000, $0)

Payoffs:

(Macrosoft, Microcorp)

slick

c

enter

Microcorp

b

stay out

Macrosoft

enter

a

Microcorp

simple

stay out

At node b, entering the market gives Microcorp a loss of $250,000, while staying out gives it a zero-payoff. Therefore, Microcorp would rationally choose to stay out. Similarly, the possibility that Microcorp will stay out at node c can be eliminated since its payoff for enter is higher than that for stay out. Therefore, of the four strategies available to Microcorp, backward reasoning indicates that its only optimal strategy is to choose enter at node b and stay out node c.

By pruning the non-optimal moves from Microcorp’s decision nodes, Macrosoft’s choices now look as follows:

Figure 3: The new game tree of software game

Payoffs:

(Marcrosoft, Microcorp)

($430,000, $0)

($400,000, $100,000)

simple

slick

Macrocorp

Macrosoft’s optimal strategy is obvious-choosing slick as this yields a payoff of $430,000 instead of $400,000 from adopting simple campaign. Therefore, by looking ahead and taking its opponent’s entry decision into account Macrosoft can avoid making a mistake of $30,000. Consequently, the strategy profile – {slick, (stay out, enter)} is called the sub-game perfect equilibrium (SPNE); it is also a Nash equilibrium (NE) of the game. Since backward induction holds that players will play their optimal action at each decision node, the resulting strategies will thus lead to a NE. However, it is important to note that a NE is not always a SPNE. In particular, the other NE of the software game – {simple, (enter, enter)} is not a SPNE. This is because it violates the rules of backward induction which assumes that Microcorp would never choose enter at node b.

On the other hand, Microcorp may want to arrive at the NE – {simple, (enter, enter)}. Since Microcorp prefers outcome B of ($400,000, $100,000) to outcome A ($430,000, $0) (figure 2), but it cannot get there unless Macrocorp adopts the simple strategy. Microcorp may, therefore, threaten to always choose enter. If Macrosoft were to believe the threat, it would believe that it would earn only $380,000 by choosing slick and $400,000 by choosing simple. However, Microcorp’s threat to enter is not credible and Macrosoft knows that once it chooses slick, Microcorp will choose stay out regardless of its commitment as stay out is simply its best move at node b. In this case, Macrosoft has the advantage by becoming the first mover and can therefore induce its rival to stay out of the market. While Microcorp suffers the disadvantages of a second mover unless it could credibly commit to always adopt the strategy (enter, enter).

Figure 3: Centipede game

I II I Payoffs to (I, II)

(8, 19)

(0, 0) (-1, 10) (9, 9)

Effective as it is, backward induction has revealed some limitations. One of these has been disclosed in the well-known centipede game. Figure 3 illustrates the game in which two players alternate in choosing between stopping and continuing the game. If a player stops the game, each will receive a zero payoff at that point. But if a player chooses to continue, he is fined £1 while the other is rewarded with £10. The game continues until one of the players stops or both reach the final payoffs of £8 and £19 respectively.

Go

Go

Stop

Stop St

Stop

Go

Backward induction suggests that player I should stops the game at the very first move and gets a zero payoff. Suppose that the game has reached the final decision node where player I makes the last move. At this point, player I has to choose between Stop and Go. The only rational choice here is to stop and pocket £9 rather than deciding to continue and receiving a less payoff of £8. This means that at the previous decision node, player II will choose to stop the game, taking into account that player I, who is rational, responds by choosing Stop on the next move. This in turn implies that player I, at the first decision node, now effectively considers between Stop and receiving a zero payoff or Go and losing £1 when player II rationally stops the game at the succeeding node. Player I, therefore, should stop the game immediately. This outcome is the unique SPNE. However, i

How Supermarkets Collude In Local Areas Economics Essay

t would be better if player I continues the game until he can get £9 by stopping at the penultimate node, or, as a second best, until the final round where he gets £8. The question is that if player I, in practice, really chooses to stop the game at the first decision node.

Experimental evidence by Kelvey and Palfrey (1992) and El-Gamul et al. (1993) shows that the logic of backward reasoning is seldom followed by decision-makers. In particular, in a four-legged centipede game experimented by Kelvey and Palfrey, only 7% of players stopped the game at the very first move with a maximum payoff of $6.40 at its head. When the payoff was increased to $25.60, 15% chose Stop at the first decision node. Even at the final node, only 69% of players (in the high-payoff centipede) and 85% of players (in the low-payoff centipede) chos

Tesco, Asda and Sainsbury’s are the three main supermarkets that constitute weekly shopping for the public in my local area, west Charlton. These three supermarkets are recognised for their vast range in goods and at affordable prices. It is no surprise then that in terms of market share, they each comprise the top three places for having the most market share in the U.K. [CITATION Pri97 l 2057] During the last couple of years, though, I have noticed that many of the smaller supermarkets in the same area have begun to close down.

Since enrolling in the IB Higher Economics course and studying market structures in particular, I’ve developed an interest into how supermarkets compete with each other, or even, how they collude together. Maybe, given their large hold of the market share, the benefits from collusion would be unmatchable compared to other smaller supermarkets, in terms of increased sales revenue. Also, formal collusion, one of two forms of collusion, is illegal as it goes against the Competition Act 1998 (the Act) Chapter 1 [CITATION Pri97 l 2057] .

Therefore, the research question I have formulated is ‘To what extent do the larger supermarkets in my local area collude with each other?’

To be able to explore this research question, I will first present a summary of the supermarkets, where the characteristics of them will be described. This will lead on to my next section where I will discuss relevant theoretical market structures and relate economic theories to them. After I have presented these theories, I will hypothesise which market structure is adequate for the supermarkets present, thus creating a sufficient research design where the prices of similar products will be compared. Finally, I will analyse the collected data and prove or disprove my research question, leading to a conclusion of my essay and exploring possible limitations.

2. MARKET SUMMARY

In the area I am studying there are three main supermarkets; Asda, Tesco and Sainsbury’s, situated in West Charlton (appendix 1.1). Each supermarket is similar in size, satisfying the vast needs of the inhabitants in the area. It is worth mentioning that due to the supermarkets being of a substantial size structurally, there must have been large start up costs. Each of the three engages in non-price competition. This includes things such as advertising on T.V, having parking areas and the use of brand names. The offerings of these services are in the attempt to attract more customers. Take for example, Asda, which has parking as well as various sectors to its stores such as electrical and clothing sections as well as groceries. The aim of this is that customers can visit only this store by satisfying all their needs from the vast offers of goods. Furthermore, each supermarket advertises their brand names to gain more customers due to the brand loyalty it has established. This could make their demand curve more inelastic, meaning that an increase in the price of a good would result in the increased revenue exceeding the reduction of quantity sold (appendix 1.2).

These three supermarkets also dictate the majority of market share, as I have mentioned. Lastly, it is worth mentioning that Sainsbury’s and Asda are open for 24 hours from Tuesday to Friday, otherwise it is from 7 in the morning to 11 in the evening. Tesco are open from 7 to 11 everyday, apart from Sunday when they open an hour later and close an hour earlier. I don’t think that the slightly lesser hours that Tesco is opened during the week will affect my research much, or at all. This is due to the fact that I don’t believe Tesco make much of their sales between midnight and 7 in the morning.

3. MARKET STRUCTURE THEORIES

I will now present the four types of market structure theories and their assumptions. I will not going into great detail on the structure of a monopoly as this is not a possible market structure for the supermarkets, given the fact that there is evidently more than one firm in the area. This is the same for perfect competition, as the goods produced by supermarkets are not identical.

Firstly, I will present the market structure of a monopolistic competition. The assumptions of this market structure are [CITATION Pri97 l 2057] :

The industry is made up by a large number of firms

The firms each act independently of each other, due to each firm being small, relative to the size of the industry

The firms produce differentiated products; consumers can tell one product from another

Firms are free to enter and exit the industry, due to lack of barriers to entry and exit

Firms are able to make abnormal profits in the short run, however due to lack of barriers to entry; this attracts other firms into the industry. This means that in the long run, only normal profits are able to be made

Due to the fact that the supermarkets in question are of a substantial size, I believe that the start up cost in itself will be of a great barrier to entry. Also, I don’t believe the industry I am examining is made up of a large number of firms, as there are only three supermarkets of their type in the local area.

Another market structure that the supermarkets could come under is an oligopoly. These are the basic assumption of an Oligopoly: [CITATION Pri97 l 2057]

A few firms dominate the industry

There are barriers to entry and/or exit for the industry

The firms are price makers as they have a downward sloping demand curve

The firms are interdependent; the action of one firm can have an effect on another

Abnormal profits can be made both in the short run and long run

In addition to these assumptions, firms in an Oligopoly can be either collusive or non-collusive.

Non collusive oligopolies face price stability due to the kinked demand curve. This is shown in figure 1.

Figure 1 [CITATION Pri97 l 2057]

0

D=AR

MR

Output

Price/Cost

MC1

MC2

Q

P

PED is >1

PED is <1

Due to the kinked demand curve, price will be stabilized at price ‘P’. This happens as the Price elasticity of Demand (PED: The responsiveness of the quantity demanded of a good or service to a change in its price) [CITATION Pri97 l 2057] above price ‘P’ is greater than 1. This means that an increase in price above point ‘P’ will result in a loss of revenue. Likewise, the PED below price ‘P’ is less than one, meaning a reduction in price to this level will result in a loss of revenue again. Due to these factors, it is logical that firms do not favour either move, so they are said to be stable at point P. This also results in the output being stable at point ‘Q’ as a change in marginal cost from MC1 to MC2 would still mean output would stay at ‘Q’. This is due to firms in this market structure producing at the profit maximising point, where MC=MR. [CITATION Pri97 l 2057]

Firms in this market structure may also be collusive. This exists when the firms collude to charge the same prices for their products, in effect acting as a monopoly. There are two types of collusion, formal and tacit. Formal collusion exits when firms openly agree on the prices they will charge. In the case of supermarkets in the U.K, it is illegal for this to occur as it is deemed to be going against the interest of the consumer due to it resulting in less output and higher prices. Tacit collusion, however, exists when firms charge the same prices without any formal collusion. The three supermarkets in question may have decided to charge the same prices and not compete with each other, in order to increase revenue. This is represented in figure 2.

Figure 2 [CITATION Pri97 l 2057]

Abnormal Profit (Difference between price and cost)

0

Output

Price/Cost

C

P

Q

MR

D=AR

AC

MC

As shown in figure 2, firms can make abnormal profits between their price and cost, due to the price exceeding the cost to the firm. This form of collusion is very possible as each supermarket is very similar to each other and all produce similar type goods.

Firms in an Oligopoly can experience economies of scale. Economies of scale are any decreases in the long-run average costs that occur when a firm changes all of its factors of production, in order to increase its scale of output. There are a number of different economies of scale that can benefit a firm as it increases its scale of output. These can be: [CITATION Pri97 l 2057]

Specialisation- Firms can be more efficient when they specialize in different areas of expertise

Division of labour- This is the breaking down of a longer production process into many smaller activities, making production more efficient by reducing unit costs

Bulk buying- As firms increase in scale they are often able to negotiate discounts with their suppliers, as they are buying more altogether. This reduces the firm’s cost of input, and thus their unit costs of production

Financial economies- Larger firms are able to get loans at lower interest rates, as they are seen as a lesser risk to lend money to than smaller firms, by the bank

The assumptions of a monopoly are as followed: [CITATION Pri97 l 2057]

Only one firm producing the product at hand, so the firm is the industry

High barriers to entry and/or exit

Abnormal profits can be made in the long run, due to barriers to entry

This market structure is unlikely to be present in my research area as there are clearly more than firm in the same industry.

Finally, the basic assumptions of perfect competition are:

The industry is made up by many firms, so total output cannot be affected by one firm

The firms all produce homogeneous (exactly identical) products

No barriers to entry and/or exit

Producers and consumers all have perfect knowledge of the market

Again, this market structure is unlikely to feature in my study, mainly due to the fact that there is product differentiation, as well as evident start up costs.

4. HYPOTHESIS

After reviewing and comparing the discussed market summary and theories, I have hypothesised that the market structure the supermarkets are in are oligopoly. I have reached this hypothesis for the main reasons that:

There are evident barriers to entry such as strong branding of products and start up costs

There are only three supermarkets in the local area, between them sharing almost 64% of the market share. [CITATION Pri97 l 2057]

In addition to these points, I believe tacit collusion between the three supermarkets would greatly benefit their competition with other smaller supermarkets in the area. It would also avoid unnecessary competition between each other, and perhaps result in gaining more customers.

After hypothesising that the three supermarkets are in an oligopoly, and thus capable of collusion, I will now be able to test my research question ‘To what extent do the larger supermarkets in my local area collude with each other?’

5. RESEARCH DESIGN

For me to test my formulated research question, I will create a methodology. I will compare the prices of 15 different products across the three supermarkets. I will check the prices once every week for three weeks, so I can get a mean price at the end, making the result more reliable. I will make sure the prices of the same products are taken in the same time period, and where possible, use products produced in the U.K. This would avoid export costs affected and invalidating results. If not enough U.K based products can be found, I will make sure that any exported product used will have been exported from all supermarkets. This will maintain a degree of validity in the research. I will also avoid products produced by the supermarkets themselves. This would be because the cost of production may be very different from one supermarket compared to another, thus having a large impact on the final pricing. I will compare independent brands that feature across all three stores. Each supermarket in the area of West Charlton is located within one mile of each other. [CITATION Pri97 l 2057]

In terms of the data collection, I will go to each supermarket and compare similar, or when possible, identical products and their prices. I will note down their current price at which they sell at. Also, I will go to each supermarket close to their opening times on Saturday, as on this day the stores all open at the same time. The reason for not going later on in the day is because of price reduction on non-durable goods that are set to expire. If I include goods which prices have just been reduced temporarily to get rid of lasting stock, it would not represent the overall pricing of the good in regular situations.

Lastly, I will compare the prices using adequate means of analysis; thus deducing whether or not there is enough similar pricing evident to suggest collusion of some sort.

6. DATA COLLECTION & ANALYSIS

Firstly, I will present my data collected for the prices of 15 products from all three supermarkets, across a span of three weeks, once a week. Table 1 shows my findings of the prices.

Selling Price of Goods (£)

Selling Price of Goods (£)

Selling Price of Goods (£)

Week

1

2

3

1

2

3

1

2

3

Goods

Tesco

Asda

Sainsbury’s

Bread

1.15

1.14

1.15

1.14

1.14

1.14

1.05

1.04

1.04

Salad Pack

1.74

1.74

1.74

1.74

1.74

1.74

1.74

1.74

1.74

Milk

1.68

1.68

1.68

1.68

1.68

1.68

1.58

1.58

1.58

Eggs

1.70

1.70

1.70

1.70

1.70

1.70

1.70

1.70

1.70

Butter

2.85

2.85

2.85

2.85

2.85

2.84

2.85

2.85

2.85

Cheese

1.35

1.35

1.35

1.20

1.24

1.24

1.35

1.35

1.35

Cooked Chicken

1.99

1.99

2.00

1.98

1.98

1.98

2.99

2.99

2.99

Ice Cream

3.99

3.99

2.50

3.47

3.47

3.47

3.99

3.99

3.99

Pizza

2.25

2.25

2.25

2.07

2.07

2.07

2.58

2.58

2.58

Baked Beans

0.64

0.64

0.64

0.54

0.54

0.54

0.64

0.64

0.64

Cereal

1.89

1.89

1.89

1.78

1.78

1.78

1.89

1.89

1.89

Crisp Pack

2.03

2.03

2.03

1.00

1.00

1.00

2.03

2.03

2.03

Biscuit Pack

1.59

1.59

1.59

1.48

1.48

1.48

1.58

1.58

1.58

Soft Drink

1.69

1.69

1.69

1.00

1.00

1.00

1.69

1.69

1.69

Hot Dogs

1.78

1.78

1.78

1.78

1.78

1.78

1.78

1.78

1.78

Table 1

Source: Prices collected by me for all supermarkets

To analyse the spread of the data, I will work out the standard deviation for each product, which will indicate the spread of the data. A lower standard deviation would indicate a set of closer, similar prices, likewise a higher standard deviation would imply less chance of collusion evident. [CITATION Pri97 l 2057]

The standard deviation for each product is represented in Table 2, along with the mean prices for each product over the three weeks.

Average selling price over 3 weeks

Goods

Tesco

Asda

Sainsbury’s

Standard Deviation

Bread

1.15

1.14

1.04

0.05

Salad Pack

1.74

1.74

1.74

0.00

Milk

1.68

1.68

1.58

0.05

Eggs

1.70

1.70

1.70

0.00

Butter

2.85

2.85

2.85

0.00

Cheese

1.35

1.23

1.35

0.06

Cooked Chicken

1.99

1.98

2.99

0.47

Ice Cream

3.49

3.47

3.99

0.24

Pizza

2.25

2.07

2.58

0.21

Baked Beans

0.64

0.54

0.64

0.05

Cereal

1.89

1.78

1.89

0.05

Crisp Pack

2.03

1.00

2.03

0.49

Biscuit Pack

1.59

1.48

1.58

0.05

Soft Drink

1.69

1.00

1.69

0.33

Hot Dogs

1.78

1.78

1.78

0.00

Table 2

From the standard deviation, we can see they are all overall quite small, indicating the prices are all close to the mean price. This seems to indicate some form of collusion occurring between the supermarkets. However, there are some exceptions. For some goods the standard deviation is relatively high to the other products. Also, in most of these goods, such as soft drinks, crisp packs, pizza, ice cream and cooked chicken, it is Asda who feature the lowest price out of the three, while Tesco and Sainsbury’s have similar prices to each other. This seems to show that there is possible collusion between Tesco and Sainsbury’s, while Asda undercuts their prices.

The similar pricing between Sainsbury’s and Tesco suggests a form of collusion, tacit or formal. I inquired to the Office of Fair Trading (OFT) about my findings. The OFT are a government based organisation that ensure businesses are ‘fair and competitive.’ [CITATION Pri97 l 2057] In a reply they stated:

“Although similar prices might seem to suggest that companies are getting together to agree them, this is not necessarily the case. For example, one company might have independently decided to price at a level similar to another or both may have independently decided to behave in the same way”. [CITATION Pri97 l 2057]

As similar pricing does not necessarily mean formal collusion is taking place, I will assume that the two supermarkets are tacitly colluding, although this area may be needed to be researched into further for a definite result.

As well as colluding, I have also noticed that there is evidence of non-price competition between Tesco and Sainsbury’s. This included things such as the use of advertising, free delivery and other services situated in the store themselves. This has lead to each supermarket gaining brand loyalty, and as a result, creating a more inelastic demand curve for their products. This is possibly another explanation of why these two supermarkets in particular where of a higher price overall, compared to the other supermarket, Asda.

For the case of Asda, they have engaged in price war tactics, rather than forming a collusion. In this case, undercutting rivals may be beneficial to them by increasing their sales revenue. This can be represented by ‘game theory’.

Supermarket

Tesco’s Price

Asda’s Price

£2

£1

£2

£1 million each

£2 million for Tesco/ 500,000 for Asda

£1

£2 million for Asda/ 500,000 for Tesco

250,000 each

The table shows that if both supermarkets lower price, they will make less revenue than if they had colluded. However, it is still tempting to undercut the other store as then that would lead to greater revenue. The highlighted box shows the possible situation at the moment, with Asda undercutting the other supermarkets thus increasing revenue. This choice making situation is known as ‘the prisoner’s dilemma’. [CITATION Dar10 l 2057]

Another explanation for the lower price offered by Asda for goods could be down to lower unit costs caused by a greater storage capacity. The supermarket’s cost of storage mainly depends on the material used to build them, which is the surface area of the building. The level of output for the supermarket will depend on its storage capacity, so its volume area. As the size of a supermarket increases, the volume to surface area ratio increases. Therefore, the cost per unit overall will be much less than a smaller supermarket, such as Sainsbury’s and Tesco.

Lastly, from analysing my collected data, I have reached the conclusions:

Tesco and Sainsbury’s collude by charging very similar prices, but still have non-price competition between them.

Asda competes with a price-war tactic, by undercutting the other two supermarkets.

7. CONCLUSION

The aim of my research was to investigate the type of competition, if any, between the three major supermarkets in my area, West Charlton. The question ‘To what extent do the larger supermarkets in my local area collude with each other?’ prompted me to gather the pricing of 15 identical products across the three stores. The prices were taken every Saturday morning one a week for three weeks.

I found that two of the three supermarkets had signs of collusion, while the third supermarket engaged in a price-war by undercutting the other two supermarkets.

Firstly, Tesco and Sainsbury’s have similar prices to each other, while having higher prices than Asda. This was mainly due to the two stores acting as a monopoly by colluding and charging similar prices. This meant that each firm could make abnormal profit, which they used to create greater brand loyalty, thus making the demand for their products more inelastic.

Lastly, the final supermarket, Asda, engaged in price-war tactics. The main reason for this was due to the idea of gaining more revenue as indicated by ‘the prisoner’s dilemma’. In addition to this, Asda had a greater storage capacity, meaning an overall lower cost per unit.

Therefore, after collecting data and analysing them, it is found that there was evidence of collusion, but only between two of the supermarkets, not all three studied.

There are, though, apparent limitations in my study. Firstly, my area of research was only in one town. If there is found to be some form of collusion between supermarkets here, it doesn’t necessarily mean it is occurring all over the country with those same supermarkets. Also, the time span of my investigation was three weeks. This may not have been enough time to gather an appropriate amount of results to come to a reliable decision. This could be said the same for the amount of products used in my investigation; 15 products may not have been enough to come to an appropriate result. As well as this, I could not make a judgment whether the collusion between Tesco and Sainsbury’s was either tacit or collusion. This would have to be investigated further. All of these limitations overlook the aim of my study and thus should be inspected further.

8. BIBLIOGRAPHY/ACKNOWLEDGMENT

Anderton, A. (2006). Economics: Fourth Edition. In A. Anderton, Economics: Fourth Edition (pp. 63-64). Causeway Press.

Dorton, I. (2007). Economics. In I. Dorton, Economics (pp. 119-123). Oxford University Press.

Dorton, I. (2007). Economics. In I. Dorton, Economics (pp. 114-118). Oxford University Press.https://www.ukessays.com/essays/economics/how-the-economic-downturn-affected-uk-hotel-industry-economics-essay.php

Dorton, I. (2007). Economics. In I. Dorton, Economics (p. 115). Oxford University Press.

Dorton, I. (2007). Economics. In I. Dorton, Economics (pp. 81-82). Oxford University Press.

Dorton, I. (2007). Economics. In I. Dorton, Economics (pp. 105-111). Oxford University Press.

Garner, E. (2010, June 1). TNS Global. Retrieved June 1, 2010, from TNS Global Website: http://www.tnsglobal.com/news/news-

Prior to the ‘credit crunch’ which commenced in August 2007 when the European Central Bank and the US Federal Reserve put £45bn into the financial markets (Elliott 2008 [online]), Europe, the USA and the UK were enjoying an economic boom with rising house prices and high consumer confidence (Budworth 2008 [online]). Gross Domestic Product (GDP) rose to £381,565 Million in 2007, and household disposable income per capita to £14,321 in the same year (Key Note 2008, p. 18). During these ‘boom’ years, lending was high and borrowers able to raise large sums of money due to relaxed lending restrictions by banks. Individuals whose circumstances would have at one time barred them from borrowing were allowed to access many times their salary (Budworth 2008 [online]). Debts secured upon property were sold on to investors. Property prices thus became vastly inflated creating a ‘bubble’ which burst when borrowers started to default on their loans and the value of the investments therefore fell heavily. The huge losses by the banks leading to the collapse of Lehman Brothers in the US and the near collapse of Northern Rock in the UK meant that lending became much more difficult and banks stricter about who they lend money to. (Budworth 2008 [online]). The resulting shortage of funds due to fears about lending and lack of loans has led to a downturn in the economy, falling house prices and increasing unemployment with many firms going out of business altogether and many more making drastic savings (Budworth 2008 [online]). Further consequences include a vast increase in public spending which is predicted to take years to pay off, a predicted rise in unemployment (by the British Chamber of Commerce) to 3.2 million, wage freezes or cuts and massive job losses (The Economy News 2009 [online]). The collapse in available credit started in the USA but in these days of global trading the implications were soon felt around the world with the UK quickly facing problems. Germany, France and Italy – the three largest economies in the Eurozone – were officially in recession by late 2008, and others rapidly followed suit. Both Spain and Ireland have witnessed a housing bubble burst and contraction in wider economic activity (Foresight 2008, p. 7).

2.2 The Pound Against the Euro and Dollar

One factor that complicates the situation somewhat is the pound’s weak status against the Euro and Dollar. Sterling has lost value rapidly over the last year or so. In July 2008, one pound would still buy $2, but by November 2008 it was worth only $1.48, the lowest point for 6 years. Similarly at one point £1 was almost equal in value to 1 Euro. While this is bad news for people buying goods or traveling outside the UK, it also means that UK goods and services become more attractively priced from the point of view of Eurozone or USA travellers (O’Grady 2008 [Online]). Specifically, hotels in the UK will appear relatively cheaper since this fall in the value of sterling, and hence more attractive to inbound travellers and tourists. At the same time, it means it is less attractive for the UK holidaymaker to travel to the Eurzone or USA, and more attractive to stay ‘at home’.

3. Hotel Industry Background

3.1 Introduction – The Growth Years to 2007

Hotel operators in the UK cater both to the corporate sector and consumer sector. Both are significant parts of their operations and both includes not just accommodation but also facilities such as meeting and conference rooms in the case of the corporate sector and add-on services like food and beverages for both sectors. The UK has been historically an important business destination with the growing importance of the London stock market and financial sector (Key Note 2008, p. 11). In the consumer sector most activity is accounted for by holidays and short breaks with a significant minority for wedding or party venues.

The UK hotel market grew in 2008 to a value of £11.5 billion, which is an increase of nearly 20% since 2002. This growth took place against the backdrop of a healthy worldwide economy with the global travel market recovering after the 2001 terrorist attacks (BMRC 2009, p.1). Factors influencing this growth were varied and included an increase in the number of tourists coming in to the UK in the years since 2002 and a diversification in the hotel market with increases in the budget sector as well as luxury brands. There was an increased call for upmarket brands as London in particular saw an increase in the ultra wealthy market sector for which money was no object (BMRC 2009, p.1). Other factors driving growth include the growth in internationalisation and global business, rises in disposable income, and the development of tourism from emerging economies such as former East Europe and India. The growth of the internet and online booking also paid a part as well as increased marketing by hoteliers (Key Note 2008 pp. 19-21).

During 2008 this boom came to an end. The hotel industry was hit relatively late by the depression, and even during 2008 industry experts were proclaiming that the previous 12 months had been a time of overall growth (Cater & Hotelkeeper 2009, p. 6). Occupancy rates were static in the first part of 2008, but then hotel transactions started to decline and during September 2008 occupancy fell steeply as did revenue per room (Cater & Hotelkeeper 2009, p. 6). Further, developments for new hotels and improvements were cancelled and budgets reduced.

3.2 Strengths and Weaknesses of the UK Hotel Market

A Key Note report identifies aspects of the UK hotel market influencing the vulnerablity or resilience to recession. On a positive note, the UK hotel market is a strong and sophisticated one with a wide range of different options to appeal to a range of different types of customer and including internationally recognised brands as well as smaller individual operators. Developments in technology and the increase of internet use over the last 10 years mean selecting and booking a trip is easier than ever before. The fact that most UK residents do not use hotels further offers an opportunity for growth, as does the potential for further increase in internet use. Restaurants attached to hotels and other such ‘add on’ services provide further expansion potential. Finally, the UK is experiencing a growth in its older population, who have more time to travel.

On the negative side, the hotel market is particularly vulnerable to an economic downturn as travel and trips are often seen as an area in which spending can be cut back. (Key Note 2008, pp. 48-50). Research also suggests that despite the apparently rosy outlook of the years immediately prior to 2008, the market had other issues to contend with even without recession. The long-stay leisure market (defined as those travellers staying away for five nights or more) has been in decline since 2004: the number of long-stay hotel rooms booked in 2008 was half that in 2006, at 11 million (BMRC 2009, p. 1).

4 The Impact of the Recession on the Hotel Industry in the UK: Specific Factors

4.1 Introduction

This section looks at some of the factors which impact upon the Hotel industry, and why they are important. The messages are mixed. Some of the factors are detrimental to the industry while others have more positive impact.

4.1 Air Travel in Decline

Although long-term growth in demand for air transport is projected, growth rates in the short to medium-term are likely to be affected by the general slowdown in the economy and by the rising cost of air travel. A market-wide study indicates that although long-term growth in demand for travel by air is expected, short to medium term projections are for negative growth in 2009 with the beginnings of recovery in 2010 (Key Note 2009, p. 10). This will have an impact upon the UK hotel market as there will be fewer travellers into the country. However, it should be bourne in mind that fewer UK holiday makers will want to holiday abroad due to financial considerations, thus boosting demand for hotels.

4.2 Collapse of the Property Market

One of the hardest-hit sectors of the economy in the recession has been building as house prices have crashed and loans to finance building projects have dried up together with the market for the finished product. The UK enjoyed some of the highest periods of growth of house and other building prices, and the construction industry has been particularly badly hit by the latest recession. Developers are unable to access credit to fund large scale building schemes, so many hotel projects have been stalled (Blitz 2009 [online]). Aside from new developments, hotel owners who are unable to access further credit are also finding things more difficult. While larger operators and branded chains are able to look to the medium and long-term, over which a boom for hotel and travel are predicted due to emerging markets, smaller operators have less access to the resources which will see them through the next couple of years (Blitz 2009 [online]).

4.3 The Falling Value of the Pound

The pound fell against foreign currencies until at one point in late 2008 it was worth very nearly 1 Euro. This should mean that UK services, including UK hotels and UK tourist attractions, become more attractive to visitors from overseas as they get more for their Euro or dollar. The deterioration of the global economy has certainly had an impact in reducing inbound tourism, but at the same time the pound became more attractive against the Euro: for the average visitor the cost of purchasing goods and services is approximately 10-12% cheaper than at the same time the year before (Foresight 2008, pp.1-2). Foresight predicted at the end of 2008 that while inbound tourism to the UK would fall slightly with a growth of -0.7, spend would increase by 2.4%. It should also be considered that a falling pound makes it less attractive for the UK holidaymaker to leave the country as prices across Europe will become more expensive (Foresight 2008, pp. 1-2).

VisitBritain, the body which aims to promote UK tourism, has launched a £6.5 million advertising campaign outside the UK to promote the affordability of Britain as a destination. However its calls for this investment to be matched by the UK government have not so far been successful (Mintel Market Reforecasts, 2009 [online])

4.4 Oil prices

A further factor is the price of oil, as this dictates the cost of air fares. Increased oil prices lead to raised surcharges on airfares and hence to higher flight costs. The cost to the airline is also considerable – if the price of oil is high they cannot simply pass it all on to the customer. A Key Note market report noted that when prices were over $120 a barrel BA said it would find it hard to break even, easyJet commented that a rise of $1 adds £2.5m to its operating costs, and Ryanair predicted extra costs of Euro 400m (Key Note, 2009, p. 11) Higher prices lead to a decrease in inbound flights, but equally to an increase in the number of UK residents holidaying abroad who might then consider staying within the UK. The price of oil fell from a high of nearly $150 a barrel in June 2008 to under $55 in November 2008. Oil price falls, however, can be bad news if the fall in price is due simply to a stagnant market (Foresight 2008, p. 6).

5. How the Recession has hit Specific Areas of the Hotel Market

5.1 Overview

2008 has certainly seen a fall in the market, and predictions for the next few years to 2012 are gloomy. Early 2008 showed positive trading in UK hotels, but the second half of the year had a significant deterioration with what Robert Milburn, of Www.cater.com, called ‘fragile and volatile conditions’ in the trade. Numbers of overseas visitors dropped by 5% between April and June 2008, and lead-in times became shorter, with 1-2 weeks being the norm rather than 4-6 weeks. A fall of 1.8% was predicted for 2008, but the recovery in 2009 which was also predicted now seems unlikely (Key Note 2009, pp. 62-63).

With rising unemployment and fears about job security, there is not simply less money to spend on luxuries such as holidays and hotels, but also an increasing perception amongst consumers that they should ‘make do and mend’; the spendthrift attitude which characterised the 1990s and years to 2008 has been replaced by a notion that one should save rather than splurge. Even by the end of 2008, predictions were being made that 2009 will see less tourism overseas than in 2008, a situation which has occurred only twice in the last 40 years (Foresight 2008, p.3).

Mintel predict a significant drop in the hotel market which will take some time to recover from, based on figures from the International Passenger Survey and trade sources. Their figures for revenue raised per available room also indicate that the hotel sector is struggling in both London and the regions (Mintel Market Reforecasts 2009, [online])

In the hotel industry worldwide, occupancy rates are declining and revenue per room are also dropping (FT.com 2009 [online]). Average room rates in the UK have dropped to around £100 per night and demand is low (Blitz 2009 [online]). It would seem at first glance that the industry faces a challenging time during 2009 and into 2010 at least, however there is also some positives; holidays are seen by the consumer as very important, and the UK is perceived by holidaymakers around the world as an excellent destination (it is the 6th most visited country world wide and is ranked forth in the Anholt-GfK Nations Brand Index in terms of Tourism (Foresight 2008 p. 8)). Mintel predict that while holidays will be reduced by consumers they will not be cut out altogether and the average family will continue to take one ‘main’ holiday per year as this type of break has ‘become ingrained in the consumer mindset as more of a right than a privilege’ (Mintel Market Reforecasts 2009 [online]). Whereas the overseas holiday market will fall slightly in 2009 and 2010, the UK market will simply stagnate (Mintel Market Reforecasts 2009 [online]). The following sections examine events in and predictions for particular sub-sections of the hotel market in the UK.

5.2 Business Travel

As the global recession deepens, business travel will suffer. Companies who remain in business will seek to cut their expenses by reducing spend on business travel, cutting trips to the absolute minimum and using cheaper hotels (Foresight 2008, p. 7).

The 2009 Key Note report notes that domestic business travel within the UK, which also impacts upon hotel usage, will also decline. The market is expected to increase very slightly from 2011, but will remain generally static over the 2008 to 2012 period. Inflation will lead to a marginal increase in expenditure, but as inflation affects all sectors, should be discounted. See Table 1:

Forecast UK Market, Domestic Business Travel, 2008-2012

2008

2009

2010

2011

2012

Trips (000)

18,500

18,300

18,000

18,200

18,500

Percent change year on year

-3.1

-1.1

-1.6

1.1

1.6

Expenditure (£M)

4550

4590

4600

4670

4800

Percent Change year on year

0.4

0.9

0.2

1.5

2.8

Table 1: domestic business travel in the UK excluding those trips which do not require an overnight stay (adapted from Key Note 2009, p. 29)

The same report shows that the forecast for inbound business travel – people travelling from overseas to carry out business in the UK – is also poor. The rate of growth in 2008-2009 slowed as the world economy slumps. While the rate does not actually go into decline, it slows to near 0. (Key Note, 2009, pp. 29-31).

5.2 Consumer (Non-Business) Travel

The domestic travel area offers some possible positives for the industry as a whole. It is arguably the case that tourism and the hotel industry in the UK are better placed to withstand the results of a recession than either other industries or other holiday destinations. The reputation of the UK as a whole is very strong as a destination, as is that of England in particular.A 2008 survey by Visit Britain of 614 respondents based in the UK who regularly take short breaks reported that 9 out of 10 people consider England when choosing a short break. The branding of England has improved over the course of this tracker study, 58% of respondents say it is their favourite holiday destination considered. It is considered easy to get around and seen as having beautiful scenery (Visit Britain 2008, p.2). Short breaks account for almost 2/3 of breaks taken in the UK, so these findings are significant for the industry as a whole. (Bainbridge 2009, p. 1).

Another consideration is the rising concern with being ‘green’ and the impact of frequent air travel on the environment (Bainbridge 2009, p. 1). Consumers who want to reduce their carbon footprint and impact upon the environment are increasingly opting to stay within the UK (Bainbridge 2009, p. 1). What Bainbridge does not highlight, however, is that the new concern for ‘green’ issues is not completely beneficial. Tourists from overseas will be equally concerned to cut their travel abroad, so this could also reduce inbound tourism into the UK. Research is conflicting with some showing that interest in saving the environment is fairly low priority for the majority of consumers and other studies confirming the idea that ‘green’ issues will become increasingly important (Key Note 2009, p. 49). Hoseasons, the self-catering leader, also take this view, claiming that more people are choosing to holiday in the UK because of a demand for a ‘green’ and alternative to flying abroad. Similarly, the ferry lines entered 2008 assuming that demand would increase for their services as a greener alternative (Key Note 2009, p. 49).

5.3 Short Breaks

A 2009 report confirms that although the market for UK short breaks taken by UK residents is not forecast to grow much over the next year or so, nor is it expected to fall. Key Note predict the following (Table 2):

2008

2009

2010

2011

2012

Volume of trips

(in Millions)

55.0

57.0

60.0

60.0

62.0

Value

(£M)

8,000

8,700

9,300

9,500

9,900

Table 2: Forecast UK Short-Break Holiday Market

Key Note also point out the conflicting factors at work in the non-business UK short break holiday market. It has been mentioned that holidays are very important to the UK public, moreover a short break can be taken where a long one might be rejected. However, research also suggests that while the ‘main’ holiday is sacrosanct, short breaks are easier to do without, but this might relate to overseas breaks rather than UK ones. To further complicate the issue, as people are increasingly slow to sell their properties they might be expected to ‘treat’ themselves to more short holidays rather than suffer the cost of moving house. The poor sterling rates also encourage people to stay within the UK for these breaks. On the other hand, family finances are being squeezed by job losses and the psychologies of a recession, and could deter people from spending on any kind of holidays. Overall there is ‘no way of knowing whether an economic downturn is good or bad news’ (Key Note, 2009, p. 49)

5.4 Budget Hotels and Holidays

5.4.1 Overview

The UK has the most expensive rates for hotels in Europe, and average prices rose by 12% in 2007 to an average of just over £100 per night. London’s exceptionally expensive rates influence this figure (Key Note 2009, p. 50). Against this background, and bearing in mind the recession, a move towards increasing the number of budget hotels seems inevitable. Previous expansion in the hotel industry has concentrated on the luxury end of the market with the growth of ’boutique’ hotels and the interest in catering to the super-rich. While this seems unfortunate given the recession, it is not obviously a bad strategy as historically the luxury market has been shown to reflect the economy more slowly than the rest of the market. (Key Note 2009, p. 92) In October 2007, Marriott estimated the growth in revenue per available room at between 5% and 7% in 2008; however, by May 2008, this had been revised to between 3% and 5%. As clients reduce their spending, it is likely that over-supply will be seen in the market and this will lead to some brand rationalisation (Key Note 2009, p. 92).

One predicable result of the recession is to increase interest in budget holidays and cheaper hotels. The Visit Britain survey of UK residents who take short breaks reported in March 2008 that price had now overtaken other factors in choosing where to stay (Visit Britain 2008, p.2). This is likely to increase as the UK moves deeper into recession.

The budget hotel market was under development even before the recession set in. Established brands such as Travelodge and Premier Inn expanded their operations, and they were joined by the ‘Purple Hotels’ from the Real Hotel Group. Hilton also developed plans for a budget hotel chain, and CitizenM, a design-led brand, was developed. Other brands include Nitenite and Yotel, built at low cost using prefabrication techniques. The growth in the market has led to further segmentation in the sector with introduction of upmarket tiers to the budget range (for example Holiday Inns ‘Express’ brand (Key Note 2008, p. 16)

A Key Note report written at the beginning of the recession predicted that the mid-range hotels would be the main casualty of shrinking demand. The problems with the economy were exacerbated in the hotel industry by the recent increase in energy and food costs ( Key Note 2008, p. 11)

5.4.2 Business Budget Hotels

As Bainbridge points out, budget hotels have benefited by both business and holiday customers downgrading in the recession. Some budget hotels have increased the range of facilities they offer to includes free wi-fi, breakfast and similar to accommodate a new business clientele. Whitbreads budget chain, Premier Inn, for example (the UK’s biggest hotel brand) is upgrading its rooms with flat screen TV, air-conditioning and Freeview, and has seen sales for its business account scheme increase 36% over the previous year to February 2008. (Bainbridge, 2009, p. 1).

This increase in the number of business travellers using budget hotels since the start of the recession in 2008 is corroborated by research by BDRC in 2009. They report that budget brands are consciously aiming to compete with mid-market brands by strategies such as the ones mentioned above. This drive has been rewarded by better standing in business advertising awareness for the budget hotel brands. (BDRC 2009 [online]) Key Note also report that mid-market business hotels are likely to suffer as they are positioned between the value and luxury hotel options, and what they call ‘tiering’, or introducing of levels in to the budget range, will also affect the mid-market brands (Key Note 2009, p. 92).

5.4.3 Consumer Budget Hotels

For the non-business traveller, accommodation quality is very important in UK breaks. While travellers abroad endure less than perfect accommodation because costs are low and the weather good, within the UK they demand better quality. One issue is that bed-and-breakfasts and guest houses are notoriously prone to poorly-run individual establishments, leading to calls for the market to be tightened. However the budget hotel sector has grown and has mopped up some of the non-business market as well. The fact that there are many chains available in this sector means travellers can be reassured regarding expectations and quality as they are buying into a brand name. This is particularly true in London – a popular choice for consumer short breaks – where hotels are notoriously expensive (Key Note 2009, p. 50).

5.5 Staff and Recruitment Impact

The recession has had a severe impact on the hotel recruitment market, and it is unlikely to recover before 2010. Job cuts look set to reach 600,000 as businesses and consumers cut spending. The Chartered Institute of Personnel and Development warned of the toughest year in more than 2 decades, and their predictions were backed up by a survey of 150+ senior management in the hotel industry carried out by the recruitment specialists Admiral Group which revealed that over 2/3rds of those surveyed were going to delay recruitment decisions, and put fast-track graduate programmes had on hold (Sharkey 2009, p. 7). These findings are reiterated by the results of a study by Deloitte in 2008 which predicted that the downturn could cut new jobs in the sector by 100,000 with a corresponding dramatic shrink in the UK tourism industry. A recession could see a £11b reduction in the economic input by visitors to the UK, currently worth £114b or 8.2% of the UK’s GDP. The British Hospitality Association also criticised the lack of help from the Government (Thomas 2008, p. 9)

One less gloomy prediction is that the recession will have less impact as the hospitality market in general and the hotel market in particular is more diverse than in the past, with some opportunities actually being created particularly in the casual and budget dining and contract catering sectors. This is reinforced by a survey carried out by the British Hospitality Association which shows that the contract catering sector has grown and will continue to do so in the recession (Druce 2009, p. 7)

5.6 Room Occupancy and Prices

Room occupancy rates – the percentage of nights that hotel rooms are in active use – have been increasing since 2005. This is good for hotel operators as it allows them to repay investments and reap more return for their money. In 2007 there was a 1% point rise in domestic occupancy (61% in 2006, with the 2003 rate being 59%). This pre-dated the recession and was a result of the strength of sterling at this time (Key Note 2008, p. 14)

Returns in terms of paid accommodation in the UK show a surprising result. Gains were still made in 2008, and a report by Deloitte showed that in the early part of the year revenue per room grew strongly (Caterer & Hotelkeeper 2009, p. 6), which is unusual as the recession started to set in during this year for most parts of the UK economy. However, this seems to be a function of gains made at either end of the booking season. Early bookings would have been made before worries about the economy set in, and late bookings made might have been as a result of last-minute demand and hence prices paid were higher (Key Note 2008, p. 15)

5.7. Smaller and Specialist Sectors

The result of the recession can also be traced in the smaller and specialist areas of the UK hotel market. For hotel operators, boom areas in these sectors are not necessarily a good thing, as will be shown.

5.7.1 Activity Holidays

Activity holidays overseas were enjoying a boom in recent years, however for the next few years the market is predicted to grow less rapidly, whereas activity holidays in the UK are predicted to rise. In 2010 for example the total no of activity holidays in Millions taken by UK residents was predicted before the recession at 11.5; this was revised to 10.8, with 2011, originally predicted to total 12 million was revised to 11.4. By contrast, predictions about UK activity holidays have been revised upwards: the 2011 level was predicted at 5.0 million, and this was revised to 5.3 million. (Mintel Market Reforecasts 2009 [online]). The impact for hoteliers is mixed. If the holiday involves hotel stay, then the news is good; however if the accommodation is self-catering the hotel operator will lose out.

5.7.2 All-Inclusive Holidays

All inclusive holidays, a sector which has been in decline in recent years due apparently to the increasing ease of online booking and ease of finding information, are now predicted to rise over the short-term as they allow all holiday costs to be known in advance and paid for up front. Both Thomas Cook and TUI are aiming to increase their all-inclusive capacity (Mintel Market Reforecasts 2009 [online])

5.7.3 Camping and Caravaning Holidays

This sector enjoyed a boom in the 1960’s and early 1970’s but with the advent of cheap overseas package holidays has been in decline. However, Mintel predict that these holidays are an attractive option for the budget conscious consumer, and will benefit from the increase of families who elect to stay in the UK in 2009 and 2010 for financial reasons. They point out that the Camping and Caravanning club had their best ever year for recruitment of new members in 2008 (Mintel Market Reforecast, 2009 [online]). Domestic camping holidays are predicted to do rather better over the next couple of years before the long-term trend towards decline reinstates itself. The growth in this area is not good news for the hotelier, as by definition a stay in a hotel is ruled out for this holiday type.

5.7.4 Others

Other sectors, for example boating holidays, have also been affected. Even where the market remains buoyant – boating and luxury holidays – growth prediction has been downgraded and is expected to occur at a slower rate than predicted (Mintel Market Reforecasts 2009 [online]).

Sectors of the UK market which are predicted to do well include coach holidays within the UK which are seen as a budget option and so are fairly resilient to an economic downturn, and heritage tourism as well as holiday centres like Centre Parcs. Mintel see the latter as particularly resilient as they are both percieved as a budget option and are attractive to the UK consumer as they offer ‘pay in advance’ all-in-one packages. An increase in coach holidays is also good to some extent for the hotelier, although the bulk of coach holiday operators chose low-cost hotels where price margins are cut very low, as the coach holiday is seen as a price-conscious alternative to the consumer.

6. Lessons Learne

How Unemployment And Inflation Affect Gdp In Eu Economics Essay

d from Previous Economic Downturns

The last time a recession occurred in the hotel industry was in the wake of the 2001 September 11th terrorist attacks on the Twin Towers in New York. The Sept 11th attacks and anthrax scare which followed caused uncertainty about the short and medium-term economic futures and had an impact upon travel and tourism plans leading to a reduction in hotel use and travel. In the US these areas, along with airlines were significantly affected in the aftermath of the terrorist attack. (Mintel Market Reforecasts, 2009 [online]). In the recession of the early years of the 21st century, the response to the challenge was to discount room rates heavily, however this strategy was of questionable use. The heavy discounting was intended to boost occupancy level, however this necessarily led to less profitability and in

Normally when the price of a good we want to buy goes up, it affects us. But why does the price increase? Is it because supply is lower than demand? Or, was it an increase in the oil price that affected the price? In order to answer these questions, we need to turn to macroeconomics.

Economists attempt to forecast economic conditions to help consumers, firms and governments make better decisions.

Consumers want to know how easy it will be to find work, how much it will cost to buy goods and services in the market, or how much it may cost to borrow money.

Businesses use macroeconomic analysis to determine whether to expand production or not. Will consumers be able to buy the products

A Government needs macro analysis when preparing a new budget, creating taxes, deciding on interest rates and making policy decisions.

Macroeconomic analysis mostly focuses on three things: Gross domestic product (GDP), unemployment and inflation.

Introduction

Normally when the price of a good we want to buy goes up, it affects us. But why does the price increase? Is it because supply is lower than demand? Or, was it an increase in the oil price that affected the price? In order to answer these questions, we need to turn to macroeconomics. Economists attempt to forecast economic conditions to help consumers, firms and governments make better decisions. Consumers want to know if it is easy to get a job, how much it will cost them to buy goods and services in the market, or how much it may cost them to borrow money. Businesses use macroeconomic analysis to determine whether to expand production or not. Will consumers be able to buy the products? A Government needs macro analysis when preparing a new budget, creating taxes, deciding on interest rates and making policy decisions. Macroeconomic analysis mostly focuses on three things: Gross domestic product (GDP), unemployment and inflation.

For these reasons, this empirical project will investigate how changes in the unemployment and inflation affect the gross domestic product per capita of European countries during the year of 2005.

The starting point of this work is the Okun’s Law model. This work will describe briefly the theory and show how unemployment and inflation are related to GDP.

The work explains the relevance of my research to the theme and briefly outlines the objectives and hypothesis to be tested. The expected results will also be mentioned.

After discussing the data, section 3 presents the econometric methodology used in the process and briefly describes the statistical model, tests and steps. Some time will then be spent, on the comments and interpretation of the results obtained by the tests and models.

Finally, provides the conclusions and highlights some topics for further research.

Literature review

In a research note, Alliance Bernstein economist Joseph Carson says job losses in prior downturns have been roughly proportional to the decline in gross domestic product. But in the current recession, the proportion of jobs lost is running about a third greater than the drop in real GDP.

The correlation between GDP growth and unemployment is called Okun’s Law, after the late economist Arthur Okun who documented it in the 1960s. But the numerical relationship that Okun estimated – and other economists have since refined – has broken down. His original estimate suggested about a 3% decline in GDP for every 1% increase in unemployment. Before joining the Fed, Ben Bernanke, working with Andrew Abel, figured more recent suggested about a 2% decrease in output for every 1% increase in unemployment.

Walterskirchen (1999), on “The Relationship between Growth, Employment and Unemployment in the EU” analyses the macroeconomic links between economic growth and the labour market. Two methods were adopted: time-series analysis for individual EU countries and international cross-country analysis for the period 1988-98.

Empirical test showed that there is still a strong and positive correlation between GDP-growth and the change in employment. But employment, of course, will rise only if economic growth rates are outstripping productivity gains.

He found and concluded that there is a strong negative correlation between real output growth and the change in the unemployment rates in time-series and in cross-country analyses. The simple-minded argument that there cannot be a negative relation between economic growth and unemployment, because both are rising in the long run, is of course completely wrong.

Arai, Kinnwall and Thoursie (2002), developed a model investigation conducted on “Cyclical and Causal Patterns of Inflation and GDP Growth”.

The views that high inflation impairs GDP growth are investigated using annual data for 115 countries over the period 1960-1995. They estimated dynamic panel-data models of the effects of inflation on growth taking into account that countries are heterogeneous and that there were time-specific symmetric shocks, as well as endogeneity of inflation and dynamics of GDP growth. They found no evidence supporting the view that inflation is in general hurtful to GDP growth. On the other hand, there is a negative correlation between contemporaneous intra-country inflation and growth for periods characterized by positive oil price shocks.

Economic theory

In economics, Okun’s law is an empirically observed relationship relating unemployment to output. It states that for every 1% increase in the unemployment rate, a country’s GDP will be an additional roughly 2% lower than its potential GDP. Another version describes the relationship between quarterly changes in unemployment and quarterly changes in real GDP. The name refers to economist Arthur Okun who proposed the relationship in 1962.

Okun’s law is more precisely called “Okun’s rule of thumb” because it is primarily an empirical observation rather than a result derived from theory. Okun’s law is approximate because factors other than employment (such as productivity) affect output. In Okun’s original statement of his law, a 3% increase in output corresponds to a 1% decline in the rate of unemployment; a .5% increase in labour force participation; a .5% increase in hours worked per employee; and a 1 % increase in output per hours worked (labour productivity). Okun’s Law states that a one-percent decrease in unemployment is associated with two percentage points of additional growth in real GDP.

One implication of Okun’s law is that an increase in labor productivity or an increase in the size of the labor force can mean that real net output grows without net unemployment rates falling.

Okun’s law can be written as:

(overline{Y}-Y)/overline{Y} =

c(u-overline{u}), where:

overline{Y}is potential output or GDP at full-employment

Y is actual output

overline{u}is the natural rate of unemployment

u is actual unemployment rate

c is the factor relating changes in unemployment to changes in output

It is difficult to use in practice because overline{Y}and overline{u}can only be estimated, not measured. A more used form of Okun’s law, known as the difference or growth rate form of Okun’s law, relates changes in output to changes in unemployment:

Delta Y/Y = k – c Delta u,, where:

Y and c are as defined above

ΔY is the change in actual output from one year to the next

Δu is the change in actual unemployment from one year to the next

k is the average annual growth rate of full-employment output

The Okuns can also be connected to inflation.

Macroeconomists try to forecast economic conditions to help consumers, firms and governments make better decisions. This project will investigate the following economic issues:

How much changes in unemployment affect GDP per capita

What is the effect of an increase in the overall price on the GDP per capita

Are inflation and unemployment correlated

How are these economic indicators related to each other

Data

The data set included 40 european countries over the year of 2005. I chose Europe due to nationality and also because European countries have almost the same level of development. The data came primarily from IMF World Economic Outlook (WEO) with the GDP per capita based on the purchasing power parity, unemployment rate measured in percentage of total labour force and inflation measured by the annual percentage change in the CPI index. This is widely accepted as a reliable source of information.

The selected 40 countries are presented in the table 2.

Gross Domestic Product based on purchasing power parity in ($), the inflation is in annual % growth; unemployment is in annual % of economically active population. I could have used percentage of real GDP per capita growth but because I am using cross sectional data, and not time series, it seemed more appropriate. Mean unemployment rate is about 8% and mean inflation rate is about 3.8%. The lowest unemployment rate was found in Belarus (1%) and the highest in Macedonia (34.9%). Lowest inflation rate was found in Poland (0.7%) and highest in Russia (10.9%).

The Model and empirical results

To begin with the methodology it is important to recall the main purpose of the research. The aim is to measure by how much changes in unemployment and inflation affect GDP per capita of European countries.

To do that, GDP per capita will be the dependent variable, and unemployment and inflation will be the independent variables.

My model is:

GDP = β0+ β1unemployment+ β2inflation + ut

Where GDP is the Gross Domestic Product based on purchasing power parity (PPP), Unemployment is the unemployment rate, Inflation is the annual inflation rate, exports is the total exports and ut is a disturbance term (other factors).

I will carry out tests using STATA 11 stating the appropriate hypothesis to be tested.

Firstly I will test for multicolinearity. Multicolinearity happens when 2 or more regressors are highly correlated. In the presence of multicolinearity, the estimate of one regressor’s impact on y while controlling for the others tends to be less precise than if predictors were uncorrelated with one another. I will use a correlation matrix obtained from STATA to see the correlation between them.

Secondly, I will do a T test for testing hypothesis relating to the regression coefficients.

The statistics t-test allows us to determine a p-value that indicates how likely we could have gotten these results by chance. By convention, if there is a less than 5% chance of getting the observed differences by chance, we reject the null hypothesis (H0) and say we found a statistically significant difference between the two groups.

Then, I will do an F test.

=

Finally, I will do the GoldFeld-Quandt test for heteroscedacity. The Goldfeld-Quandt test is a test for this type of heteroscedasticity. The sample is divided into three ranges containing the 3/8 of the observations with the smallest values of the X variable, the 3/8 of the observations with the largest values, and 1/4 in the middle. If the disturbance term is homoscedastic, there should be no systematic difference between RSS1 and RSS2.

Empirical results

In the table 1.5 the correlation between GDP per capita, unemployment and inflation is examined carefully. The correlation matrix measures the two way relation between GDP, unemployment and inflation. It can be seen that both unemployment and inflation share a negative relationship with GDP per capita. This negative relationship holds consistent with traditional Keynesian theory, Stockman’s neoclassical model and some endogenous growth theories, which imply that higher inflation, is negatively correlated to growth. Unemployment and inflation have a weak negative relationship, which means that there will be no risk of multicolinearity in this regression.

The true model is:

GDP= 42365.98 – 992.4unemployment – 3082.9inflation

In the first regression (table 1.1), the results indicate that an increase of unemployment rate by 1% unit decreases GDP per capita by $992.4. On the other hand, an increase in the inflation rate by 1% unit decreases GDP per capita by $3082.9.

R2 (=0.5199) indicate that the 2 independent variables (i.e. unemployment and inflation) account for 51.99% of the variation of the dependent variable (i.e. GDP per capita). If the model were derived from the population rather than a sample it would account for approximately 0.0259% less variance in the dependent variable as the adjusted R2 is less than R2 by this amount (0.5199- 0.4940=0.0259). Adjusted R2 is more accurate estimate of the proportion of variance explained for the sample that has been used to generalise to other populations and studies, particularly when comparisons are being made which have included either fewer or more variables.

T test

To test whether or not the slope coefficient or the intercept differ significantly from zero, the following hypothesis are employed at 1% significance level:

H0: coefficient of unemployment (B1) = 0

H1: coefficient of unemployment (B1) ≠ 0

Calculated t= (-992.39 – 0)/ 253.32= – 3.92

H0: coefficient of inflation (B2) = 0

H1: coefficient of inflation (B2) ≠ 0

Calculated t= (-3082.918 – 0)/ 572.28= -5.39

Critical t statistic at 1% =2.704

Both calculated t for B1 and B2 are greater than the critical value ate 1% level of significance. We reject the null hypothesis.

F test

H0: B1=B2 = 0

H1: at least one coefficient ≠ 0(i.e. B1≠0 or B2≠0)

α=0.01

Calculated F(2, 37)=( 0.5199/2)/ [ (1-0.5199)/37)]= 20.04

Critical value of F (2, 37) = 5.27

We reject H0 since calculated F is greater than the critical value at 1% significance level

Goldfeld-Quandt test for heteroscedasticity

After sorting the data in ascending order, the sample was divided in three subsamples omitting the middle one.

Central sample: ¼ of the observations in the middle of unemployment variable

First subsample: 3/8 of the observations with the smallest values

Third subsample: 3/8 of the observation with the largest values

OLS regression models on the first and third subsample were estimated according to table 1.4 and 1.5. we state the hypothesis:

H0: homoscedasti

Human Capital Natural Resources And Development Economics Essay

city of the error term (the variance is constant)

H1: heteroscedasticity of the error term( the variance is not constant)

λ=RSS2/RSS1=800067395/2.1867e9=0.366

F(13,13)=7

Since the calculated F-ratio of 0.366 is lower than the critical value at the 1% level of significance, then the null hypothesis of homosedasticity is not rejected at the mentioned level of significance. Therefore, the liner sp

The most important characteristic of developing countries or less developed countries is that it has low per capita income. In addition, people in developing countries or less developed countries usually have poor health, low levels of literacy, extensive malnutrition, and little capital to work with.

The growth, in developing countries, is improving living standards – rides on four wheels. There are (1) human resources, (2) natural resources, (3) capital formation and (4) technology. These four wheels operate in rich and poor countries. Let’s see how each of four wheels operates in developing countries and consider the policy of the government can steer the growth process in favorable direction. Now we study about the process of development of economy of a developing country in Asia- China.

China is also a developing country in Asia. For last two decades, China’s economy has growth very fast. With growing annually average about 10% of GDP, China has been seen as only one economic potential country instead of Japan’s position in the world. China’s economy might continue the high growth because Chinese government promises to adopt strong economic measure to reduce impact of global economic crisis on its nation. What factors have made China develop its economy faster than other developing counties in Asia?

China has experienced since its economic reforms were launched in the late 1978 looks very different to much more gradual development than other counties in Asia. The points of China’s growth were high investment in development of Small and Medium Enterprises and foreign firms, via FDI industry sectors, development of human resources, human capital, technology, and development in industry sectors,

Human Capital and Development

In all factors of economic and social development, human resources are set as the most important one by the Chinese Government. Therefore, efforts should be made to bring China’s personnel management into the new stage of the strategy of strengthening China to catch up with that of developed countries. At the same time, the training and educational level and employees’ professional capacity have been greatly enhanced due to the human capital theory, public administration and talents evaluation skills drawn from developed countries. The implementation of the strategy of strengthening China with talented people resulted in the formulation of strengthening provinces and municipalities with talented people. Dazhou City of China’s southwest Sichuan Province, for example, is an undeveloped city. The personnel sector of this city holds that the shift from human resources to human capital is the objective requirement of Dazhou’s economic construction and rapid social development. In promoting the shift from human resources to human capital, Dazhou City attaches great importance to the accumulation of human capital, increase of investment, and enhancement of education, training, and recruiting foreign talents to improve the quality and capacity of talents. At the same time, Dazhou City manages to stimulate the vigor of the talents and trigger the potentials of the talents in management system, operation system, and environmental conditions. Dazhou City also encourages the talents to do hard pioneering work to incorporate human capital into other productive factors to pursue multiplication efficiency. This case illustrates that training results in the innovation of human resources development concepts and practice. It is therefore easy to imagine the importance of innovation in central areas and places at middle-upper levels. The MPA training program provides governments and the society with high-level public managerial personnel.

Moreover, China also encourages to consider factors such as management, technology, capital, and labor force in distribution field and conduct in-depth implementation of the principle of income distribution according to work, clear-cut the income differences of employees, break away from traditional egalitarianism in income distribution, and at the same time properly handle the relationship among market guidance pricing of personnel, people’s capacity and contribution, current economic situation of corporations and employees’ affordability.

Natural Resource and development

China remains a major producer and distributor of resources. It is in fact, a world leader in the production and manufacturing of many coveted natural resources. The geography of such a large area provides many opportunities, in terms of accessibility and availability of these items, for China.

Most large countries depend on the realization and utilization of their natural resources for their ultimate economic success. Other small countries with few natural resources to extort depend on larger countries like China to provide necessary goods and supplies to keep their economies stable. Becoming familiar with what certain countries like China have to offer the world makes people realize the importance of stable relationships across the globe.

Many countries depend on goods supplied by China. The applications of oil, coal and natural gas are obvious; most countries require fuel and heat to thrive. “According to Web Elements, goods like batteries require antimony as a lead hardener. Tungsten, because it has such a high melting point and high conductivity, is used in such applications as light bulb filaments.” Both of these metals are manufactured in China where they occur naturally and are relatively easily accessible.

In the April 2009 updated version of the Central Intelligence Agency’s “World Factbook,” crude oil and natural gas remain two of China’s more abundant and profitable natural resources. China’s oil production was estimated at 3.725 million barrels per day in 2008, which made it the fifth-largest oil producer in the world. China had 19.6 billion barrels of crude oil in reserves, according to 2008 estimates. In 2007, estimates held the country’s natural gas production at 69.27 billion cubic meters. China’s reserves of natural gas were estimated at 2.265 trillion cubic meters in 2008.

China has the largest potential for hydropower out of any other country in the world. Numerous mountain ranges with quickly flowing rivers and tributaries add to this potential. If this potential is realized, hydropower can prove to be one of China’s most valuable natural resources. If hydropower was harnessed at such a volume as to provide for other neighboring.

year

production

consumption

year

production

consumption

1980

2114

1765

1994

2939.29

3160.61

1981

2012

1705

1995

2990

3363.16

1982

2045

1660

1996

3131.34

3610.09

1983

2120

1730

1997

3200.34

3916.27

1984

2296

1740

1998

3198.19

4105.83

1985

2505

1885

1999

3195

4363.6

1986

2620

2000

2000

3248.76

4795.71

1987

2690

2120.04

2001

3300

4917.88

1988

2730

2275

2002

3389.65

5160.71

1989

2756.5

2379.52

2003

3408.87

5578.11

1990

2774

2296.4

2004

3485.31

6437.48

1991

2835

2498.8

2005

3608.62

6695.44

1992

2845

2661.6

2006

3672.74

7235

1993

2890

2959.49

Source: United States Energy Information Administration

Capital Formation

Since 1992, with the renewal of economic reforms, China has enjoyed faster economic growth, with a rate of nearly 10 per cent annually, while its external trade grew by more than 15 per cent a year (Zhai and Wang 2002). During this period, SMEs expanded rapidly in all sectors. Rural SMEs, which include almost all TVEs and all rural household and PEs, produced about one-third of China’s GDP since 1996 and employed over 130 million rural workers. Urban SMEs, comprising small- and medium-sized SOEs, urban collective enterprises (COEs), urban household and private firms, and enterprises with other ownership forms, mainly joint venture (JV) enterprises, produced about another one-third of GDP and employed 115 million urban workers (Sun 2000).

The significance of SMEs has continued to grow in China. SMEs not only help to expand the scale of the market economy, but also contribute to the creation of the system of the market economics as a whole. Most management systems in China, for instance, began first in SMEs

and then became widespread (Fan 2003). The important role of SMEs in China suggests that their development is critical for sustained growth of the economy.

Increasingly, China may have also have benefited from a further element of domestic competition. Even in the command economy period, for instance, the central plan controlled probably less than half of industrial output (Brandt et al. 2008). Over the last three decades of much more open markets, scope was given to decentralized experimentation in novel institutions and forms of organization (Brandt and Rawski,2008). The provision of tax receipts has also led local governments to compete against each other by concentrating spending on productive investment and trying to create hospitable economic environments designed, in particular, to attract FDI (Qian and Weihgast, 1996)

China’s trade and investment reforms and incentives led to a surge in foreign direct investment (FDI), which has been a major source of China’s capital growth. Annual utilized FDI in China grew from $636 million in 1983 to $61 billion in 2004. FDI will continue to pour into China as investment barriers are reduced under China’s WTO commitments and Chinese demand for imports continues to increase.

Country

Cumulative Utilized FDI:

1979-2004

Utilized FDI in 2008

Amount

($ billions)

% of Total

Amount

($ billions)

% of Total

Total

563.8

100.0

92.4

100.0

Hong Kong

241.6

42.9

41.0

44.4

United States

48.0

8.5

2.9

3.2

Japan

46.8

8.3

3.7

4.0

Taiwan

39.6

7.0

1.9

2.1

British Virgin Islands

36.9

6.5

16.0

17.3

South Korea

25.9

4.6

3.1

3.4

Technological Progress

Improvement in the production is the most literal interpretation of technical progress, result from a combination of research, innovation, and development. Since the founding of the People’s Republic, industrial development has been given considerable attention. Among the various industrial branches the machine-building and metallurgical industries have received the highest priority. These two areas alone now account for about 20-30 percent of the total gross value of industrial output. In these, as in most other areas of industry, however, innovation has generally suffered at the hands of a system that has rewarded increases in gross output rather than improvements in variety, sophistication and quality. China, therefore, still imports significant quantities of specialized steels. Overall industrial output has grown at an average rate of more than 10 percent per year, having surpassed all other sectors in economic growth and degree of modernization. Some heavy industries and products deemed to be of national strategic importance remain state-owned, but an increasing proportion of lighter and consumer-oriented manufacturing firms is privately held or are private-state joint ventures.

Cite This Work

ecification is definitely homoscedastic.

Conclusion

In general, the findings reveal that there is a negative relationship between inflation and GDP per capita that is statistically significant beyond 1% significance level and of an economically interesting magnitude.

The performance of the economy is important to all of us. We analyze the macro economy by primarily looking at national output, unemployment and inflation. Although it is consumers who ultimately determine the direction of the economy, governments also influence it through fiscal and monetary policy.

come; it took years to recover from this as consumers became used to the lower prices. As Bloss (2009) points out, the tactic is also very easy to copy by competitors and hence a risky one.

7. Conclusion.

The UK hotel market has certainly been affected by the economic downturn. The above looked at the background to the recession and how it has affected the corporate and consumer sector. While the sector has certainly been impacted with job cuts, slower, stagnating or declining predictions and less building projects, there are some positives for the UK market as holiday makers elect to stay at home rather than travel abroad.

Cite This Work

56F59E8A99C8428989E9BE66187D5792.aspx

Measure of Spreads. (2007). Retrieved June 3, 2010, from Stats4students: http://www.stats4students.com/Essentials/Measures-Of-Spread/Overview_3.php

Office of Fair Trading. (n.d.). Office of Fair Trading. Retrieved June 3, 2010, from http://www.oft.gov.uk/: http://www.oft.gov.uk/

Office of Fair Trading. (2010, May 25). Office of Fair Trading Reply Letter. London, U.K.

Prisoner’s Dilemma. (1997, September 4). Retrieved June 3, 2010, from Stanford Encyclopedia of Philosophy: http://plato.stanford.edu/entries/prisoner-dilemma/

e to end the game.

In conclusion, the rationale of applying backward induction seems strong since it can help narrow the number of possible Nash equilibria. By looking forward and reasoning backward, each player can predict what other players will do at subsequent stages of the game. Therefore, he can judge the consequences of his possible moves, assuming that players are rational, and therefore; decides on the optimal move. However, backward induction exhibits some limitations as discussed in the centipede game where the argument rests on the prediction of behaviour off the equilibrium path. This arguably leads to the challenge of rationality assumption of game theory which needs further justification.

Word count: 1499

ault. Ironically, it was the Realists making reality conform to their ideals that created the distortion of government economic policies, leading to short-sighted intervention in the relatively free market. This resulted in the unintentional long-term consequence of perverting the natural incentives of productivity – profit and loss – which, in turn, ultimately triggered the global-financial-crisis. “It was government intervention in the markets that created the crisis and that less, not more, regulation is what the system needs to heal and to survive.”

Marcell Acs

109790

ers adopt PVRs?

A change is required with the change in the Global market. The strategies have to be renewed every time again and the change has to be speedy in nature because there is a fear of extinction otherwise. My suggestions for the commercial networks and the major channels are that they should immediately change their strategy. Either they should start charging the viewer’s straight away or they should pursue the viewer’s somehow to watch the commercials. This can be done by probably making the advertisement interesting and funny enough so that the viewers don’t feel like skipping it. Or the advertisement should have some kind of intangible connect with the viewers. The medium of the advertisements can also be made more divergent like hoardings display or in the theatres during the start of the movies or involving an appreciated celebrity. Hence they will have to open up to new ideas and thoughts in order to save themselves from making losses.

have gone to western corporations and consumers, even as certain areas of the developing world have gained on account of economic investment in production and service facilities.

The benefits of globalisation have unfortunately been accompanied by large scale environmental degradation, uneven development, and low wage employment for the poor. With awareness increasing steadily about the adverse consequences of unregulated globalisation, most governments are taking policy actions to regulate its adverse effects. It is important for nations to ensure that their integration with the global economy does not lead to the marginalisation of the poor and the destruction of their natural environment.

Word Count: 3000, apart from bibliography

In the business cycle Real GDP is recorded quarterly and when it falls for more than two consecutive quarters a recession is declared. This lack of economic growth is caused by real GDP being less than potential GDP spending in the economy and therefore a fall in aggregate demand. This shifts the aggregate demand

In September 2012, the UK Government introduced quantitative easing in an attempt. Although no money was physically printed bonds were theoretically bought electronically which meant that the money supply in the economy increased. This had the effect of (British Broadcasting Corporation, 2012)

When a recession is occurring and there is a decrease

Limitations of the project are:

The time under which the analysis has to be done is a short time so the project cannot be completed with perfection

Also the topic of discussion is a very vast one and so the project is done with the little understanding that I could get hold of during the time of analysis

Also a number of assumptions have been made in the analysis that is to be performed which might lead to slight inaccuracies but as far as it comes to my knowledge that these ambiguities have been reduced.

After thirteen years, govt, appointed fourth central pay commissions under chairmanship of justice P.N.Singhal on July 26, 1983 to examine structure of all central govt. employees, including those of union territories. Officers belong to all India service and armed forces. Commission submits its report on July 30, 1986 and recommended drastic changes in pay scale.

The 5th pay commission (1952-1996) made certain recommendation regarding restricting of pay scales.

The 6th pay commissions was established on 2006 and committee submit its report on March 2008.

ed their production parts across countries & sell its products all most around the world just to take the benefit of the internationalisation & globalised concept. Their main strategy is to take advantage from different counties’ favourable condition that helps their business to gain more revenue using economics of scale. As we have discussed the main reason of their expansion of business in China are cheap labour costs, higher productivity of Chinese labour output & huge demand of Asian market. They also want to take benefit from the exchange rate & investment friendly government policy. It is proved from their establishment of unit in China & Ireland. Their well organized globalised business strategy has helped them to spread their products world wide almost in every country, which is much more appreciated from the point of view of internationalisation of a company. In every of their business strategy the concept of true globalised company can be visualised.[ Peter Dicken]



Most Used Categories

Recommendation
EssayHub’s Community of Professional Tutors & Editors
Tutoring Service, EssayHub
Professional Essay Writers for Hire
Essay Writing Service, EssayPro
Professional Custom
Professional Custom Essay Writing Services
In need of qualified essay help online or professional assistance with your research paper?
Browsing the web for a reliable custom writing service to give you a hand with college assignment?
Out of time and require quick and moreover effective support with your term paper or dissertation?