Chapter 10 Blog

Link: http://www.thestar.com/business/article/643821




Summary

The bankruptcy of GM seemed imminent late last year and it has finally happened. On June 1 2009, General Motors filed for chapter 11 bankruptcy. This provides GM with financial tools such as loans to restructure its business. In the early 1950's, GM dominated the automobile industry in an oligopoly they shared with Chrysler and Ford. When imports from foreign companies into the American market were fast increasing, GM stuck with their big, heavy carbon dioxide producing automobiles. In the 21st century, where Americans are more aware of the negatives of heavy carbon producing cars, GM faced competition from more fuel efficient brands from foreign companies. Ottawa and Queen's Park have taken a 72 percent ownership stake in the restrctured GM set to emerge from bankruptcy in six months with the assistance of $72 billion US in loans and $9.5 billion from Canada. GM products have lost much of their popularity with a recent poll showing that two thirds of Americans are opposed to bailing out GM with the use of tax payer's funds. Currently, foreign brands such as BMW, Toyota and Honda are the preferred automobiles among motorists with GM's market share dropping to 19.1 percent. US president Barack Obama, however, remains optimistic about the restructured GM which is expected to make profits through the current 27 year low in auto sales. GM's problems arose when GM chief executive Roger Smith failed to reduce the overcapacity of GM as vehicles that were low in demand were continuously placed on the market.

Connections to Chapter 10

The market in which General Motors operates in involves a competitive situation that has many differentiated sellers. There are many sellers in the automobile industry due to the fact that imports from foreign brands are an available and popular product for consumers. GM has to compete with several other companies such as Ford, Chrysler, BMW, Toyota, Fiat, Mercedes Benz, Mitsubishi, and Volkswagen just to name a few. The products in this competitive group are similar but can be distinguished from one another. This definitely holds true for the automobile industry, where quality, brand name and design of the products of each company are different e.g.: foreign companies tend to produce more fuel efficient cars than GM. Each firm in a many differentiated sellers market makes us of non-price competition such as advertising. This can be seen in the automobile industry as well. During the 1960's the automobile industry functioning in North American consisted only of a few firms, General Motors, Chrysler and Ford. It would be considered an oligopoly at the time because of the few firms and the concentration of each firm in their market. Now, imports have gained a large share of the North American market and GM is forced to consider international competition from foreign auto makers as consumers can purchase cars made in Japan, Britain, Germany, France and other countries. This played a large role in the downfall of General Motors as foreign cars became more popular.

Reflection


In any competitive industry, such as the automobile industry, companies must adapt to the changing trends. GM has found itself in this situation mostly in part due to the low demand for GM products. Today, motorists' preferences lies mostly in foreign, fuel efficient cars and GM struggled to adapt to these changes. Another reason that I believe could account for GM's bankruptcy would be the recession as well as rising gas prices ( experienced by the US in the end of 2007) which would have lowerrf the demand for SUV's and pick ups that GM is known for. Though GM is expected to make a recovery, it will probably not be restored to its former glory as their market share would take a hit due to the competition. Overall bankruptcy could possibly force GM to produce higher quality and fuel efficient cars in order to compete with other companies; however, it is unfortunate that GM which has had a large influence on American culture, will have less market power in the future.

Chapter 8 Blog

Link: http://www.theglobeandmail.com/servlet/story/RTGAM.20090416.wfranceeconomy0416/BNStory/crashandrecovery/home



Summary



France has been able to evade much of the damaging economic effects of the recession unlike its neighbouring European economies. Even though this is good news for the current situation for France, the qualities that have protected the French economies from the recession will slow down its growth once recovery sets in, emphasizing the need for President Nicholas Sarkozy to make the economy more dynamic. The French economy contracted 1.2 percent for the first three months of this year according to a Reuters poll. Compared to the expected decline in GDP of 2.2 percent in Germany, 1.6 percent for the euro zone, and 1.4 percent for Britain, France has been able to cushion itself from the decline in GDP experienced in other European countries. Even though France may currently be sitting atop the other Economies, an analysis shows that Britain, France and Germany will be recovering at the same rate in 2010, but Britain and Germany will speed up in recovery for the long run. The factors in the French economy that has cushioned it from the recession include, disinflation and a wage structure which prevents salaries from being adjusted during economic downturn. Strict employment laws also make it harder for companies to lay off workers during recession, . The fact that France does not rely as much on exports means that they would not be as vulnerable to GDP changes like countries such as Germany which count on their exports to stimulate the economy. Automatic Stabilizers have also helped those struggling under the recession with unemployment benefits. Even though France is currently in better shape than other countries during this recession, once the world economy picks up, Germany is expected to recover faster due to its successes in exports. The fact that France may slow down in growth has prompted President Sarkozy to introduce reforms, especially in the labour market.



Connection



When economic conditions change, governments implement stabilization policies to help the economy react to the change. This can be seen in the French economy. Its stabilization policies have helped prevent a large drop in GDP by helping those suffering from unemployment during recession. With unemployment insurance programs and other forms of benefits, people will be more willing to spend and that would result in more money circulating the around the economy which benefits the GDP. This also explains why France has been able to tank the recession better than its European neighbours. Another situation taking place in France would be the decreasing price and the rise in unemployment. This can be explained with the Philips Curve which states that there is an inverse relationship between unemployment and inflation.



Reflection


The employment laws in France definitely need to allow more flexibility for employers. Even though its strict policies are preventing employees from being laid off in the current recession, employers would be reluctant to hire. This can prove to be a serious problem once the global economy picks up and employees are still struggling to find a permanent job. As mentioned in the article, GDP can actually contract and France could experience another period of negative GDP growth. In a way, having strict employment laws may be beneficial during recession periods because consumers would still be employed, and that would result in more spending and a stable GDP, however, once the world economy has recovered the problems of getting employed under strict laws would arise. Overall, the situation in France reveals that a rigid labour markey system, may help ease the effects of a recession and provide some form of stability, but in the long run, it may prove to hinder growth.

Chapter 7 Blog

Link: http://business.theglobeandmail.com/servlet/story/RTGAM.20090401.wcarney0401/BNStory/Business/home

Summary

Mark Carney, the governor of the Bank of Canada made a prediction that trends in the global economy will result in the recession persisting into the second half of the year during a speech delivered to a business audience in Yellowknife on Wednesday. Some of the factors hindering the economy include, weaker global growth, the selling off of inventories rather than new production, worsening labour markets and spare factory capacity which would cause the recession to extend further into the year. Mr Carney also made a remark that the contraction in the first quarter looks likely to be at its worse since 1961 where quarterly GDP was first collected. The International Monetary Fund and World Bank also made predictions that the world will shrink for the first time since World War Two. A large factor in Canada's economic recovery is dependant on the recovery of the global economy as 40 percent of Canada's gross domestic product is from the country's exports. This drop in trade will result in Canada's GDP to drop by 3 percent in 2009 and it also limits the growth next year to 0.3 percent according to the Organization for Economic Co-operation and Development (OECD). The OECD also made a comment that Stephen Harper should spend more to stimulate the economy and that Mark Carney should decrease borrowing costs. Carney has indeed lowered the lending rate by 4% since December 2007 which leaves it at a record low of 0.5 %. The central bank has devised a plan to lower market borrowing rates by buying securities such as government debt and corporate bonds. Carney concluded his speech by telling bankers that measures taken by Canada and other economies will take time to fully take effect and, also warned that lowering borrowing costs and increasing deficits can further damage consumer confidence and businesses.

Connection to Chapter 7

The main focus of this chapter is about the money supply and the Canadian Banking system. These two aspects of the Canadian economy play a large role in influencing the economy. As mentioned in the article, governments and central banks are relied upon to entice demand in order to stimulate the economy. In times of recession, the monetary policy of banks would be to increase the money supply as a means of providing an incentive for consumers to spend more. Another measure that banks take in times of recession is lowering interest/lending rates, like what Mr. Carney has done. The inverse relationship between interest rates and the demand for money can also be applied to analyze the monetary policy that will be implemented by the Bank of Canada. With lower interests, the demand for money goes up because the cost of borrowing it and taking out a loan is lowered. This will also encourage further spending by the consumers.

Reflection

I agree with Carney's last statement that the Bank of Canada should be prudent in making decisions regarding the monetary policy. Lowering interest rates will not necessarily result in increased GDP especially in times of recession where the psychology of consumers is to save rather than spend. I think we can also expect lower reserve rates in deposits during these periods of recession so that a larger loan can be taken out by the bank in order to encourage more spending. Banks should also be patient in allowing the measures taken by banks and governments around the world to take effect as continuing to lower interest rates can prove to be harmful to business and consumer confidence.

Chapter 6 Blog

Link:http://www.economist.com/displaystory.cfm?story_id=13248177


Summary


This article reports on the recent measures that the Bank of England has undertaken to ease the effects of the recession on the economy. On March 5th the Central Bank lowered its interest rates, bringing the base rate down to 0.5 %. This decline in interest rates began in October when it was at 5%. A new policy of "quantitative easing" has also been started which involves the government buying debt securities, and private assets for 75 billion pounds ($105 billion) and pay for this with their own money. Quantitative easing is a common practice when banks have lowered their interest rates to zero and they want to ease further. It is intended to increase the money supply. This policy was also implemented to counter deflation. Consumer price inflation experienced a drop from 5.2 % last autumn to 3% in the year of January. It is predicted that it will drop to 0.7 % by the end of 2009 and with an economy in debt like Britain's, deflation would result in a deeper hole. The Bank of England also expects GDP to decline by 3% in 2009, the steepest drop since the second world war. The main purpose of quantitative easing is to prevent the money supply from taking a large hit and at the same time boost GDP by providing a large supply of money.


Connection to Chapter 6


The key component of this chapter would be Gross Domestic Product. GDP is effected by trends in investment and savings. There is a positive relationship between GDP and investment, more investment resulting in an increase in GDP. The challenge posed by banks in times of recession would be to provide incentives for people to invest and that is the situation presented in the article. By decreasing interest rates, the Bank of England is enticing consumers into borrowing loans in order to invest and increase the GDP. In times of recession, people are inclined to save which lowers the aggregate demand and less money will circulate the business sector, lowering GDP. This chapter also discusses the business cycle and one of the theories associated with it would be the monetary theory. The monetary theory states that changes in the money supply are key factors in GDP. The policy of quantitative easing was implemented to influence the GDP by increasing the money supply in order to boost economic expansion. The quantitative easing policy also has the power to bring the multiplier into effect on GDP as investment and consumption spending would increase. The expenditure multiplier would be necessary to take into account when measuring how effective lowering interest rates would be.


Reflection


The fact that the Bank of England is trying to fight deflation is a testament to the state of the GDP level in England. I personally remain sceptical about how effective these new measures will be considering the tendency for people to save in these discretionary periods. Most people in periods of recession would probably be hesitant to borrow loans even if under low interest rates due to the chance that they would have a hard time paying it off. Indeed the Paradox of thrift could also be applied to the current recession. People continue to save but it lowers business activity resulting in increased unemployment and a decrease in their ability to save. This of course has consequences on GDP as shown in England and the response of the bank is to decrease interest rates and increase money supply. I am also concerned about the state of GDP in Canada as the recession is expected to get worse after growth in GDP is reported to have slowed down over the past couple of months. After reading this chapter and the article above it has become clearer to me the challenges that governments and banks face in guiding a country through a recession. It is not as easy as simply lowering interest rates as the psychological state of people during recession tells them to save. Overall, consumer confidence must be restored in order to pull the economy out of the recession but doing this is no easy task for the banks and government.

Chapter 5 Blog

Link: http://queanbeyan.yourguide.com.au/news/national/national/general/fulltime-jobs-grow-but-trend-is-grim/1432843.aspx?storypage=1

Summary


The current recession has once again taken its toll on another nation; this time in the form of an increase in unemployment levels. Unemployment in Australia has worsen from 4.5 per cent to 4.8 per cent, reaching its highest mark in two years. The approximate numbers of unemployed jobseekers are 540,000, 84000 more than in January last year. The deputy of prime minister, Julia Gillard made claims that the situation would be worse without the $42 Billion spending plan which was rejected by her opposition. The main reason for this increase in unemployment is the loss of jobs in the manufacturing, retail, finance and mining sectors. This recession has influenced male employment more than women's with and increase to 4.9 percent from 3.7 percent in male unemployment. Though there has been a rise in unemployment levels, the recession has not damaged the Australian economy as much as it has for the UK and US economies. The participation rate increased last month due in large to the decline in retirement savings, enticing older workers to stay in the workforce. A notable concern would be the fact that the rate of job growth is not fast enough to keep up with the increase in skilled migrants,graduates and school leavers.


Relation to Chapter 5



There are several types of unemployment discussed in this chapter that could be applied to explain the increase in unemployment. Demand deficient unemployment is probably the main cause of this problem. A cause and effect analysis must be used to clearly explain this. The global recession has resulted in either a decrease in income or an uncertainty of future incomes for much of the population. This uncertainty shifts the demand curves of many products to the left and so employers are having difficulty in selling their products. If they do not sell as much then they will not need to hire as many workers hence the rise of the unemployment takes place. Frictional unemployment is probably not applicable considering that it is usually common only when economic conditions are good as employees are willing to leave one job to pursue a higher paying one. Seasonal unemployment could be a possible reason for the unemployment. Demand for tourism has probably gone down and Australia is a popular destination for vacationing which could also explain the rise in unemployment. Structural unemployment could also be in effect but probably not as influential to the Australian economy as demand deficient and seasonal. Insurance induced unemployment is probably not a key factor in this situation because according to the article it is due the lack of retirement savings that has kept participation rate high. People are uncertain of their retirement savings therefore they choose to stay in the workforce longer which results in an increasing participation rate.





Reflection

This particular situation in Australia exposes the volatility of economies all over the world. There can still be job growth but as the article shows, it must be at a rate that can keep up with the pace that people are entering the workforce. I think the government should stimulate the economy by spending more to create jobs. What I also find concerning is the fact that more and more university graduates are having a hard time finding a job which just comes to show how troubling economic conditions are all over the world. Overall, I agree with Julia Gillard, that a spending plan is necessary to solve the rise in unemployment levels. The government expects that the unemployment rate will increase to 7 percent by the middle of next year, proving that the economic problem will be a downward spiral if nothing is down to thwart it. Canada has also recently felt the effects of this recession as economic conditions all over the world remain uncertain.

Chapter 4 Blog

Link: http://online.wsj.com/article/SB123180759988175649.html

Summary



This article on the Wall Street Journal reported on the first tax increase of Obama's reign as president. The estate tax(or death tax) which is a transfer tax( a tax imposed the passing of property from one person to another) was scheduled to expire in 2010, but Obama's democratic party has decided to maintain it and set the rate at 45%. This will have an impact on the creation of new jobs because it effects small, medium sized family businesses which is the backbone of America's new jobs. Not all family businesses can afford to pay the hefty tax rate when the owner dies. The purpose of the tax rate is to collect revenue from the wealthy property owners e.g: Bill Gates; but it should be mentioned that they have ways to avoid much of this tax. This eliminates the fairness of the tax considering the less wealthy firms will have to carry the burden of the tax.



Connection to Chapter 4

Much of the concepts covered in chapter 4 are about government imposed taxes, relating directly to the situation presented in the article. Governments place taxes for revenue, the same purpose of the estate taxes. Everyday Economics 4.2 mentions flat taxes and the estate tax could be considered a flat tax since the rate is constant for all incomes. This raises concerns about tax equity because not all families can afford to pay off the tax rate. The government should approach the situation with vertical equity, since not all family businesses have the same level of income and the estate tax will have a larger impact on the smaller businesses because they do not generate as much of an income.



Reflection

The estate tax seems to oppose many of the US government's goals to stimulate the job market in times of economic recession. If family run businesses close or cannot continue after the owner's death then more jobs will be lost. This tax is profitable for the government to make a revenue, but they should approach it to ensure vertical equity, the businesses that are worth more should be taxed with a higher rate than the ones that are lower in value. The tax rate of 45% is also a bit steep in my opinion and it also seems like a disincentive for entrepreneurs or business owners to operate in the United States. Overall, I think the estate tax should not of been put into effect at the first place. With the economy facing uncertain conditions, a growth in jobs is definitely required, and this estate tax is not helping the situation.

Chapter 3 Blog

http://edition.cnn.com/2008/HEALTH/11/13/alcohol.tax.deaths/?imw=Y&iref=mpstoryemail
Summary

This recent CNN article reported on the reduction of deaths and diseases due to alchohol after excise taxes were implemented. Statistics show that when Alaska raised its alcohol tax in 1983,deaths caused by or related to alcohol dropped by 29 percent, quite a significant amount. In 2002 an 11 percent reduction was the result of another tax increase. It was clear that raising the tax saved lives because it results in some lower consumption of alcohol. The statistics used in the study were gathered by information from death certificates; Dr. Alexander Wagenaar, a professor at the University of Florida's Department of Epidemiology and Health Policy Research along with the co-authors compiled the number of deaths connected to alcohol such as alcohol poisoning and alcoholic liver disease, and diseases linked to alcohol, such as cirrhosis and chronic pancreatitis. Deaths caused by alcohol-related car accidents or violence were excluded in the study. It is also worth noting that researchers in Finland have found similiar results. When the government of Finland lowered the tax on alcohol in 2004 to protect domestic sales, the number of arrests on intoxicated individuals increased by 11 percent. Of course, the American alcohol industry opposes the excise taxes because they claim that they would only prevent the responsible consumers rather than the abusers of alcohol from purchasing products. Another argument that was made was that taxing alcohol would have negative imapct on the economy because of diminshing returns for the government.

Connections to Chapter 3
The component in this chapter was the role of the government in a market economy. In the situation above the government levied an excise tax on the alcohol industry in Alaska in order to curb alcohol use. The excise tax increases the price of alcohol which shifts the supply curve upwards. This also lowers the demand for the product by increasing the incidence tax depending on its elasticity. The question of whether alcohol is an inelastic or elastic good is dependant on whether the consumer is heavy drinker( making it inelastic) or one who enjoys wine or spirits and only drinks occasionally (which would make it elastic). The article seems to contradict the idea in the chapter that the imposition of an excise tax on alcohol (which according to the text is an inelastic product) will generate revenue for the government because of its inelasticity.This however is not the case since the number deaths/diseases due to alcohol has declined and one can infer that this is the result of a decline in demand. Another connection to the chapterthat can be made would be positive third party effects. The less people consuming heavy amounts of alcohol, the less potential there is of an alcohol related death or accident among the population.

Personal Reflection
An excise tax can reduce alcohol consumption as shown in the study, but I believe that prevention programs and education are the best solutions to this constant problem in society. Taxes on alcohol cannot truly diminish the problems since it is considered an inelastic good along with tobacco. A higher tax on alcohol might also be needed to offset the inflation the economy is experiencing. I agree that a excise tax would affect the demand of those who drink responsibly but will not affect the heavy drinkers whom the government should focus on helping. Overall it is good to see that taxes on alcohol have had significant benefits in Alaska. A similiar policy should be replicated for other products that can to be harmful to the population and environment e.g: tobacco,automoblie air conditioners and carbon dioxide producing items.