Course: Macroeconomics Semester: Spring – 2014
Code: ECO 200 Lecturer: Dr. Hassan
Handout date: 14th Feb, 2014 Due date: 14th March, 2014
Assignment Assignment Maximum Mark: marks
Student Name: __________________________________ ID:____________________
Effect of the unemployment and inflation existing in that economy.
Inflation has been one of the most commonly used terms both among scholars and the general public. The general public expresses panic in instances where it inflation goes beyond a certain level. Economists are usually concerned about inflation thanks to its effects on the Growth Domestic Product (GDP) or the economy of a country at large. The resultant effects of inflation are a product of its effects on other variables in the economy including consumption and investment. Macroeconomic policy makers have had their central objective as the sustenance of low levels of inflation coupled with high and sustained economic growth. The increased research on inflation usually emanates from the serious implications that it has for income distribution and growth in the economy.
The United States has, in the recent times experienced rising inflation rates. The most commonly used measurement of the increase in prices is the CPI (Consumer Price Index), a measure whose basis is the monthly survey carried out by the United States Bureau of Labor Statistics. The Consumer Price Index compares the past and current prices in a sample market basket of goods derived from varied categories such as apparel, transportation, food and housing. While the CPI has its shortcomings or limitations, it is widely recognized that inflation is an extremely consistent fact of the United States economy. The purchasing power of the U.S. dollar has been reducing every year since 1945 except in 1949 an 1950. The inflation rate per year since 1900 to 1970 rested at about 2.5%. This rate went up from 1970, spiking to approximately 6% and going to an all-time high of 13.3% as at 1979 (Mankiw, 2009). However, the inflation rates since then have been close to the range between 2% and 4%. In fact, the rate of inflation in 2010 rested at 1.5%. These variations in inflation have different effects on the GDP of the United States.
Still on investments, inflation increases the costs pertaining to information and transactions thereby limiting economic development. Inflation makes investment planning difficult due to the resultant uncertainty in the nominal values. Investors would be reluctant to get into contracts in instances where there is uncertainty pertaining to future inflation. Intermediaries such as financial institutions would be less eager to offer long-term financing (Masimo, 2001).
In addition, inflation has a bearing on the employment component of GDP. Scholars note that inflation being an increase in the prices of commodities where a dollar would purchase less products than it used to in the past means that commodities become more expensive. This would cause employees to demand higher wages and salaries in an effort to maintain their way of life or keep up with inflation (Lipsey et al, 2007). However, this results in a reduction in the employment rate as companies try to cut their labor costs to manageable levels. This, therefore, results in reduced household income and a reduction in the GDP or total aggregate output in the economy.
In addition, inflation has an impact on the balance of payment in the United States. When the cost of items increase relative to those of other countries, it becomes cheaper for consumers to obtain these commodities from outside the country than buy them domestically. On the same note, other countries would find the commodities in the United States too expensive (Lipsey et al, 2007). This means that the United States would be importing more than it would be exporting as its commodities would be considerably less competitive in the world market. In essence, trade deficits would occur thereby reducing the Gross Domestic Output and the economic growth at large (Wessels, 2006).
Needless to say, high rates of inflation would trigger negative effects on the Gross Domestic Product of the United States. However, this does not mean that the government should entirely eliminate inflation. However, too high inflation has a bearing on the investment decisions. Investors and lenders would be unable to invest as they cannot predict the future prices of their investment projects. On the same note, the overall costs of investment would be increased especially considering that investors would incur higher costs in gaining information pertaining to future trends, as well as transacting on any investment that they make. In addition, the government would be likely to put a price ceiling in order to limit the interest rates, which discourages investment (Lipsey et al, 2007). In addition, it increases unemployment, and the trade deficits as the United States would be importing more than it exports, thereby reducing the Gross domestic Product. All these factors hamper economic growth and reduce the Gross domestic Product of the country.
Advantages and the disadvantages of the current fiscal and monetary policy and monetary policy being implemented in the chosen country.
Effects of Fiscal and monetary policies in organizations in UAE
The fiscal and monetary policies may affect organizations either positively or negatively. First and foremost promoting various education and job training programs designed to develop a high skilled hence productive and competitive labor force is a very important policy that would boost the company miles and miles in realizing its goals. The back bone of any organization is its employees. If the employees have high level skills the profits output is likely to increase in any organization. When the workers idle around and take time to do what they would have done in less time if they had high level skill then they achieve less. The company with high skill worker reduces the cost of production as the worker takes less time to do work given and may then undertake something else. Also the quality of work produced is very important. If the quality of work is poor then the company is likely to make less profit. The workers with low level skills will produce poor quality work. Poor quality work cost the company not only in the cost of production but also its market and thus can really destroy its profit margins with high cost of production and les of supplies made (Anderson 2005).
When people are unemployed they don’t have the money to buy goods and so their spending habits are cut. The rise of joblessness led the federal government to increase its own spending and cut taxes. This way the federal government was trying to combat the rise of joblessness in either of the ways incomes rises people will spend more and the economy could start growing again. The government was ready to run a deficit for this purposes. Now going back to the company we realize that he good move fast when they are bought and that in return the time the company makes a lot of profits. When good are slowly moving the company may not make losses but all the same the huge profits that are every companies dream may not be realized. So for the goods of the company to sell the consumer must have money to buy the good. When the government policy is to reduce the state of joblessness, this means that people will have more income and they will be able to buy good. The company in return will have its goods moving fast and can make huge profits. The company can even reinvest these profits. However when the good are moving slowly it means the company will take a long time to make profits the money that could have been made a long time and then reinvested results in a huge loss. When people have no income they cause the other companies supplying raw materials to fall if they have less people to consume their products. The cost of production, in the case of our company, may increase because of the unavailability of raw materials. This is very uneconomical. It is always important to have low cost of production (Vining 2003).
The effectiveness of various economic growth reforms that were carried out in the past 5 years in UAE.
Before the implementation of trade liberalization and economic reforms years back, UAE was adamant on sticking to poor economic policies, which made the economy vastly inefficient, stagnant, discriminated from global economies and centrally controlled. After the initiation of programs such as the opening up of foreign investment together with trade and initiating free markets late in the 70s, UAE then has risen to a world class fast growing economy with actual annual gross domestic product which has over time averaged at ten percent to 2013. Recently, UAE has emerged as a vital global trade and economic power (Yeh). At the moment it is the biggest manufacturer, second biggest economy in the world, biggest foreign exchange reserves holder, biggest product exporter, second product importer and also second biggest destination for foreign direct investment.
The effects of the balance of payments on the exchange rates
Taking UAE as an example country, the country controls the amount of debts it covers form other countries. The country also uses balance sheets to track its transactions and debts. Balance sheet can help one to grasp financial health in a given business organization also to provide snapshots for potential investors and lenders. Whether the business is in debts or it considers the assets, a balance sheet helps one to keep the tracks of the current situations as well as planning for what will happen in coming years. Keeping of accurate balance sheet requires maintaining the outgoing records, for example, the assets plus liabilities at once using some strategies of balancing the checkbook, as well as keeping tracks on statements of the credit cards, and bank accounts.
References
Lipsey, R. G., Chrystal, K. A., & Lipsey-Chrystal, . (2007). Economics. Oxford [u.a.: Oxford Univ. Press.
Massimo, Ca. (2001) “Investment and the Persistence of Price Uncertainty,” Research in economics, Vol. 55,
Mankiw, N. G. (2009). Principles of economics. Mason, OH: South-Western Cengage Learning.
Samuelson, P. A., & Nordhaus, W. D. (2005). Economics. New Delhi: Tata mcGraw-Hill.
Wessels, W. J. (2006). Economics. Hauppauge, N.Y: Barron’s.
Anderson. B. (2005) Consumer Fraud in the United States. Washingon D.C. DIANE Publishing
Brown.J. (2006) United States Economics. California. In the Hands of a Child
Vining.D. (2003) Economics in the United States of America edt 3.michigan. University of Michigan
