Reflection

Because I will be going on study abroad in Scotland in the fall I think that the material which will be most applicable to me is the economics of standards as well as the exchange rate material. In the study abroad process with the CIP we go through a lot of the emotional, the social and cultural informational segments which address how life abroad will be significantly different from that in the US. However, what is not discussed of course is the economic variances that occur. While exchange rates and the various changes in standards are obvious factors that are country specific, they are two things that did not cross my mind in preparing myself for study abroad so I am very glad that I took this seminar.

Moving forward in life, I think I’ve learned a lot of material that will help me be more globally aware. I am not an economics student. The extent of my econ history traces back to Econ 101; my interests and strengths lie in business. Therefore, a lot of the material was unfamiliar to me as far as financial portfolios, foreign exchange markets and the specifics on interest rates, for instance. Therefore, now having an understanding of them and how they effect a national and global economies will help me understand more “economic language” and be a more informed citizen. 

With that said, I am probably most interested in learning more about governmental economic policies. With everything that has gone on in our country and throughout the world, and all of the economists speaking on the news channel and being quoted in the newspapers, I want to make sure that I understand the implications of the government’s actions and be able to make my own assertion of the justification of their actions based on brief understanding of economic policies. While of course I am not interested in becoming an economist or plunging deep into the study, I think that a lot is already more clear for me after we discussed the expansionary fiscal policy today in class. 

For students considering this class, I would definitely advise them to take it if they are planning to study abroad the following term or year. I would recommend to them that they invest in a planner and keep organized to remember all of the blog posts. Also, tell them that it’s important to keep up on the reading because of the material discussion which dominates class time. I would also recommend that they have taken at least Econ101 as a prerequisite; otherwise it may be difficult to initially comprehend the supply and demand material as it is addressed in a much shorter duration because of the class material in the seminar as compared to in Econ101. 

Weekly country blog

http://www.moneyweek.com/investment-advice/share-tips/what-to-buy-as-uk-economy-falters-22100

This article addresses the economic standpoint of the UK and discusses the IMF’s suggestions for the nation. Up until recently, the IMF believed the UK’s main priority to be cutting the deficit as it has jumped from £9.1bn in April 2011 to £11.5bn. However, the IMF is now most focused on the aspect of economic growth; the IMF claims that “growth is too slow and unemployment, including youth unemployment, too high.” They are further urging the Bank of England to open the door to more quantitative easing and cut interest rates even lower than the historic low rate of .5%. 

 As discussed in class, in order to decrease interest rates the UK must increase the money supply. All of this in turn will increase investment. Therefore, the UK is currently considering printing more money. As inflation is currently at its lowest level in two years, advocate of money printing are suggesting now is an excellent time. Those who do not support money printing suggest that this is only a short-term boost in the stock market if more money was to be printed and that it will do nothing for long-term growth. Also, as discussed in class, an increase in currency will cause the pound to depreciate in value:

as domestic products are cheaper exports would increase and imports would decrease because they’d be more expensive. 

Based on the decrease in taxes, the possibility to cut interest rates and the increase in transfer payments, it seems that the UK is currently employing expansionary policy. The main problem with this is of course the budget deficit which the UK is clearly experiencing. Because the nation is spending more it is forced to borrow which results in debt. Also, the UK cannot keep up this type of spending as the article states that “public finances leave precious little scope for any significant boot to public spending.”

Weekly blog

http://www.guardian.co.uk/business/2012/may/24/uk-economy-contracted-2012

This article discusses the recent decline in GDP by .3% in the first few months of the year. The struggling eurozone as well as downturn in the construction sector has resulted in a state of economic depression. “Deputy prime minister Nick Clegg suggested that the coalition plan to expand its policy of credit erasing, using government guarantees to kickstart spending on infrastructure and housing to boost the economy.” As we’ve learned in class, Clegg’s suggestion includes important short term and long term remedies. In the short-run, by helping to boost the housing market, citizens will face eased financial burdens on their home which will then lead to an increase in consumer spending. In the long run, by investing in infrastructure the government is expanding its capital resources. This will lead to an increase in jobs which will help boost consumer spending as more employment equates to more money and more disposable income.

Beware of Greeks Bearing Bonds

a) The passage I was most interested by was the discussion about Greek taxes. I was shocked that in 2009 Greece stopped collecting taxes because it was election year. While I am aware that politicians will do a lot (some may do anything) for a vote, disintegrating taxes is absurd. However, it seems to be a commonality in Greece, as was revealed in one of the interviews that ““The first thing a government does in an election year is to pull the tax collectors off the streets.” The estimations that two-thirds of Greek doctors reported incomes under 12,000 euros a year is another fact that I was startled by. However, it’s explained that the reason so many Greeks evade their taxes is because of the inefficient legal and justice system; Greek courts take up to 15 years to resolve tax cases. Ultimately, I’m just blown away that the government did not think about the long term effects of all of these practices.

b)The financial crisis in Greece affects the rest of Europe because Greece is in debt to many European countries. If they default on their loans, “then the European banks that lent the money will go down, and other countries now flirting with bankruptcy (Spain, Portugal).” This also has a great effect on countries like the UK for instance that are offering Greece bailout money in order for Greece to stay in the EU and keep the euro as their currency. The UK is dishing out millions of tax payer dollars to Greece when the UK is not in a position of economic strength themselves. Ultimately, whatever decision Greece makes will be felt greatly by its fellow European nations.

c)According to the equation GDP= C  + I + G + E - I, GDP in the short-run would significantly decrease. Increasing taxes would cause consumption to decrease and thus result in a decrease in GDP. The affect is the same if the government were to decrease government spending; it would cause GDP to go down. Investment is also likely to go down as businesses will actually have to pay taxes and be unable to seek governmental assistance. 

How Walmart is Changing China

I thought that the parallels the author made between Walmart CEO Sam Walton and the Chinese Communist Party’s secretary general, as well as Walmart and the Chinese Government were very interesting. The author states that both leaders have created cult  status in their authoritarian organizations “held together by an elaborate belief system or ideology bordering on the religious.” Furthermore, the advertising, promotional methods and propaganda of both organizations have the same goal in mind: to influence the outside world and prevent dissenting behavior. Each organization proclaims a responsibility to serve: the government has a service to its people while Walmart has a service to its customers. Perhaps the most startling similarly is how both organizations monitor its citizens and its employees and customers to make sure they “stay within the boundaries of ‘correct’ behavior.” 

The article showcased how the strong presence of a successful multinational firm can completely change a culture and its economics. Walmart revolutionized China with an American ideal of “bulk shopping.” The article states that Walmart’s annual revenue is in the top quartile of the GDP of sovereign nations. With such success as a company like Walmart, its power seems unstoppable. Walmart has been able to both change Chinese cultural conventions/preferences as well as adapt to them because of their strong variety and low prices. For instance, while Walmart has created a new type of Chinese consumer with access to electronics and millions of other products, Walmart has also undergone efforts to make their company more environmentally friendly which has been  a step in the right direction for the Chinese consumers disgusted by pollution and in the market for organic foods. A more specific example of how multinational firms, economics and culture interact is Walmart creating the Direct Farm Program that in which Walmart deals directly with the dismantled mandatory collective and commune farmers of the Mao era. Through this interaction, Walmart is able to cut down its supply chain, have better standard control of its food while working with traditional farmers of Chinese culture to promote economical well being of both parties.

Multinational firms have a large presence in the UK because of the nation’s GDP and level of development. Like any other country, multinational firms are going to influence consumer spending, employment and perhaps standards of living. In developing countries, these firms can promote economic growth and surge foreign investment. This then brings jobs to the country, boosts the economy and calls for an increase in teh ability of citizens to purchase and consume. Moreover, governments will often times adapt their policies to be more agreeable for businesses and citizens as it promotes foreign investment. However, multinational firms have also been accused of exploiting local labor and taking advantage of corrupt governments to do unethical business. While there are certainly drawbacks, multinational firms ultimately help to create a more equal playing field in world economic standing. The UK, for instance, is a top developing country with a strong base of multinational firms. Many multinational firms are headquartered in London and thus has helped to promote the city as a financial world headquarters and increase its GDP.

UK weekly blog

http://www.telegraph.co.uk/finance/currency/9269819/What-on-earth-is-Britain-doingtrying-to-save-the-euro.html

This article addresses the leadership of the UK and their attempts to save the euro. The Prime Minister and the Chancellor have given their support to expensive bail-out schemes; Osbourne has committed tens of billions of pounds of British taxpayers’ money to the euro bail-out funds. However, the article states that the size of the various bail-out funds that are so far mobilized to help save the eurozone countries is much larger in real terms than the reparation payments and reconstruction plans of the First and Second World Wars combined. Clearly, this is a an incredibly large sum of money and much of the burden is being placed on UK tax payers who are already suffering from a decade of being encouraged to borrow money to help pay for the unaffordable standards of living. Therefore, helping to save the euro will only further devastate the UK. 

The author is skeptical as to why the UK governmental leaders would even want to save the Europe when the author believes that euro has outlived its usefulness. What is more, the author states that if Greece reverts to its own national currency than the country would start to recover within months, and the same can be applied to Portugal and Spain. He makes these claims based on historical records that since the end of WWII many countries have quit fixed currency systems, and in almost every case that has been the moment when growth has been restored. 

Therefore, it seems that it is in the UK’s best interests to avoid financial aid. The financial burden that will be placed on the UK citizens’ shoulders will cause consumption to plummet. While government spending will increase, it will be spent on saving the bail out eurozone countries. Industries will suffer without consumer spending and therefore companies will be unable to invest. Ultimately, the GDP will plummet and there will need to be efforts to help promote long-term growth. 

UK, week 7

http://www.bbc.co.uk/news/business-17836624

According to the article, the UK economy has returned to recession "after shrinking by .2% in the first three months of 2012." The UK economy was last in recession in 2009. The article talks about the decrease in construction and production industries as well as a decrease in government spending. As we've learned in class, an increase in government spending and business investment promotes long term economic growth. Increased government spending in creating jobs, as well as tax cuts should be used to increase consumer spending. However, in the UK, the deputy chairman of industry body Judy Lowe said, "The huge cuts to public spending - 25% in public sector housing and 24% in public non-housing and with a further 10% cuts to both anticipated for 2013- have left a hole too big for other sectors to fill." Based on this article and the last blog post about the UK, it is clear that consumer spending is suffering, especially in the public housing sector.While this is an oversimplified solution, efforts could be made to help the UK citizens with affordable housing initiatives, which could then spur more consumer spending and help aid the suffering retail industry, for example. 

Market Analysis

       The UK has the third largest economy in Europe; GDP is $2.25 trillion, and with a substantial population of 63,047,162 people and GDP per capita at $35,900 the UK is an excellent country for investment, providing a gateway into the entire European Union. Because of the wealth and large population of London, the company should introduce the luxury limousine. With a population of 8.615 million people, London is one of the top 20 most populated and most expensive cities in world. Given the domicile tax status, London is also a magnet of wealthy internationals. Making London even more suitable for the luxury limousine is its status as a global financial center; finance is London’s largest industry. The city is home to five major business districts, and more than half of the UK’s top 100 listed companies and over 100 of Europe’s 500 largest companies are headquartered in London.

Reinventing the Bazaar

1. A passage I found interesting was the discussion about how price dispersion can persist even when information costs are low. Even though the internet has made product comparison easier, the information is still not free because of the difficulty involved in observing quality. Therefore, consumers are willing to pay more money for a recognizable brand name, the assurance of quick delivery as well as safe online payment. The passage also showed the problems with the inability to judge quality in low-income/developing countries. In India for instance, the inability to judge the butterfat content led Indians to stop buying milk as consumption dropped 25%.It was not until the government introduced inexpensive machines to measure butterfat content of the milk at each stage of production that quality could be guaranteed. Nevertheless, this example of the milk in India is very different from quality over the internet. At least the internet provides consumers with some basis/standards for quality making the purchase decision easier even if it is more expensive. However, being completely unable to decipher product quality is incredibly frustrating and disconcerting. It reinforces how lucky we are as American consumers, despite problems we may have to deal with our economy.

2. Transaction costs represent the costs incurred in an economic exchange,not including the money price. The article talks about search costs and their importance in the market place. In the case of search costs, information is not free; if consumers want to find competitively priced products and find the best deal, they have to pay the merchant a few. However, the author explains that “it does not pay to search.” 

The text states: “If you incur a search cost of 10 cents or more for each merchant you sample, and there are fifty sellers offering the urn, then even if you know there is someone out there who is willing to sell it at cost, so you save $5, it does not pay you to look for him. You would be looking for a needle in a haystack. If you visited one more seller, you would have a chance of one in fifty of that seller being the price-cutter, so the return on average from that extra price quote would be 10 cents, which is the same as your cost of getting on more quote” (43).

In other words, transaction costs can also represent the cost of your time researching/comparing prices as well as transportation costs in pursuit of market price knowledge.

3. Effects that arise from imperfect information include search costs (time, effort and money spend learning what is available where for how much) and evaluation costs (difficulties buyers have in assessing quality). Search costs ultimately weaken the force of competition; while product choice may exist, with imperfect information buyers are not able to easily compare prices and thus buyers can charge high monopoly-type prices. Another effect is the lack of mutually beneficial exchange. In both of these situations the consumer suffers; they are forced to pay high prices for products and/or have to deal with high search costs to even become informed, but will most likely then end up paying even more money for all of the product information then compared to just paying the high price in the first place. 

However, another interesting effect of imperfect information is the entrepreneurial flourishing of “middlemen” like distributors and realtors. When search costs are involved in can prove more economical for consumers or businesses to hire someone else to find out the information for them. With this information in hand buyers can make better, more informed decisions while the middleman benefits monetarily for his service. However, this can also cause problems for sellers as lower search costs may result in the disproportionate lowering of price.

A Fez of the Heart

A. One passage that I found extremely interesting was the stoning of tourists clueless to the religious modesty of the Turkish Muslims. This is a perfect example of why it is important to understand the culture of your travel destinations before you embark on your journey so you can have some grasp on what is acceptable and what is not. By researching Turkey and finding out that the majority of the population is Muslim, tourists should already have some grasp on the values of that religion to conclude that dressing modestly when walking though town is probably a given. With that said, however, the lack of cultural adaption does not permit stoning. The stoning of the tourists is a completely radical and unjust action that I can not imagine went over very well with the home governments of the tourists. The act of stoning by the Turks showcases the type of radical behavior that can occur when traditional customs and values are suddenly threatened by the flux of new coming tourist invaders. 

It’s also very interesting that the Turks attempted to post warning signs but the language barrier prohibited both sides from being able to effectively communicate. If the Turks had a better fluency on the language of the tourists and the tourists better understood the culture of Turkish residents, the whole issue of the stoning would most likely not have been an issue as tourists would have simply thrown on some clothes over their bathings suits when walking through town on the way home from the beach. 

It’s further fascinating that Turkey evolved from a place that stones bikini clad tourist to a vacation destination where breasts, bikinis and scantily clothed bodies became “no problem.” This suggests just how desperate the governments of developing countries are: governments and those in the business sector are willing to sacrifice on cultural values to boost their nation’s economy through tourism and all that accompanies it. I think that this article showcases the kinds of sacrifices countries have to make to be able to compete in the global economy.

B. The interaction of culture and economics can not only be seen in the example of Turkey adapting its customs in exchange for tourism revenues, but it is also showcased in that fact that tourists were drawn the ruins and shrines in Turkey that residents did not consider significant. The text states: “. . . the ruins had been there as long as anyone could remember and hardly merited exploring in the baking heat of high summer.” However, to the tourists that flocked to Turkey, it is clear that they have significant cultural and historical appeal. This example is at the heart of why it is that people travel (or at least one of many reasons): to see/experience a culture or event/location that one could not do in one’s place of residence. For instance, many tourists flocked to Turkey for the beaches and for the physical landmarks. However, many tourists also flock to MI and places like Maine in the fall to experience the changing colors of the leaves, a seasonal occurrence that we may not appreciate because (for those of us who have lived in MI our entire lives) it a natural and expected occurrence.

Another example of culture interacting with economics is how the Pomegranate families adapted to take advantage of the tourism flux. The text states: “So some Pomegranate families were prompted to clear spare rooms and offer them to the latest arrivals as pansiyon accommodation. The more enterprising among them even dared, having heard the practice was acceptable, to charge a few lira at the end of the visitors’ stay.” It’s interesting that initially, those in Pomegranate did not even consider charging the visitors for the board. It just showcases how differently hospitality endues throughout  varying cultures. It is further significant that the residents adopted new cultural practices to find economic gain in tourism. 

C. In Scotland, Edinburgh is the leading city for tourism. It features Edinburgh Castle, the Palace of Holyroodhouse, Linlithgow Palace, Rossyln Chapel as well as a number of other surrounding castles. In addition, the towns of the city are a beautiful mix of both modern and traditional appeal. The Highlands and the Isle of Skye also attract many travelers to Scotland as it is picturesque scenery that separates the Western Highlands from the Eastern Highlands. Further west is the popular Eilean Donan Castle and the Isle of Skye. Furthermore, one can travel to Mallaig from Fort William on the train and experience the same scenery that was featured in the Harry Potter movies during the Hogwarts Express scenes of the characters journey to Hogwarts by rail. Tourists are drawn to these locations because of the natural beauty of the landscape and the historical significance and utter beauty of the castles. I know I for one am incredibly excited to visit Linlithgow Palace because Mary Queen of Scots was born there; I am fascinated by her life as well as her connection to Tudor England. Harry Potter has also become a marked staple of our generation interestingly enough, and thus it makes sense that avid Harry Potter fans would want to “ride on the same tracks as the Hogwarts Express” and experience the same beauty that they witnessed in the movies. 

http://www.thereareplaces.com/newguidebook/pdest/ukscpts.htm

Forecasts on UK economy point to further downturn

Report predicts sharp increase in insolvencies in north-east of England and Wales, and rise in write-offs on corporate loans

Banks and insurers face a rocky 2012 as insolvencies rocket to levels not seen since the 1990s, according to a report by the Ernst & Young Item Club.

The economic slowdown will also hamper corporate lending by the banks, the report said, which came after recession became official last week with figures showing the economy contracted 0.2% in the first quarter of the year. Lending to businesses is unlikely to recover to its 2008 peak before 2016, the report predicts.

In a separate study, the accountancy firm Deloitte's consumer tracker found 51% of people were downbeat about their household's disposable income, up two percentage points from 49% in the previous quarter.

After six weeks of bad news for the chancellor, George Osborne, starting with his ill-received budget, reports that the current borrowing squeeze will continue for several years will be disappointing. Britain joined many other EU nations in recession, including Belgium, the Netherlands and Spain, following a sharp fall in construction and poor figures from the financial and business services industries.

The Item Club said financial services faced a "worsening outlook as the real effect of sluggish growth continues to impact creditor and consumer behaviour". It said write-offs on corporate loans will increase to 1.9% of loans in the corporate sector, from 1.6% in 2011. "Insolvencies are likely to rise more sharply in the north-east of England and Wales, where economic output is set to contract by 0.1% and 0.3% respectively," it said.

Neil Blake, senior economic adviser to the club, said: "Although 1.9% doesn't sound big, this will be the highest annual rate of write-offs since the mid-90s, and the more loans banks have to write off the less money they will have to lend. Consumer-led sectors such as retail are likely to be hit disproportionately hard as discretionary household spending is cut back amidst difficult labour-market conditions, especially in regions hit hard by government spending cuts."

Blake said the rise in write-offs and lacklustre outlook for business investment and economic growth was the main reason he believed lending to corporates has worsened considerably since the last quarter.

The forecast is now for a contraction of 6.8% this year rather than the previous estimate of 5.7%. Corporate sector loans are not predicted to return to their pre-crisis peak of £575bn until 2016.

Blake said: "The contraction expected in 2012 is more acute than the 6.1% contraction last year, and means that the funding squeeze that corporates and SMES have been experiencing is only set to get worse.

The downbeat assessment of the economy was echoed by Ian Stewart, chief economist at Deloitte, who said the only positive note from its study were the signs that the slump in consumer sentiment may be bottoming out.

He said: "For consumers to spend more, disposable incomes need to improve. Wages are unlikely to see much growth this year, so the big hope is that sharply lower inflation will support consumer spendingpower. He added: "If inflation drops in the second half of this year, the UK consumer should see some modest growth. Yet the UK consumer remains vulnerable to events, particularly an intensification of the euro crisis or further rises in oil and energy prices."

A rise in oil prices is often cited as a potential barrier to growth. Britain is particularly vulnerable to higher prices for oil and gas following a drop in the value of the pound and a dramatic fall over the last decade in North Sea output.

Concerns that the situation was already set to worsen came after a speech from a senior Bank of England official who said inflation was likely to stay higher than predicted. Deputy governor Paul Tucker warned that recent falls in inflation may come to a halt and stay above the bank's target level of 2%. Wages are currently increasing at 1.1%, leaving a 2.4% shortfall in light of the 3.5% rate of inflation.

http://www.guardian.co.uk/business/2012/apr/30/uk-economy-forecasts-further-downturn






RESPONSE


As it stated that the economic slowdown will hamper corporate lending, that means that business investment will go down: rather than fund future projects or buildings, the businesses will have to use their money to pay for immediate occurrences. However, the article also states that by 2016 lending to businesses is likely to recover, so in the long-run, investment should increase.


The article further states that 51% of people were downbeat about their household’s disposable income, thus suggesting that consumption would also decrease as there is less money to spend on non-necessity consumer goods. Additionally, the article notes that corporate loans will increase as companies use write-offs. However, this increase in corporate loans will result in less lending money. Therefore, consumer-led sectors will suffer even more from the lack of disposable income as consumers and these sectors will be unable to borrow large sums of money. 


In the short run then, the equation for national income will look like:


GDP (decrease) = C (decrease) + I (decrease) +G + E -I.


However, the article states that the UK will try to increase consumer spending by lowering inflation. So if the UK can do this, in the long run Consumption should increase. Yet, there are also the potential barriers of high oil and gas prices as well as the intensification of the euro.