International Economics Study
This paper will analyze the world’s economy in terms of microeconomics and macroeconomics concepts and models. The basis of argument is Keller’s article in Boston Globe Business Journal published on 30 May 2013 and Washington’s feature in The Economist dated April 23 2013. The articles talk about the global recession that hit the world a few years ago. The article relates to inflation, which is a topic of study in economics, both at the microeconomic and macroeconomic levels. Before criticizing the article or supporting it, it is essential to understand the meaning and difference of micro and macroeconomics. Posner argues that economics refers to the study of how individuals and firms use their limited resources to satisfy their limitless needs. Economics as a whole has two branches of study namely microeconomics and macroeconomics. Microeconomics is the branch that deals with how people satisfy their limited resources at a personal level. On the other hand, macroeconomics is broad and looks at the general economy of the country and its effect on the gross development of the country. This article speaks of inflation as an economic issue.
The main economic issue that Keller discusses in the article is the global recession. Inflation is the persistent increase in costs with no accompanying increases in earnings. This lowers the living conditions of people because the costs are too high to meet with the current money. The global recession refers to a period of world’s economic slowdown. The International Monetary Fund (IMF) states that there are many factors that determine whether a slowdown qualifies to be a global recession or not, but an economic growth below three percent is equivalent to a global recession. This article shows the effects of recession to Europe, which is similar to effects in other nations. Apparently, because of the continued recession in Europe, Organization for Economic Cooperation and Development slashed the forecast of its economy saying it will probably shrink by 0.6 percent, this year, after another drop of 0.5 percent in the year 2012. This is clear evidence that the inflation in Europe has made the economy of Europe feeble. The drop is most likely because many investors either pull out or avoid further investments in the euro zone because of fears that heir businesses may fail to peak. To them inflation and recession are a threat to their businesses.
Inflation is an issue that closely relates to economic concepts and models such as the concept of supply and demand, price-setting models among other microeconomic concepts. It also relates to macroeconomics concepts such as employment, national and international economy, monetary policies, and international trade. Inflation relates to microeconomics in that it affects how people satisfy their unending needs with little resources. This closely interlinks with the laws of market demand and supply, which influence the decisions people make monetary decisions. This is an essential microeconomics concept, which helps people understand what influences their behavior economically. A persistent increase in prices results to people purchasing fewer products. This is because they simply cannot afford to purchase the same quantities they purchased earlier at a lower price. This affects suppliers and manufacturers who reduce their production because the costs of production are high. At the microeconomic level, the impact is on an individual.
Issues of inflation also relate to microeconomic issues of the flow of money and production resource in the economy. This is how resources move from household (individuals) to the market and then to businesses and later to the labor force before the household gets the ready to use services and goods and vice versa. For the circular flow of resources to occur, the prices should favor all the parties in the economy. During the recession people, reduced consumptions and businesses laid off some workers to cut down the costs. Other business owners decided to halt production with the anticipation of a reduction in the production costs and the cost of raw materials. This only serves to increase inflation and financial crisis since resources are not flowing in the economy as they should be flowing. Through deductive thinking, it flows that inflation relates to micro economic concepts and models.
At the macroeconomic level, some impacts such as unemployment after companies lay off workers to reduce the high costs of production affects individuals directly. With few working people and few commodities, trading governments generate little income from taxes. Unemployment refers to the percentage of workers in the country, state, or city who are not at work, or, we could say, do not have jobs. Ideally, in the free-market economy, people would have utilized all worker resources. However, many people want to work but cannot find jobs. For many, lack of skills or education is an impediment to finding jobs. In some cases, businesses can fail, and people may lose their jobs. Most of the time, they find some job elsewhere in the state or in another part of the country. However, there had been periods when economic failure was more widespread. In part to an environmental phenomenon called the dust bowl, in the 1930s, the United States experienced massive unemployment, reaching twenty-five percent. A less serious economic downturn is a recession. This is a picture of unemployment in the United States for much of the Twentieth Century. Note the high unemployment during the depression of the 1930s. Unemployment dropped rapidly during World War II, leveling off around seven percent. This shows how an economic downfall affects economies, especially through causing high unemployment.
Inflation affects global trade between nations and investments in countries. International trade is a macro economic issue, and as such, inflation relates to macroeconomics. An issue like recession made it virtually impossible for people to export and import goods because the costs such as fuel cost has risen. This made trade expensive, and international traders feared they might end up importing or exporting goods at a high cost only for the prices to lower thereafter. This is an effect of price speculation where people anticipate changes in the price of commodities and as a result, they delay buying or selling the commodities. This largely reduces the amount of goods in supply in the market, which only aggravates the inflation.
Washington argues on the mind provoking analysis on changes in the apparent relationship between inflation and unemployment. He also states that The IMF remarks the steadiness of inflation anticipations and reckons that people ascribe to centered bank credibility; from the early 1980s, centered banks convinced the public, that inflation in the future would be usually reduced and steady. Inflation anticipations became so well anchored that even the worst months of economic performance from the nineteen thirties could not produce deflation. In the year 2008, a major demand shock hit the American economy. We can depart the delineation of “demand” since it is vague for now. It should suffice to state that yearned keeping spiked firms and households shocked for their financial future. Now, here are one-article talks of the Great Recession. In the last decade’s former to it, inflation anticipations have solidly targeted at reduced grades that families ceased to believe worldwide price and wage shifts as economically significant. Whatever occurred in the economy, broad inflation would be reduced and steady, and reduced and steady inflation thus came to have little to do with anything occurred in the finances.
The economic urgent situation that conceived the large recession occurred against the backdrop of some macroeconomic imbalances and deficiencies in the economic regulatory structure of the international finances. The crisis contributed to increasing interest rates and critical disturbances in the function of the economic system, which slowed demand and provision of items and services in the economy. The quality of economic data dropped drastically and impaired relations between players in the economic scheme. Some economic organizations failed, or government administration took them. Household demand dropped in the country after country, contributing to disintegrate of trade goods to other countries. The global finances went into a downward spiral. This is yet another relationship between the international crisis (inflation) and world economy.
Keller’s article argues on the effects of recession to the Euro Zone economy and makes some suggestion to decision makers. Keller suggests that perhaps banks should consider revising their interest rates. This is among the monetary measures that a country should take to reduce inflation. Reducing the lending rates encourages borrowing; this is hazardous to the economy of any country because when people borrow too much the money supply rises. A high money supply leads to the increase in prices of commodities because the supply and demand forces in the market operate through the purchasing power of people. High borrowing means increase in the purchasing power of people; this occurs with no rise in the supply and as a result, people are demand more. The result of a rise of demand is a rise in the costs of commodities and services. With the global recession in place, the best alternative would be to increase the lending rates. This will discourage heavy borrowing and control the inflating prices of goods and services in the market. This is a logic approach to the issue because when financial issues suppress people, their next alternative to solve their money issues will be to borrow (Keller n.pag.).
Other arguments are that the global financial crisis originated amidst the neglect of worldwide governance. Failure of the worldwide community to give the globalized finances, credible international rules, led to the increase in prices of commodities. The bursting of the house cost bubble in the United States triggered the unwinding of speculative places in the distinct segments of the economic market. Although, all these inflation increases were unsustainable and would have burst eventually. For policy, makers who should have renowned better than to bet on drubbing the bank to claim, with the advantage of hindsight is easily not credible (Kelly n.pag.).
The Shelter cost bubble itself was the result of the deregulation of financial markets on an international scale, broadly endorsed by Governments around the world. The use of securitization through devices like residential mortgage-backed securities (RMBS) that seemed to satisfy investors’ hunger for double-digit earnings promoted the dispersing risk and the severing of risk and information on inflation. It is just at this point that greed and profligacy go in the stage. Without the financial way of life, befitting regulation, expectations on comes back of solely economic devices in the double-digit variety would simply not have been possible (Reuters n.pag.).
In economies with single-digit growth rates, those anticipations are deceptive from the starting. Although, human beings tend to believe that in their lifetime things may happen that not ever happened before, disregarding, at smallest temporarily, the courses of the past. This occurred in most recent memory throughout the supply market booms of the new finances. Regardless of the dot.com smash into of 2000, a wide variety of investors started to invest their capital into hedge capital and innovative economic devices. This capital required to boost their risk exposure for the sake of high yields with complicated computations seeking for the best wagers, which supplemented to the opaqueness of many devices. It should have been clear from the onset that not everybody can be overhead mean. In supplement, for the capability of the real finances to contend with economies restrict overstated real land parcel and product charges or misaligned exchange rates, but it is only now, through the know-how of the urgent situation that this is approaching to be appreciated by numerous actors and policymakers (Washington n.pag.).
I acquiesce with the arguments on the determinants of the recession because it is factual that demand and provide factors have an allotment to do with the topic. The aggregate demand dropped because of, higher interest rates, which decrease borrowing, and buying into, dropping real wage rate, dropping buyer self-assurance, Credit crunch, which determinants, a down turn in bank lending and smaller buying into, a long period of deflation. Dropping charges often boost persons to hold up expending. In supplement, deflation increases the genuine value of liability initiating liabilities to be poorer that before. Increases in the exchange rates, which make exports expensive and decreases demand for trade goods. Keller and Washington try to argue about the identical but in a rather distinct approach. The aggregate provide bend displays the amount that firms will provide in the finances at each cost level. There is an allotment of argument about the accurate form of the curve. Many academic economists and Monetarists argue that the form differs between the short and long run some boost in yield if demand boosts, but in the end any increase in demand is inflationary (Keller n.pag.; Washington n.pag.).
In other words, I accept as true that its integrity is the reason inflation has been stable throughout the recovery, then it will nearly certainly extend to do too little and unemployment will finally resolve a natural rate considerably higher than the pre-crisis grade. If, on the other hand, it works out that salary rigidities are mostly to blame for steady inflation, later the economists should actively seek a higher inflation rate in order to boost paid work growth (Washington n.pag.).
As an economist, I would contend that the reduced pattern relationship between funds and inflation takes a long duration to establish. Although the functional characterization of the transmission mechanism from monetary expansions to price expansion is, still an issue of substantial argument, I would continue this literature in three dimensions it takes an international viewpoint, with a broader set of nations than in preceding investigations and a longer time sequence, thereby internalizing some promise worldwide transmission channels. For example, through commodity charges, it encompasses interactions between monetary variables; that is asset costs specifically house charges and inflation. This permits for a channel of transmission that has been in the latest publications. (Washington n.pag.).
I find that first, international cash demand shocks sway inflation and global product charges. International product price alarms sway inflation. These findings focus an added international transmission mechanism to inflation, which one-by-one nations cannot control, via product prices. Second, asset or property cost dynamics appear that economies propel them mainly by financing cost alarms at the international grade. Furthermore, an increase in house price uses a positive advantage on inflation at the global level proposing that an interest rate conduit may work by asset values. Third, there seems to be a limited contradictory connection between public debt and inflation. This connection builds on the idea that increased public liability induces personal demand to fall in a good manner decreasing inflation (Washington n.pag.).
From a principle perspective, there are two deductions. First, from an international viewpoint, the Study suggests acknowledgement of international externalities of products and asset standards. Notably large monetary and financial players should identify the significances of their conclusions on global inflation dynamics exactly, by cash growth, obscurely through the effect on commodity charges and on asset/house charges. Second, economists and authorities should monitor genuine property charges closely given their lead relationship for international inflation (Posner, 18).
In conclusion, it is evident that the global financial crisis was a result of demand and supply forces. The recession led to many micro and macroeconomic issues among them unemployment, lowering of people’s living standards, collapse of some businesses and a general reduction in the government earnings. To date some countries are still trying to pick up the pieces after the financial crisis. This makes it difficult for investors to set up shops in such regions because they fear the economies are not yet stable to support their businesses.
Keller, Smith. “OECD says Europe remains a threat to the world economy.” The Boston Globe Business Journal. 29 May 2013. <http://www.bostonglobe.com/business/2013/05/29/oecd-europe-remains-threat-world-economy/8aUrvWDLzY9GYlIBlLWSOI/story.html> Viewed on 30 May 2013.
Posner, Richard A. Economic analysis Vol. 5. New York: Aspen Law & Business, 1998.
Reuters. “US housing has momentum, but another boom not likely.” The Economic Times. 28 May 2013. < http://articles.economic-times.indiatimes.com/2013-05-28/news/39580199_1_housing-market-recovery-corelogic-30-year-mortgage-rate> Viewed on 30 May 2013.
Washington, Rowe. “How Does Inflation Matter?” The Economist. 23 April 2013. <http://www.economist.com/blogs/freeexchange/2013/04/monetary-policy-2> Viewed on 30 May 2013.