Chapter 7 Blog- “Creating Money Supply”

Link: http://www.bworldonline.com/content.php?section=Opinion&title=Creating-money-supply&id=30602

Summary:

This article discusses how the money supply increases the U.S.  Many people believe that the supply of money grows when the government physically prints out more money out such as paper bills and metallic coins.  However this only represents 8% of the total currency circulating in the whole U.S. economy.  The government only prints out money when the old paper bills and coins are wearing out.  The process of injecting or withdrawing money is the change of money of supply which is referred to as monetary policy.  The most important factor in money flow in an economy is its “velocity”.  For example, if a $100 bill is used by 20 people in a year, its velocity is 20.  This is equivalent to the number of times that the bill has changed hand in a certain period of time.  Recently there was an article in the Asian Wall Street Journal which shows how the New York Federal Reserves Bank creates money in the U.S. economy.  The New York Federal Reserve Bank first writes a check for $100 million to buy securities from a brokerage house (a company who buys stocks and securities).  The brokerage house now has $100 million to increase its cash and it deposits that amount into its own bank (Bank A).  The bank will then keep 10% of its cash, and it will lend out the rest of its cash ($900,000).  Then a small company comes into Bank A and borrows $100,000.  The company deposits this money into their own bank (Bank B).  Bank B now has $100,000 in cash and it puts 10% as reserves ($10,000) and 90% for lending to other businesses ($90,000).  Now another business borrows $10,000 and puts it in its own bank (Bank C).  This chain can go on and on.  In these series of transactions, these banks have created $190,099,000.  Therefore loans are the major source of creating money in the U.S. economy.  Last year, Bernanke, the chairman of the Federal Reserve, announced that the Fed was planning to purchase $600 billion of government securities which resulted in adding $5.4 trillion in the U.S. economy.  Many people believe that adding more money in the economy will increase the growth of the U.S. economy but however in the past few years, the U.S. dollar has been decreasing.  The reason for this is because there was a decrease in demand for the U.S. dollar.  The worth of the dollar is determined by its attractiveness.  Wild changes in the supply of U.S. dollar in the pass few years have caused the U.S. dollar to suffer its downfall.

Connection:

This article relates to many concepts in the textbook.  For example, this article relates to the Fisher equation of exchange (MV=PT).  In the past few years, the U.S. had an increase in money supply when the Fed purchased $600 billion of government securities.  The bank gained this amount of cash and used it to make it loans.  After many loans were made by different individuals and companies, money was created as a result.  Money supply has a direct relationship with GDP.  If money supply increases, the GDP increases as well.  Another concept that relates to this relationship is velocity.  Velocity in economic terms is defined as the number of times that each unit of money supply changes hands during a given period.  In the past few years, banks have increased the velocity of money by giving out loans to different individuals.  This action increases the velocity of money and it helps circulate it throughout the economy.  Velocity is also directly related to GDP.  If velocity of money increases, the GDP increases as well.  As a result, we can form an equation between money supply, velocity and GDP.  If both money supply and velocity causes GDP to increase, we can say that MV=GDP (M= money supply, V= velocity).  This article also discusses how money is created by banks.  Banks receive cash from selling securities.  Most of the cash they receive will be used for loans to other individuals but a small portion of the money is kept in the bank to serve the purpose of reserves.  After a series of loans, more and more money will be created.  We can use the formula, ΔM= excess reserves / reserve ratio.  With this formula, we can calculate the change in money supply.  For example if we take the excess reserves in the article ($900,000) and divide it by reserve ratio (10%=0.1), we can calculate the change in money supply.  If we divided $900,000 by 0.1 we get a change in money supply of $9 million.  The action taken by the bank to change the money supply is referred to as monetary policy.  However the increase in money supply has caused the U.S. dollar to drop.  According to the law of supply, when supply increases, prices decrease.  This law also plays a factor in the value of the U.S. dollar.  When supply of money increases, the value of the dollar decreases as well because the attraction has decreased.  As a result, in the past few years, the U.S. dollar has declined even below the Canadian dollar.

Reflection:

Overall, in my opinion I think it’s a good idea to increase the supply of money.  The increase in supply of money will cause the rate of interest to decrease.  Lower interest rates would encourage more borrowing and less saving by the public.  This increases circulation of the money within an economy and therefore it will increase the level of GDP.  U.S. is a good example of this because it has been increasing the supply of U.S. money.  As a result of this, U.S. has one of the lowest interest rates in the world and it is the world’s leader of having one of the highest GDP.  Therefore this will have a positive affect on the economy of the United States.  However, on the other hand, there are some disadvantages of increasing the supply of money.   Increasing the money supply can be a disadvantage to one’s economy as the value of the currency will decrease if the money supply increases.  According to the law of supply, if the supply increases, the price will decrease.  This law also plays a role in currency in money.  If there is a larger supply of money, the worth and value of the dollar will decrease.  U.S. in the past few years had increased its money supply and as a result, the U.S. dollar declined below the Canadian dollar.  The U.S. dollar no longer has a huge attraction as before and therefore the value of the U.S. dollar has decreased.  However having a lower dollar can have its advantages too.  If the currency of the U.S. dollar decreases, more people will buy American products because its currency is lower.  Overall I believe that increasing the supply of money is good for an economy because it has more advantages than disadvantages.

Virtual Cards

Virtual cards

1. http://business.financialpost.com/2011/04/23/smart-phone-money/
2. http://www.articlecell.com/Article/Advantages-and-Disadvantages-of-Virtual-Credit-Card-Processing/989668
   3. http://money.cnn.com/2011/04/28/technology/facebook_credits/?section=money_latest
   
   

1.      How long do you think it’s going to take to get to all virtual cards?  How many years?
(1 point)

I think that this world will start using virtual cards in 30 years.  In 2040, I think virtual cards will dominate and there will be no more coins or paper bills anymore.  Paper bills, coins, and our credit cards are very inconvenient to carry around.  Also virtual cards allow us to make purchases anywhere we want.  The transaction is accounted at a much faster process and we don’t have to go to the store to make a purchase anymore.  If we started using virtual cards, we no longer have to carry our wallet and we only have to carry a smart phone.  Also there are some signs where virtual credit cards are being used in some countries such as the United States.  Right now there are some signs that virtual cards will one day take over.  For example, Facebook right now is starting its own virtual economy as our currency is going through a major change due to our highly advanced technology.  However a sudden change in our currency may receive a negative response from the public so that is why gradual change is necessary instead of quick immediate changes.  Therefore I think it may take about 30 years in order for people to accept virtual cards.

2.      Why? (1 point)

Virtual cards will one day replace coins, paper bills, and credit cards because it is more convenient to do it virtually than carrying a wallet full of cash with you all the time.  Virtual credit card processing devices have been the new trend in electronic business lately.  Many people do business online on the internet just because it is more convenient.  With our highly advanced Internet, any credit card device is compatible with any Internet connection.  However having virtual cards completely replace paper bills and coins is a very serious matter to this world.  Some people are in favour of having virtual cards to dominate our currency and some people are against in having virtual cards.  There are both advantages and disadvantages of using virtual cards.  One reason why people support using virtual cards is because unlike credit cards, there is less chance of having credit card frauds.  The virtual credit card process uses only one number for a transaction.  Once the number is used, it cannot be used again.  Since the amount of spending is fixed, the virtual credit card process is very safe.  It is also very difficult to hack into these cards because they expire in shorter period of time than our regular credit cards.  On the other hand there are some disadvantages of using a virtual credit card.  In my opinion I think it may take as long as 30 years until we start using virtual credit cards because I think it will take that amount of time for more people to accept the idea of virtual credit cards.  Some people may think that virtual credit cards are a great method of making purchases and payments however there are also some people who do not accept the idea of using virtual credit cards.  According to one of the laws of circulation of money, money must be recognizable and readily accepted.  If people do not accept virtual credit cards, than it cannot play the role of money.  One disadvantage of virtual credit card is that the retail store must take a risk with its goods.  The goods are delivered to the customer before he/she makes the payment of the goods.  If the customer is not willing to make the payment after the good is delivered, the retail store suffers the lost.  Also another disadvantage of using virtual credit card is that virtual credit cards have short life spans as they are expire very quickly.  It is a big hassle for the customer to keep renewing their virtual card.

3.      Who will not be on board with this new virtual wallet? (2 points)

Seniors will not be on board with this new virtual wallet because they are not used to using very advanced technology.  In their childhood generation, technology was not very well developed and they continued life with little reliance on technology.  Since seniors did not work with technology that much in their lives, they have little knowledge about our new technology.  If credit cards, paper bills, and coins have been replaced by virtual credit cards, seniors will have trouble using these highly advanced devices and they may not accept virtual cards as a form of money.  Also people who live in rural or farm areas may not accept virtual cards as a form of money because they rarely interact with technology in their lives unlike people who live in urban areas.  People who live in rural or farm areas accomplish tasks with little reliance on technology and it is very unlikely for them to carry smart phones around with them.  If virtual cards become our form of money, people in rural or farm areas will be very likely to reject it. 

4.      What companies are going to be affected negatively by this? Name 3. Please name 3 industries, not 3 companies. (3 points)

Companies who sell and manufacture wallets will be affected negatively by this because if one day virtual cards replace all our cards, we no longer have a purpose of carrying wallets with us, so the demand for wallets will decrease.  Some examples of companies that sell and manufacture wallets are Marc Jacobs and Louis Vuitton.  Convenience stores and small restaurants who normally only accept cash will be affected negatively by this because they do not have a large sum of money to invest and install one of these mobile devices in their store.  Since paper bills and coins are no longer used by consumers, there will be a lower demand for convenience store goods.  The main purpose provided by convenience stores is that they provide goods that are convenient to customers because they are usually located near people’s homes.  However that problem is already solved with virtual cards because it provides convenience that the consumers do not actually have to go to the store and make purchases.  They can make purchases anywhere they want with their virtual card.  An example of a convenience store is Sunnyside Market (a convenience store that is located on Victoria Street on 58^th Avenue).  Industries that produce metals such as copper will be affected negatively.  Since coins and paper bills are no longer needed, the government does not need to make any orders of copper and other metals from mining industries that are necessary to make coins.  One example of a mining company who sells copper and other metals is Capstone Mining Corporation.  Since there is 1 less purpose for copper and other metals, there will be less demand for their products and as a result, their sales would decrease.

5.      Who is going to make money from this? Name 3. Please name 3 industries, not 3 companies. (3 points)

Mobile companies who sell smart phones and highly advanced devices such as Apple Inc. and Research in Motion Ltd. will make money from this because since everyone requires a smartphone in order to make purchases and to process transactions.  Credit card companies such as Visa and Mastercard will make money from this because even though there are no more physical credit cards, they still control the transactions being made.  In the past few years, credit card companies (Visa and Mastercard) have been working on more limited contact-free payment methods using NFC (Near-field Communications), the technology that will revolutionize and replace our old wallets one day.  There is a high demand for this method and credit card companies can still collect interest from people’s debts.  Also credit card companies and other card companies no longer have to waste money and time on manufacturing the physical credit card.   Companies who provide internet services such as Google and PayPal will also make money from virtual credit cards.  Since virtual cards involve with high use of Internet and online services, there will be a higher demand of using those services.  Since coins, paper bills, and actual credit cards are eliminated by virtual cards, people can only make online payments either on the computer or on the mobile phone.  This method will eliminate the competition of method of payment and therefore companies such as Shaw and Telus who provide Internet services will benefit from virtual cards.

Great Depression versus Current Recession

Questions to answer:

1.   How did the Great Depression start?

The Great Depression started when the New York Stock Market crashed on October 29, 1929.  Previously before the stock market crash, the Roaring Twenties (1920s) was a very productive and prosperous decade.  Prices in stocks kept increasing and people constantly put their money in investments even though it was really risky.  They were too confident and believed that the successful of the New York Stock Market will never end.  Many people wanted to buy stocks but not everyone had the money to buy them.  So, “buying on margin” was very popular in the 1920s.  People only paid 10-20 percent of the price of the stock.  The only risk of doing this is if the price of the stock fell lower than the amount borrowed, the buyer has to pay back the loan immediately.  If buyers do not pay back the loan immediately, people will run into debt issues and that is how a stock market starts to crash and prices start to drop.  This was the case in 1929.  People hurried and put their money on the stock market and banks placed customer’s money on the market too.  People were too confident in the stock market and forgot about the risks to it.  As a result, stock prices started to drop; people who bought on margin did not have the money to pay back to the brokers.  As a result, the stock market crashed and this initiated the 12 year depression.

2.      How did the current recession start?

The current recession started back in September 2008 where there were many American financial corporations which filed bankruptcy.  Much of the American economy involves making loans with other companies, and general loans and mortgages on houses and cars.  People were buying many of these expensive items even though they did not have the money to buy them in the first place.  Banks could be at fault for initiating the recession because they approved loans even though the people did not have the income to pay off the mortgage.  This caused a chain reaction throughout the United States as mortgages of houses were no longer profitable.  People could no longer afford mortgages which caused a decrease in price of the houses.  With a decrease in price of houses than its original prices, investors and individuals could no longer put their houses on the market to make a profit.  Many banks ran into bankruptcy in 2008 because many people were unable to pay off their mortgages.  Loans are a major income for banks.  If their loans are not paid back by individuals, the bank cannot lend money to other people and businesses.  The bank suffers the loss if the mortgage is not paid back.  Before you know it, there were many occasions where many people were having trouble paying off their loans.  Many banks suffered the loss and they soon went into bankruptcy as they suffered the loss.  Many banks had no other choice but to turn to the government and ask for a bailout to prevent bankruptcy.  Later on the crisis of bad credit started spreading to other countries which eventually led to a global recession.

3.     How did the government take part following the event?  Were / are they successful attempts?

During the current recession, the U.S. government gave many bailouts to many major industrial companies and major banks that were about to fall into bankruptcy.  Government bailouts were mostly given out to the “Big Three” (Chrysler, General Motors, and Ford) Company.  In December 2008, Bush agreed with an emergency bailout worth $17.4 billion.  That money was going to be distributed to companies on the verge on bankruptcy during the months of January and February of 2009.  Also the U.S. government and the Canadian government decided to cut their interest rates in order to increase demand from consumers.  People started to buy goods and the economy began to recover and right now today, the economy is still recovering from the financial crisis in 2008.

In 1930 during the Great Depression, market prices started to fall.  Sales decreased and many industries and manufacturing companies had to slow down on production.  The decrease in production led to layoffs in factories, which meant less income for families, and less spending on consumer goods.  As a result demand for goods decreased in the Great Depression.  Many people were unemployed during the Great Depression.  The government had to give relief payments (called “pogey”) to the people who had no source of income.  At the beginning of the 1930s depression, the government was Mackenzie King.  King believed that the economy would recover on its own.  When Canadians turned to him for financial aid, King had no intention of giving any money to them.   King failed to understand the issue of unemployment and it cost him the election of 1930.  In 1930, R.B. Bennett came into power.  The first action he took was that he gave the provinces $20 million for work-creation programs.  He believed spending would improve the economy but as a result it did not benefit the economy.  Then Bennett decided to raise tariff rates by 50% to protect Canadian industries.  In the long term run, this did more harm than good.  Instead, this erected trade barriers against Canada.  Also, Bennett established work camps for the unemployed to encourage people to work and he tried to improve the economy.  However as a result, the economy did not improve from the government actions.

4.   What factors are present now that were not present during the Great Depression?  (i.e. banking, online resources, etc.)

During the time of the Great Depression, there were fewer restrictions on issuing loans.  Banks try to regulate who should receive loans and who should not receive loans.  For example, banks ask for your personal finance information such as the amount of income earned and your history of using credit.  If you have a bad credit, the bank may reject you for issuing a loan.  During the 1930s when the Great Depression started, banks were not as regulated as today.  Since they did not have Internet back in the 1930s, they could not check your personal history of credit and other financial data.  As you can see Internet plays a huge factor in our current recession and the Great Depression.  With the Internet, banks can check the information of a specific person in a matter of seconds.  However during the 1930s it would be very difficult for bankers to check out financial data without any kind of advanced technology.

5.     How did these two affect United States’ GDP?

GDP refers to the value of goods and services produced in a country in a given year.  Stock market prices also fell as demand was low.  There were more goods being produced than sold.  Businesses had to cut back on their production because sales were coming in slowly.  This decreased GDP because fewer goods were being produced.  Businesses had to lay off many people due to slow sales and as a result many people were unemployed during the Great Depression.  The unemployment rate increased from 3% to 25%.  Many people had their wages fall by 42%.  With such a high unemployment rate (25%), there are less goods and services being produced.  Global trade started to slow down as more goods were being produced than being sold.  As a result, GDP was cut in half from $103 billion to $55 billion. 

During the current recession, businesses stopped expanding, unemployment increases, and housing prices decline.  It all started off with the decline in housing prices in the U.S. market.  In the first quarter of 2008, the GDP dropped 3.8%.  At the beginning of 2008 the GDP was $14.72 trillion but at the beginning of 2009, the GDP decreased to $14.33 trillion.  During the recession many people in the United States were laid off which increased unemployment rate.   There was a low demand for goods during the recession so production was cut back and GDP slowed down during 2008 when the current recession occurred.  Global trade slowed down as goods were being produced faster than they were being sold.   

6.      6.     Reflection:  In your own words, tell me which one has made more of an impact on the world.

In my opinion, I believe that the Great Depression made more of an impact on the world than the current recession because during the Great Depression, unemployment rate reached up to 25%.  In the current recession, the unemployment rate only reached up to 9.4%.  The unemployment rate was approximately 2.5 times higher than the unemployment rate during the current recession.  In the Great Depression when there is an unemployment rate of up to 25%, the GDP will significantly decrease since 1 out of 4 people are unemployed.  Many people had to rely on government relief during the 1930s to buy food.  The government relief was never enough to cover all their basic needs for life.  As a result many people were homeless and they traveled from one place to another to find jobs but were unsuccessful.  During those times, people were desperate to survive as they needed more financial help from the government but the government ignored their requests and the government did not come up with a solution to fix the unemployment issue.  In today’s society when we have a recession, like the one we are still recovering from, the government offers more assistance than back in the old days.  The government provided bailouts to government in the verge of going into bankruptcy and the government would help the people in financial need.  The government in today’s society cares more about the citizens then the government in the 1930s.  Also in today’s society we have more advanced technology than the 1930s.  In today’s banking systems, we can control and manage transactions easily in a matter of seconds where in the 1930s there was no Internet and computers.  So recording transactions was impossible with so much people during the Great Depression.  Also computers help us solve problems much faster than humans.  If there is a problem in the banking system in the modern day, we can refer to the computer and detect the error in a few minutes.  If there was a problem in the banking system during the 1930s, it would take longer for people to find out the problem and the problem will cause the whole system to malfunction.  Overall I just have to say that the Great Depression was a worse experience than our current recession due to their lack of technology back in the days.

Marking:

·        Please use 5 resources for your references.

·        Insight of reflection

·        600 words

References:

1.       1.        http://en.wikipedia.org/wiki/Stock_market_crash
2.      http://en.wikipedia.org/wiki/Wall_Street_Crash_of_1929
3.      http://history1900s.about.com/od/1920s/a/stockcrash1929.htm
4.      http://www.suite101.com/content/the-start-of-the-global-financial-crisis-2008-a88065
5.      http://cashmoneylife.com/economic-financial-crisis-2008-causes/
6.      http://www.guardian.co.uk/business/2008/oct/13/creditcrunch-marketturmoil1
7.      http://www.econbrowser.com/archives/2009/01/oh_yes_its_a_re.html
8.      https://www.cia.gov/library/publications/the-world-factbook/geos/us.html

Chapter 6 Blog- Apple’s iPad 2 Chalks up Strong Sales in Weekend Debut

Link:  http://online.wsj.com/article/SB10001424052748704027504576198832667732862.html

Summary:

On March 14, 2011, Apple Inc. released its new product, the iPad 2 to the public.  On the first 3 days since the release of iPad 2, there were about 400,000 to 600,000 units sold to the market.  Retail stores supporting Apple Inc. products such as Best Buy Inc., Target Corp., Wal-Mart stores, AT&T Inc., and Vernon Wireless, and Verizon Communications Inc. contributed in selling most of the iPad 2.  The new version of iPad is much thinner than the original one and it has a new feature containing a camera at the front and the back of the iPad for the purpose of video conferencing.  The price range for the iPad 2 is very similar to the original iPad, ranging between $499 and $829.  Apple’s products including the iPad 2 were manufactured by Samsung Electronics Co.  Some market watchers suggested that Apple should switch to another manufacturer company because a Korean company has high quality products like Apple which competes with Apple’s smartphones and tablet PCs.  An iPad 2 with 32 gigabytes cost Apple Inc. $270 where the original iPad only cost Apple Inc. $245.  Therefore Apple Inc. had to pay an extra $35 for each iPad.  Since the iPad 2 was only an improvement of the original iPad, analysts expected that the sales for iPad 2 won’t be really high.  However, their predictions were totally off by a huge margin.  Instead of decreasing sales, the sales doubled.  By the beginning of 2011, it is expected that Apple will have a total of 30 million units will be sold, which is double the amount of sales in 2010.  According to Apple’s previous quarterly results, the original iPad contributed to 17% of Apple’s sales which totaled to a final amount of $26.7 billion in revenue.

Connection:

This article relates to the factors of aggregate demand.  In this article, there was an increase in aggregate demand because there was a new product released.  .  New technology can change people’s preferences and tastes which usually receives a large response from consumers.  Since technology plays a significant role in our lives everyday, it is very popular and people will spend whatever amount in order to receive it.  For example in this article, it talks about the success of iPad 2.  iPads 2 are very expensive (ranging between $499 and $829) when it is first released and still there is a huge response from consumers.  People are fascinated by the amazing features provided by iPads and therefore people are willing to pay whatever price in order to obtain an iPad 2.  People had a good impression on the first iPad which built its reputation very high in the first place and now the new version of the iPad will be expected to be an improved version building up the features of an iPad.  With people encouraged to spend more, there is more money injected into economy.  Businesses will be more profitable and successful which means employees are able to retain their jobs.  The iPad 2 will keep on encouraging spending in our economy and as a result the GDP (Gross Domestic Product) will significantly increase, causing our economy to be more stable in the future.

Reflection:

Was the new release of iPad 2 a good impression on Canadian’s economy?  In my opinion I believe that iPad 2 was a significant product that can help Canada’s economy to continue to run efficiently.  Our economy was hit hard by the recent financial crisis in 2008.  Many people in Canada lost their jobs as a result and this affected their spending habits.  When an economy is in a depression, businesses generally have poor financial results and they lay many people off to lower the company’s expenses.  When the economy is in trouble, the best solution to fix the problem is to encourage spending so businesses will become more profitable and successful but however this is also the time when there is very little spending involved because people are unemployed.  Therefore I believe the factor that is able to stimulate people’s spending habits is the release of new products such as the iPad 2 in this article.  Apple’s iPad 2 encouraged people to spend more and it changed the spending habits of many people.  People disregard the price and only focused on getting an iPad at the end of the day before it was sold out.    Technological changes usually result in a positive feedback from consumers because technology is very popular and they play a significant role in our lives.  The economy in Canada is still recovering from the after shock of the recent financial crisis.  However new products are constantly being developed and I strongly believe that they are able to stimulate a person’s spending and cause the economy to start running efficiently again.

Chapter 5 Blog- America’s Biggest Problem? Unemployment

Link: http://news.ca.msn.com/top-stories/msnbc-article.aspx?cp-documentid=27639525

Summary:

In this article, it talks about how unemployment is a major problem in the United States right now.  In a Gallup poll, it indicates that 35% of the people considered themselves “unemployed”.  The unemployment rate is the highest in the United States since October 1983 where 41% of the poll indicated they were unemployed..  The issue of unemployment has been a serious cause of dissatisfaction in the United States.  Some people are blaming the U.S. government for this cause because the government is not doing its job to help people who are in need of government support.  According to a survey, in the past year, the economy and the unemployment rate in the United States have been ranked the biggest problem for them.  This clearly shows that the government needs to do something about solving the problem of unemployment, as people are worried about not having a job especially in today’s hardship of paying personal expenses.  Today, United States’ unemployment rate has been improving as of late.  The unemployment rate is now at 9% with approximately 14 million people looking for a job.  Approximately 8 million people, who are working part-time, want a full-time job.  Many economists strongly believe that the unemployment rate posted by the government is underrated as the unemployment rate should be way higher than 9%.  The Gallup poll was a survey that was based on 1000 people.

Connection:

This article is related to chapter 5 because it talks about how unemployment is a major issue in the United States right now.  The term that is used to define the area of economics concerned with the overall view of an economy is macroeconomics.  Recently in a Gallup poll, like the Labour Force Survey measures the number of employed and unemployed people in the U.S. on a monthly basis.  It was represented by 1000 people and 35% of the people considered themselves “unemployed”.  Therefore approximately 350 people considered themselves “unemployed”.  However this stat is very contradictory to the published unemployment rate by the U.S. government, which is 9%. When is a person considered unemployed?  For example, a person who had looked for work in the last 4 weeks is considered unemployed.  In the article, the people who are classified as “discouraged workers” are not considered unemployed because they are not looking for work.  They are also known as the hidden unemployed because those are members of the population who are not actively seeking a job because they do not believe there are suitable jobs available.  The people who are actively looking for work plus the people who are employed makes up the participation rate.  We can calculate participation rate with labour force divided by the entire population who is 15 years +.  With a 9% unemployment rate (14 million people unemployed) we can take 14 million people and divide by 9% to determine the employment rate.  There is an approximate 155 million people who are employed.  There is an approximate 200 million people who are over 15 years of age in the United States.  To calculate the participation rate, we have to add unemployed and employed people (14 million + 155 million) and divide it by the population (15 years +).  The result is an approximate 84.5% participation rate in the U.S. right now.  Therefore 15.5% of the population is not actively looking for work.  Without the restrictions on unemployment rate, the unemployment rate (Let’s say for now including people who are not looking for work) would peak 25%.  The reason why the government put so many restrictions on to consider who is unemployed is because restrictions understate the unemployment rate which makes it more appealing to the rest of the world.  If unemployment was really high, it would discourage immigrants because job opportunities are a significant factor that influences the decision of immigration.  The U.S. government should start paying attention to unemployment right now as it is causing some uneasiness in some people right now.

Reflection:

After reading this article, I do not think the Gallup poll is a good economic indicator because sometimes in a survey, people don’t tell the truth of what their real status is.  Sometimes people might be embarrassed that they are unemployed and say that they are employed.  Also, the unemployment rate published by the U.S. government is not a good economic indicator because the government put many restrictions on to consider whom is unemployed and whom is not considered unemployed.  Although the unemployment rate is measured accurately by the U.S. government however in my opinion, the unemployment rate hides the truth.  The unemployment rate is merely an understated number that makes it more appealing to the public.  If you counted people who is not looking for jobs the unemployment will reach around 20-25%. The government can probably hide the problem of unemployment in stats and numbers but the government cannot hide the actual problem of unemployment and uncertainty amongst the people. With such a high unemployment rate in the United States, why is United States still the government the leading country with the highest GDP in the world?  In my opinion I think there are so many large American corporations and there are many American investors that are able to make up for the high unemployment rate.  The gap between rich people and poor people is very large in the United States.  That explains why there are many rich people in U.S. as well as a lot of people living in poverty.

Chapter 4 Blog- “What would it take to eliminate the Deficit? Here’s a List”

Link: http://money.cnn.com/2011/01/19/news/economy/texas_budget_deficit/index.htm

Summary:

This article is about how government overspending in Texas has caused a major deficit in Texas.  This year, Texas has spent close to $31 billion reaching a $27 billion deficit right now.  In order to fix this problem and get out of this deficit, major cuts in public social services must be made including education and Medicaid.  The Republican leaders chose not to raise taxes because they did not want a violent reaction from the citizens.  Also, Texas didn’t want to use the money projected from the rainy day fund, which has already collected $9.4 billion.  There were a 13% budget cuts in public education and a 7.6% drop in higher education support.  As a result there would be less funding for pre-K Early Start programs and four community colleges would be shut down to save some money.  Health and human services would also be cut by 25% including other public government services and approximately 9,300 government jobs would be removed.  There were cuts in public social services such as receiving meal deliveries and services.  Approximately 60,000 students would have no support from government for financial aid for college and there is less funding for defending homeless people in court duties.  The department that supervises parolees would be cut by 21%.  After the recent Great Recession, government revenue is starting to decline.  In this fiscal period, Texas would only generate $72 billion of revenue which is down from $87 billion years comparing from the last 2 years.  In order to cover for these cuts, Texas would have to spend an extra $12 billion in order to maintain its services.  In these next few years Texas will have less government support and you will expect less government spending in order to pay off this deficit.

Connection:

This article relates to government spending on public services and this article is a prime example of Wagner’s law of increasing state activity.  This article follows the theories of chapter 4 because the textbook states that the growth of government spending tends to rise and it is very common for governments to overspend and run into deficits.  Governments are constantly spending over their budget.  The largest component that makes up government spending is on public social services which include education system, healthcare system, public work programs, and pensions for the elderly.  Since the United States is a capitalist country it does not provide much public service unlike socialist countries.  This is why people in Texas don’t have to pay very high taxes.  Although they still pay some direct taxes such as income taxes but at a very low rate compared to Canada.  In the United States, they have a vertical equity because there is a huge gap between the rich and the poor and therefore the equity terms must have different terms that separate the rich and the poor.  For example, in the United States, they do not have a public medical care system.  Every time someone walks in to the doctor’s office, they have to pay each time.  In this situation it would be an ability-to-pay approach because when people pay the tax portion when going to the doctor’s office, they pay by how much they have to spend.  So in other words only people who can afford medical care is able to access United State’s healthcare system.  Therefore the government cannot afford to overspend its budget or else it would run into deficits like Texas.  This article also follows the theory of Wagner’s law of increasing state activity.  Wagner’s law of increasing state activity was developed by Adolph Wagener in 1883.  This states that in industrialized economies government spending can be expected to grow a t a faster rate than the total output of goods and services.  This is the exact same case in this article.  Wagner also stated when there are problems with the economy, the government will try to correct market imperfections and in financing large-capital projects.  In this article the government is making cuts in many social services trying to correct and fix this deficit.  The government is overspending too much and its spending grows faster than the revenue they are generating.  With low income from taxess and high expenditures, there is bound to be deficits.  This is the problem that governments must turn their attention to in the future so the same mistake of overspending won’t happen again.

Reflection:

When the government came up with the idea to cut back on government public services, I agreed with his idea because since residents in Texas do not pay a whole lot of tax, therefore I don’t think they should get those public services.  I don’t think people who work really hard in there jobs and people who do not contribute to the labour market should get the same amount of benefits because people who work for the benefits deserve it and while people who do nothing and doesn’t contribute anything should not deserve the same amount of benefits.  There is no way that the government can provide those services without gaining a lot of revenue such as taxes from the residents.  I believe that the government made the right choice.  I thought this choice was unique from other situations.  Usually the government would try to raise its tax so they can use the money to pay off its debts.  However I feel that the government had gone through some thorough reflection of the crisis and thought of the best way to handle this situation.  The government would think and predict ahead what the results would be if it raised the tax.  How would residents react to this change?  What would be the consequences?  I liked how the government of Texas had this all planned out before making its move.  The government thought that cutting social services would be the best thing to do in this case since residents aren’t paying high taxes that will cover the social services and increasing tax rates will cause a huge commotion and dissatisfaction among the citizens.