Falling Oil Prices Dissertation

Falling Oil Prices and their Long-term and Short-term Impact on Ordinary Investors

Falling Oil Prices – Oil prices for the better of human history have been subject to various factors like economic recessions and booms. All one has to do is to use history as a reference to ascertain whether these prices are likely to change when taking into account the prevailing global aspects like the change in the United Stated presidency. On the same note, it is undeniable that OPEC has acted to influence oil prices and hence the global economic setup. Bottom line, the crude oil industry experiences ups and downs and can only be treated as volatile.

It is for this reason that the effects of falling and low prices on investors ought to be interrogated in the sense that it is only prudent to assume that oil prices eventually influence investment decision makers. After all, oil prices have been found to have a tendency of affecting almost every aspect of the economy and hence both future and current investments. At the current global age, oil prices have experienced a dip and stand to remain so for a considerable time into the future according to economists and other stakeholders (Degiannakis, Filis & Kizys, 2014).

It is for this reason that OPEC, with its powers, has concentrated their efforts on ways and mechanisms to use in raising these oil prices including lowering production and hence prices. When there is a shift in oil prices, in this case, a downward shift, it means that they are losers and gainers. Thus, from a critical analysis point of view, there needs to be a careful and clear interrogation of the concept.

The purpose of this study paper is to investigate the impact of long term and short term implications of falling oil prices on the ordinary investor. The objectives of the study were to have a deeper understanding how this affects both energy dependent and independent investors. The study established that as oil prices continue to decline, it is crucial for ordinary investors to be long sighted in making their decisions. Though falling and low prices are a temporary phenomenon, it so happens that their effects can never be overlooked.

For example, low prices mean that oil and oil products consumers have a greater disposable income to spend on other products. This means that retail outlets experience a sense of business boom (Bohi & Montgomery, 2015). The same case applies for motor vehicle manufacturing industry whereby low oil prices induce prospective customers and consumers to indulge in buying more vehicles. Taking into account that the motor vehicle industry is rather a crucial sector of the global economy, it is only evident that oil prices have a causal effect on quite a large chunk of the economy.

The study further established that low oil prices have both macro and microeconomic effects which equate into more fiscal and monetary policies by stakeholders. For example, federal governments have to come up with such policies like increased tax rates due to the low revenue they get from low oil prices. Increased tax rates automatically affect ordinary investors. It is for this reason that such countries have to perform macroeconomic adjustments to cushion for these impacts. In so doing, falling or declining oil prices effects must be remedied by running substantial and rising fiscal deficits.

Additionally, falling oil prices results in reduced commercial activities around oil producing regions or areas in that such companies like truck retail and construction companies often reduce their investments due to low returns. This paper employed qualitative research methodology. Data was collected by reviewing relevant peer-reviewed economic literature on oil prices and the economy. Data was presented as a narrative essay and utilized convenience sampling method.

Statement of Problem

Though there have been numerous efforts geared towards understanding oil prices in the economy, the process has not been impressive so far. This is particularly so because ordinary investors may not be able to comprehend the underlying economic jargons, models and policies. More so, history have acted to teach investors lessons on investments in such cases where they are not sufficiently equipped to adapt to these oil changes. It has become increasingly important to have a better understanding and hence this study paper.

Thesis

This study paper investigates and establishes the long-term and short-term impacts of falling oil prices on ordinary investors. The paper seeks to help have a better understanding of oil prices impacts on the economy by reviewing both fiscal and monetary policies that are taken in accommodating these oil price changes.

Significance of the study

Findings of this paper may be used by relevant stakeholders to help curb negative effects of falling oil prices and encourage ordinary investors to enjoy the benefits that come with the same.

Review of Literature

Effects of Falling Oil Prices on Currency Devaluation and Investments

Currency exchange rate is the value which one currency is measured against another currency. With low and falling oil prices, there tends to be push-up domestic inflation due to high import prices. It is undeniable that investors require higher returns to compensate for the inflation. It the follows to compensate for inflation; the federal bank has to raise interest rates to curb inflation. With the government attempting to curb inflation, various steps are followed including Open Market Operations and Cash to Liquidity Ratio for banks (Nazlioglu, Soytas, & Gupta, 2015). The effect of raising the interest rate on loanable funds can be explained by the following economic model:

Falling Oil Prices - High Interest Rates
Falling Oil Prices – High Interest Rates

From the above analysis, it is evident that an increase in interest rate leads to a reduced supply of loanable funds and hence low investment from ordinary investors.

 The aggressive measures are aimed at reducing the supply of currency in the economy by making its supply low thus increasing its value. In so doing, the interest rate in the economy automatically increases meaning that the government is in a bid to discourage banks to lend loans and funds to the consumers and discourage investors from accessing such loans and finances. Consequently, it results to reduced investments. On the same note, it is important to note that currency value is a crucial factor in attracting foreign investments (Sadorsky, 2014). Thus a low currency caused by inflation acts towards discouraging ordinary investors from investing in such countries with low currency.

In the bond market, there is an inverse relationship between bond prices and interest rates such that if a currency crash was to happen, there is a likely hood of the bond market crash. High-interest rates caused by low or falling oil prices usually results into low bond values making it unattractive to ordinary investors including foreign investors who may be willing to invest in international government bonds.

The effects of declining oil prices in the economy have never been clearer. Falling oil prices mean that countries have to cut public budgets. This, in turn, has resulted into serious social and political ramifications that have been found to have a direct relation with investments. For example, in Russia, the ruble suffered significant devaluation with falling oil prices. Consequently, the stock-market prices tend to fall. The effects of declining oil are better understood when such factors like federal or central banks reserves shrinking, capital flight, low exports and low foreign investors are taken into account (Brown,Chan, Hu & Zhang, 2017).

Furthermore, when falling oil prices are significant enough, they tend to downgrade a country’s bond value to almost junk levels which are mainly done by credit rating agencies thus acting to discourage ordinary investors. Due to oil price weakness, Consumer Price Index has shown inflation might be incumbent in the long-run if oil prices are to continue into the foreseeable future. However, falling oil prices act like a tax cut for consumers such that they can spend other than oil and energy.

Currency devaluation in some cases may be a voluntary concept whereby a country may devalue its currency to make its exports competitive in the world market. In the recent past, China devalued its Yuen currency reaching an almost six year low (Basher & Sadorsky, 2016). Consequently, it resulted into the low crude oil. As the oil market is characterized by the dollar currency and hence dollar peg, countries have to act within and beyond their limits to maintain currency levels competitive against the dollar. As of the year 2016, the IMF urged Nigeria to devalue its currency as low prices hit the economy. Being an aggressive strategy, it was a viable option in attracting investments after the currency stabilized in the long-run.

In the Nigerian case study, the government sought to restrict access to foreign currency and ban quite a wide range of imports. Though this was viewed as being detrimental by the IMF, it was a measure to curb the effects of low oil prices and inflation (Alfaro, Bloom, & Lin,2016). The effects of the same were also felt by the common consumers and ordinary investors.

The Nigerian government was of the view that it was better to restrict access to foreign currency and limit certain imports into the country rather than devaluing their currency. This, of course, had a negative effect or impact on investors who dealt with this line of imports. Similarly, restricting access to foreign currency meant that local and international investors would not transact in certain currencies limiting their diversification both in stock and currency trading. Furthermore, in such a country which is import dependent in terms of food, it meant that investors had to get less for their money (investment returns) or had to charge consumers for their products.

In choosing not to devalue the naira, the Nigerian decision makers risked severe foreign exchange that could potentially lead to decreased foreign investment and hence an increase or surge in the black-market sector (D’Ecclesia, Magrini, Montalbano & Triulzi, 2014). Thus, this is a direct attack on the business sector especially considering that oil is just but one commodity affecting all other range of consumable products and services.

Falling Oil Prices and Increased Tax Rates

In a bid to recover tax revenues lost through falling oil prices, the federal or central banks usually takes upon increasing tax rates in the economy. Changes in the top marginal tax rates influence peoples’ decision especially in terms of consumption trends. From the argument of libertarians and economists at large, tax increase dissuades ordinary investors from economically viable projects. An increase in tax caused by falling oil prices automatically reduces the amount of disposable income for consumers meaning that they will spend less or forego certain products and services meaning such investors who had invested in those product lines experience a dip and form and revenue accruing from their operations. Additionally, when corporate taxes are high, it acts to derail additional investments. High tax rates mean that there is the low after-tax rate of return on investment hence low investment esteem.

High taxes in the economy results into low personal and house hold savings. Such savings would have otherwise been used for investment purposes in the long-run or even spent on goods or services at a future date (Brunetti, Büyükşahin, & Harris, 2016). When tax rates are increased, it means that there is a strong correlation between tax, interest rate, saving and hence investment. Taking into account that increased tax rates go hand in hand with high-interest rates, the effect of the same can be explained by the model below.

Falling Oil Prices - High Tax Rates
Falling Oil Prices – High Tax Rates

In increasing taxes, it has become a common phenomenon for federal and central banks to allow for tax credits. They have been found to be more favorable than tax deductions whereby the latter rarely occurs with falling oil prices. The value of a tax credit depends on the type of credit either given to individuals or individuals. In such cases where the government offers tax credits, it enables investors to continue investing in certain sectors of the economy to balance between high taxes effects and increased investment all the same. On the other hand, non-refundable tax credits are directly deductible from the tax liability (Enriquez, Smit & Ablett, 2015). Any excess of the same potentially reduces tax liability further. This has been found to negatively affect low-income earners because they are not able to enjoy and utilize the entire credit amount. Refundable tax credit is favorable and tends to promote expenditure and investment which is a good thing for ordinary investors all the same.

Falling Oil Prices, Local Investments and the Stock Market

With falling oil prices, it is a common phenomenon that business activities in oil producing regions tend to decrease. For example, construction companies benefit less from these low prices as oil mining and refinery companies have to cut and lower their production capacity in a bid to maintain high prices. The powers that OPEC has in dictating and influencing oil prices are quite shocking. According to the author, OPEC members’ oil production account for almost forty percent of the global oil supply which puts a considerable amount of power in their hands.

By acting as a united front, they would act to shape the future of the oil industry and more so regarding influencing oil prices to their advantage (Diaz, Molero, de Gracia, 2016). The underlying question is what would happen if these countries were to hold on and stop their oil exports for some time.

As of last year, oil producing countries including Russia and Saudi Arabia acted towards ensuring high oil prices. This was meant to reduce cut-throat competition and price under cutting proving that OPEC has the ability and power to increase prices. However, this was done by reducing the production levels and hence low supply into the market (Heitner, K. L., & Sherman, 2014). It is important to note that such countries like Venezuela have a binding agreement not to increase production significantly making the agreement even more strong in pushing the oil prices high.

With reduced supply and operations, local business suffers significantly. Ordinary investors in the housing sector feel the impact whereby the demand for housing units ultimately takes a deep. With reduced operations, there will be reduced workforce and hence a low demand for housing units. It is practical that with the opening of oil companies in a certain region, local businesses and investments sprout up. Thus, such investors like shareholders have to make a careful decision on the type of portfolio they are to invest in.

For companies being quoted in the stock market, it means that their shows trade less as they are less attractive to invest in. It has been established that there is a correlation between oil prices and the stock market (Javan & Vallejo, 2016). Such factor prices in the economy like wages and interest rates tend to offset energy costs. In reading future trends of the market, investors have to factor in factor prices. With increased consumption of oil product, prices in the market might rise.

With falling oil prices, the motor vehicle and other related oil energy industries experience a surge in their revenues and hence their share prices. The same case applied to the transport sector. However, there has not been an explicit correlational explanation as to the relationship between oil prices and overall stock market. It has been identified that in surprising cases, stock markets may fall with falling oil prices. In such cases where oil and stock prices go hand in hand, it is as a result of softening global aggregate demand. The relationship between stocks and oil is rather volatile. Prices may move in the same or opposite direction. As it stands, both prices seem to move in the same direction.

Time Value of Money and Falling Oil Prices

Time of value is an accounting concept that deals with what monetary benefit one would rather enjoy now rather than later. This concept has been so far been used in valuing investments and more so in the field of oil and accounting when such factors like interest rate and rate of return are put into account. Thus, the underlying question is, should one invest now or later in the oil industry as according to time value of money.

As previous research has shown, it is advisable to invest when oil prices are high because the interest rate is low and so is the tax rate. Thus, it can only be held that with the changing oil prices, investors should invest when oil prices are high to increase the returns in terms of present and future value of money.

Methodology

The research methodology used in this dissertation was qualitative, Triangulation/Mixed Review study utilizing convenience sampling research methodology. This research method involves data integration in that illustration, triangulation (convergent validation) and deep analysis are undeniable in this study paper. Mixed method of research involves combining aspects of both quantitative and qualitative research methods through triangulation whereby data from different sources are compared and analyzed to come up with the most reliable and appropriate conclusion and recommendation.

Triangulation, in this case, involves the use of diverse data and combining various research methods. This would go hand in hand with convenience sampling where convenient and pertinent data to the study will be analyzed. It is the most applicable method in studying real life scenarios through a detailed contextual analysis of a limited number of conditions or relationships.

The study design involved went hand in hand with the triangulation of different data sources in relations to a specific issue, phenomenon or situation with an aim to deeply understand and explain it of characteristics and other aspects like rationale and distribution. It combines the strengths and reduces weaknesses of using a single method. Through triangulation, convergence and divergence of data can be established thereof.

Discussion, Conclusion, and Recommendation

From the above analysis, it is only true to hold that falling prices have both short-term and long-term impacts on ordinary investors. Falling prices tend to result in high taxes, high-interest rates and more so a change in the stock market. It is thus important for investors to have a clear understanding of oil prices changes and the corresponding effects in that it ultimately affects the general economy in various ways. This paper should prove useful for ordinary investors and other stakeholders who are willing to seek information on oil industry and investments.

References

Javan, A., & Vallejo, C. (2016). Fundamentals, non‐fundamentals and the oil price changes in 2007–2009 and 2014–2015. OPEC Energy Review40(2), 125-154.

Nieh, C. C., & Yeh, C. Y. (2016). Relationship of Threshold Effect among Gold, Oil, and Exchange Rate.

Enriquez, L., Smit, S., & Ablett, J. (2015). Shifting tides: Global economic scenarios for 2015–25. McKinsey & Company.

Brunetti, C., Büyükşahin, B., & Harris, J. H. (2016). Speculators, prices, and market volatility. Journal of Financial and Quantitative Analysis51(5), 1545-1574.

D’Ecclesia, R. L., Magrini, E., Montalbano, P., & Triulzi, U. (2014). Understanding recent oil price dynamics: A novel empirical approach. Energy Economics46, S11-S17.

Alfaro, I., Bloom, N., & Lin, X. (2016). The Real and Financial Impact of Uncertainty Shocks.

Coudert, V., Couharde, C., & Mignon, V. (2015). On the impact of volatility on the real exchange rate–terms of trade nexus: Revisiting commodity currencies. Journal of International Money and Finance58, 110-127.

Brown, G., Chan, R., Hu, W. Y., & Zhang, J. (2017). Oil Price Movements and Risks of Energy Investments. The Journal of Alternative Investments19(4), 24-38.

Bohi, D. R., & Montgomery, W. D. (2015). Oil prices, energy security, and import policy. Routledge.

Sadorsky, P. (2014). Modeling volatility and correlations between emerging market stock prices and the prices of copper, oil and wheat. Energy Economics43, 72-81.

Basher, S. A., & Sadorsky, P. (2016). Hedging emerging market stock prices with oil, gold, VIX, and bonds: A comparison between DCC, ADCC and GO-GARCH. Energy Economics54, 235-247.

Nazlioglu, S., Soytas, U., & Gupta, R. (2015). Oil prices and financial stress: A volatility spillover analysis. Energy Policy82, 278-288.

Degiannakis, S., Filis, G., & Kizys, R. (2014). The effects of oil price shocks on stock market volatility: Evidence from European data. The Energy Journal35(1), 35-56.

Diaz, E. M., Molero, J. C., & de Gracia, F. P. (2016). Oil price volatility and stock returns in the G7 economies. Energy Economics54, 417-430.

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Community Economic Development

Community Economic Development

Title: Community Economic Development. Effective public administration is key to promoting community economic development. Community economic development is term used to describe collective action by members of a particular community to generate common solutions to their economic problems. Such initiatives may involve both small and large groups (Green & Haines, 2012). Public administration on the other hand refers to civic leadership of community affairs that is held directly responsible for executive roles (Calabrò & Della Spina, 2014). Public administration aims at promoting respect and contributing to the enhancement of the worth, dignity, and potential of members of the public. Effective public administration enhances the success of community economic development initiatives.

The model of the community development process, also often referred to as the asset model of development provides mechanisms to manage community based and development infrastructure. It is mainly concerned with the management of human resources (Patterson, Silverman, Yin, & Wu, 2016). It provides processes and practices that are aimed at promoting the effective and efficient management of human capacity in public service (Loh & Norton, 2015). The model also champions the making of human resource management (HRM) decisions that are accurate, fair, transparent, and free from political influence (Green & Haines, 2012). There are six major components of the model of the community development process. These include strategic planning, organizational design and classification, competency profile development, resourcing, learning, development, and certification, and leadership development.

Strategic planning requires that the business needs of a community be identified first before any investments are made. The community economic development program that is developed should target these gaps and needs. Strategic planning requires that all decisions be made based on existing facts (Christens & Inzeo, 2015). As a community developer, one should engage members of the public to determine their needs and work with them to develop solutions that best satisfy these needs. For example, the needs of an urban community vary from those of a rural society. Subsequently, programs to be rolled out in the two areas should vary to some extent.

Organizational design and classification is the second component of the model. It requires that standardized services and products be developed with the aim of providing an integrated and consistent approach to staffing. Subsequently, well defined and or organized job positions and streams are developed (Green & Haines, 2012). In community development, organizational design and classification is important since it helps in the division of work. Different persons are given specific responsibilities (Majee, Goodman, Reed Adams, & Keller, 2017). For example, a engineer working in a community development project should have clearly defined responsibilities.

Community Economic Development
Community Economic Development

Competence profile development is the third component of the model. It champions the development of competency based products that help define and support job success. As such, public administration managers are in a position to use profiles for the purposes of staffing (Majee et al., 2017). At the same time, employees are in a position to identify that which is required of them for them to get promotions (Calabrò & Della Spina, 2014). A community developer should be involved in the designing of learning programs fill the skill and knowledge gaps of the human resources. These programs should target all fields.

The fourth component of the model is resourcing. It involves the launching of collective recruitment and staffing programs. This helps increase access to qualified human resources. At the same time, it ensures that vacant positions are filled in a quick, effective, and efficient manner (Green & Haines, 2012). The model enables community developers to understand the need to have fully staffed team at all times. For example, it would be not make sense to run a community development program whose agenda is housing without an architect, an engineer, and an accountant.

Learning, development, and certification is the fifth component of the model. It develops programs that are aimed at enhancing the skills and capabilities of human resources (Patterson et al., 2016). It ensures that employees have access to all the programs and tools they need to improve their competencies and skills (Christens & Inzeo, 2015). As such, they are in a position to advance in their careers. A community developer must understand that change is inevitable. As such, they must always seek to update the skills and knowledge of their teams.

The last component of the model is leadership development. It involves expanding the capacity of individuals to enable them perform leadership roles (Patterson et al., 2016). In community development, this is important since it provides persons with the right attitudes and abilities to influence others positively (Calabrò & Della Spina, 2014). A community developer must understand the need to create strong leadership. They must mentor leaders who are to guide the implementation and maintenance of community based project (Majee et al., 2017). This is important to ensure the sustainability of these community economic development programs.

Zoning and Community Economic Development

Zoning and comprehensive planning continue to be important tools for community development. Zoning is a development regulation tool. It involves the division of the existing land into zones. Each zone is dedicated to a specific purpose. In community development, zoning is key in ensuring that the goals of the comprehensive plan are implemented in an effective and efficient manner (Green & Haines, 2012). Public administrators must be keen to ensure that zoning guidelines are adhered to. Through zoning, developers can improve their communities by encouraging the use of the existing land resources in a sustainable manner (Loh & Norton, 2015). Zoning promotes sustainability of development programs since it allocates land resources for all the needs of a community. For example, zoning ensures that members of a community have adequate land for residential, farming, and economic purposes.

Comprehensive planning is the process through which the goals and aspirations of a community are determined. It results in the development of a comprehensive plan. In community development, a comprehensive plan dictates public policy and in matters land use, housing, recreation, public utilities, and transportation (Green & Haines, 2012). Comprehensive plans may cover either a small or large geographical area (Loh & Norton, 2015). As a developer, one can use comprehensive planning to improve their communities by assessing their needs and working with them to seek appropriate and sustainable solutions (Christens & Inzeo, 2015). A developer must be keen to involve all members of a community in the planning process. This ensures that their comprehensive plan created has the support of all members of the community. Subsequently, the implementation process tends to be easy.

References

Calabrò, F., & Della Spina, L. (2014). The cultural and environmental resources for sustainable development of rural areas in economically disadvantaged contexts-economic-appraisals issues of a model of management for the valorisation of public assets. Advanced Materials Research, 869(1), 43-48.

Christens, B. D., & Inzeo, P. T. (2015). Widening the view: situating collective impact among frameworks for community-led change. Community Development46(4), 420-435.

Green, G. P., & Haines, A. (2012). Asset building and community development (3rd edn.). Newbury, CA: Sage Publications.

Loh, C. G., & Norton, R. K. (2015). Planning consultants’ influence on local comprehensive plans. Journal of Planning Education and Research35(2), 199-208.

Majee, W., Goodman, L., Reed Adams, J., & Keller, K. (2017). The We-Lead Model for Bridging the Low-Income Community Leadership Skills-Practice Gap. Journal of Community Practice, 3(1), 1-12.

Patterson, K. L., Silverman, R. M., Yin, L., & Wu, L. (2016). Neighborhoods of Opportunity: Developing an Operational Definition for Planning and Policy Implementation. Journal of Public Management & Social Policy22(3), 143.

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Airbnb Economic Space Project

Airbnb as an Economic Space

Title: Airbnb as an economic space. An economic space is either physical or non-physical system that creates a model through which people can design and interact with financial values. There are numerous platforms that can be classified as economic spaces including social websites such as Airbnb and Facebook. These platforms create spaces for people to gather and interact. Basically, the interaction of individuals within an economic space is determined by its structure and design. Each economic space has specific behaviors and traits associated with the social systems it forms. Airbnb has numerous benefits as an economic space because of its scale, allowing people to list and book accommodation from any part of the world.

Airbnb as an Economic Space

Airbnb is platform that allows peers to list and reserve housing around the world. Individuals with vacant rooms are allowed to register on Airbnb as hosts in order to list their properties. Similarly, guests enroll on the platform as hosts and are permitted to verify their identity using their online profiles or government-issued documents before they are allocated an accommodation. The platform is accessible through mobile application and websites. Recently, I interacted with Airbnb as a guest and experienced the numerous benefits associated with the space. It is easier, cheaper, and accessible from every part of the world. The listed properties are of diverse sizes and prices and are in locations that allow tourists to stay with the local people during their travel period. Airbnb is global in terms of scale because like many internet-based platforms, it is utilized by a global audience (Coe, Kelly, & Yeung, n.d.). Guests have the option of choosing the listing based on diverse criteria such as region, city, price, date, and features of property.

Nonetheless, the platform can be categorized into several scales that include a global, regional, national, urban, and local scale. One aspect of the platform that should be noted is that it is operated from a particular region although it is global. The listing of the products occurs from any place in the globe and hosts can easily update if their space is already booked.

Airbnb Economic Space
Airbnb Economic Space

Airbnb is fascinating because complementary economic activities are occurring concurrently at multiple scales (Coe, Kelly, & Yeung, n.d.). The accommodation services enabled by Airbnb are part of the sharing economy where users share assets and services using digital intermediaries. The difference between Airbnb and the traditional accommodation services is in the way of delivering these services. Because of the unique model utilized by Airbnb, there are numerous advantages for the hosts, the guests, and the populations at local levels. While searching for a suitable accommodation based on the available budget, I interacted with numerous hosts and the diverse properties available to clients across the globe. Basically, the actions of both the guests and hosts are shaped by the design of the platform, with each having a personalized interface to mediate the interactions.

Airbnb Interventions

Regarding interventions aided by Airbnb, it is not easier to isolate one scale of the system because the processes at a particular scale depend on the activities at another scale. The decisions that lead to the success of the business model are made at different levels of the systems. In this context, the human effort is augmented by digital structures. Each of the consumers is beneficiaries of the knowledge invested in the web platform. In the contemporary economic spaces, technology is the main tool to enhance the efficiency of the everyday activities. However, it is apparent that Airbnb platform does not overshadow the essence of ordinary work in the physical sense.

The design of the platform reveals what is an economic space and what it can do. Airbnb is a hallmark of economic globalization that braved the traditional methods of looking for accommodation. Consumers across the globe can choose from a variety of available spaces. Airbnb is a unique form of economic geography that has rationalized the tourism and travel industry (Walker, n.d.).  Essentially, the analysis of Airbnb as an economic space is not confined in a singular scale but rather understanding that different scales are performing and active at the same time. When the platform is considered in one scale, we create a restricted and ambiguous understanding of the digital model used (Coe, Kelly, & Yeung, n.d.).

Conclusion

Airbnb is popular because it allows efficient and easier listing of properties that serve a global clientele. It is a digital system that allows people to undertake economic activities in a worldwide scale. There are numerous economic benefits associated with Airbnb because of the several scales that allow economic activities at the individual, local, national, and international level. The platform can be accessed through the website or mobile application and lists properties of diverse features, prices, and location. At all scale levels, the activities occur simultaneously. Listing and booking of accommodation occurs from any part of the world and the activities of one scale depend on the performance of the other. Airbnb is different from the traditional accommodation services because it offers benefits to people at different scales of the economic hierarchy simultaneously.

References

Coe, N. M., Kelly, P. F., & Yeung, H. W.-C. (n.d.). Thinking geographically. In Conceptual Foundations.

Walker, R. A. (n.d.). The geography of production.

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Currency Crisis Cause and Resolution

Currency Crisis

Currency crises are rapid and unpredictable decline in the value of the currency of a nation. The crises are often more severe if the country involved uses a fixed exchange rate than if the country has a flexible exchange rate since the monetary authority will be forced to abandon the fixed rate. Currency crises usually increase by selling pressure of a currency and can only be remedied through devaluation or establishing a new exchange rate at a sufficiently depreciated level. Several countries have experienced currency crises which are caused by different factors. One of the most severe currency crisis occurred in Mexico between 1994 and 1995. The crises led to huge massive economic crises that forced the Mexican government to seek assistance from the United States and the International Monetary Fund (IMF) (Carbaugh, 2016). The essay herein will, therefore, examine the sources of currency crises in Mexico and the specific resolution and also including some other countries that have experienced currency crisis such as Russia and Turkey.

Mexico Currency Crisis (1994-1995)

Before the 1994 Mexico currency crises, the central bank of Mexico maintained the value of peso within a depreciated band of four percent every year against the U.S. dollar. In 1994, the Central bank decided to issue debt that is linked to the US dollar as a way to reduce interest rates on debts. The debts kept rising until it exceeded the central bank’s falling foreign exchange reserves which led to the currency crises. Despite the government responding by devaluing the currency by 15 percent, the crises continued until 1995. The continued selling pressure on the currency forced the monetary authorities to withdraw support in foreign exchange markets as foreign reserves of the Bank of Mexico fell. Although the severity of the Mexican currency crisis in 1994 was unprecedented, Mexico’s history on exchange rate policy has been characterized by the duration of both fixed exchange rate and flexible exchange rates (Ötker et al., 1995). The devaluation registered by Mexico is the largest depreciation of the currency of a country within one year.

When the currency crises occurred, there was little information about the possibility of its occurrence. The crises were somehow similar to the debt crisis that occurred between 1982 and 1983. Several assessments have been conducted to establish the main cause of the situation, and most of them reveal that it was contributed by the exchange rate policy of Mexican monetary authorities. The other cause identified through the assessment is the excessive use of short maturity tesobonos for deficit financing. Tesobonos is a peso-dominated bond which is issued by the government of Mexico and the coupons associated with it are indexed to the United States dollar. The Mexican government issued the tesobonos as a way to convince the international investors to buy Mexican debt that is exempted from risks associated with currency exchange. The investors are therefore immune to the effects of changes in the dollar value of the peso between the period of purchase and redemption. The risk associated with the change of currency is therefore carried by the Mexican government and not the investors. For instance, if the value of peso depreciated during the period of purchase and redemption, the Mexican government and the taxpayers would be liable for the losses.

According to the international economic statistics that were available before the crises, the Mexican government had the chance to evade the crises if the monetary authorities had information about the actual state of Mexican reserves. At the beginning of 1994, the Mexican reserves were at around $25 billion, but towards the ends of the year, the reserves had reduced to about $5 billion (Tavlas, 1997). The existing reserves were insufficient to meet the existing financial obligations. Furthermore, a default was considered to be a perilous move for the stability of the international financial markets. The deficit, therefore, led to the currency crisis. The International Monetary Fund (IMF) failed to provide the Mexican authorities with information about the decline in the reserves. Following the crisis, the IMF has resolved to closely monitor the financial reserves of developing countries to avert the occurrence of a currency crisis. The IMF has also resorted to providing early warning indicators to avoid the occurrence of a currency crisis in any nation.

Currency Crisis
Currency Crisis

Mexico has a great deal of the forms of direct capital investment in 1994, but it was not sufficient. The government was receiving massive amounts of money through stock-brokers who were motivated by the quick returns which were about 20 percent annually. The investment bankers and the stock-brokers were ready to exit Mexico as soon as the crisis begun thereby increasing the magnitude of economic damage. The troubles of Mexico extended from insufficient reserves, inability to service the debts, and incapability to generate profits on the equity capital. The crises also contributed to other social and political problems such as the Chiaspas rebellion at the beginning of 1994 (Tavlas, 1997). The political issues made the foreign investors take their money out of Mexico thereby broadening the implications of the crisis. The implications of the crises forced the Mexican government to seek assistance from the International Monetary Fund and the United States government.

According to Gil-Diaz (1998), the currency crisis in Mexico was contributed by the execution of the privation of the public enterprises and the deregulation of the Mexican banking sector. He concluded that the confiscation of the banking sector followed by subsequent privatization in 1991-1992 is the cause of the currency crisis. The Mexican monetary authorities made the deregulation of the banking sector without due consideration about the implications that it would have on the federal reserves. The decision later resulted in an increase in unpaid debts to the banks. The currency was then triggered by the Mexican government in 1994 because of the economic decisions. The crisis was determined by the fragility of the banking system and not the macroeconomic factors as indicators by other researchers. Three years before the crisis, the Mexican peso was overvalued which also resulted in economic pressure. The monetary policy that was passed by the Mexican authorities was inappropriate because the Federal Reserve was raising the interest rate while the Bank of Mexico maintained the existing rates. It, therefore, made the investors leave increasing pressure on the reserves.

The Mexican currency crisis had a regional effect through a contagion in various markets such as Brazil, Argentina, Asia, and Thailand; the effect was referred to as the “Tequila effect.” The crisis affected both the stock market and the foreign exchange market. Only the countries that had high economic fundamentals were exempted from the effects of the crisis. The Mexican government responded to the adverse situation by requesting for loans from different countries and international bodies among them being the United States, the International Monetary Fund, and the Bank for International Settlements. In the end, Mexican government managed to secure a loan totaling to $50billion that was used to meet the financial obligations. However, the move by the government to ask for loans received criticism from some of the European authorities that considered the move to be a moral hazard.

The Mexican government continued to resolve the crisis by implementing a severe adjustment program. Some of the strategies in the program included reducing the public spending, increasing the value added tax from 10 percent to 15 percent, and raising the prices of all the public goods and services. The program worsened the situation in Mexico as the Gross Domestic Product dropped by 6.5 percent and inflation increased by 50 percent. Furthermore, the banking system collapsed thereby forcing the government to use public funds in the rescue. The government also changed the exchange rate from fixed to flexible. Later, a law was passed that would only allow the government budget to be approved if the deficit is zero to prevent further lending. The initiative had positive implications in the GDP because of the increased exports of products to the United States. Through the Banking Fund for the Protection of Savings, the government was able to bail out the banking system that had collapsed.  Years later, the government decided to sell the Mexican banks to the international financial groups. Presently, there is only one Mexican bank as foreign investors own the rest.

One of the international institutions that played a role in rescuing Mexico was the International Monetary Fund. The IMF is responsible for providing loans to nations that are in financial deficit. The loans are usually issued following an agreement between the nation and IMF. The IMF responded to the crisis by providing a loan to the Mexican government through the U.S Treasury as a way to protect the foreign banks and other existing financial institutions. The various government also played a vital role in rescuing the currency crisis among them being the United States and Canada. The U.S. has had a long outstanding relationship with Mexico, and it is also the largest trading partner. Although the Federal Service Bank contributed to the crisis by increasing the interest rate, the United States assisted the Mexican government with loans to end the crisis. On the other hand, Canadian government through the North American Framework Agreement (NAFA) contributed funds beyond what had been collected at the time of occurrence of the crisis.

Russia Currency Crisis (1998)

Russia was severely hit by a currency crisis in 1998 that left both the economic and financial system in crisis. According to Gerry & Li (2002), the financial crisis begun in August 1997 when the Russian government defaulted on its domestic financial and economic systems. The duration was characterized by an increase in inflation, high levels of unemployment, and shanking of the economy. Although the crisis lasted for a short period, Russian who was living in the urban areas were severely hit. Globalization and uncontrolled speculation in the financial markets is one of the leading contributors to a currency crisis in the developing countries. The rise in the amount of capital that is flowing in the international financial systems as a result of globalization has had negative impacts on the economies of different countries. The crisis is caused by failures of certain sectors of the economy in the countries involved which later spreads to other countries through contagion and spill-over effects. For instance, the Asian currency crisis spread through contagion and spillovers to other countries such as Thailand in 1997 and later to Russia in 1998. Therefore, Asia is one of the causes of the Russian crisis although research shows that there is a little linkage between the crises that hit the two countries.

The Russian crisis can also be attributed to both political and economic factors. The Russian government triggered the crisis by selling the GKOs and OFZs which denominated debt instruments and coupon bonds after the fall of USSR. The Russian government then started experiencing problems that had negative implications on both the financial and the economic systems. The Russian government responded by converting the Ruble dominated instruments into US dollar-dominated Eurobonds to alleviate the risks involved. The Russian government continued borrowing from external sources that later raised concerns of its default exposure as foreign investors decided to cut their connection with the Russian debt, equity, and commodity market because of lack of confidence. The withdrawal of investors from Russia economy reduced the government capability to finance the debts thereby causing a currency crisis. According to the reports provided by the Economic Intelligence Unit (1998) in 1998, 30 percent of the Russian expenditure was used to service the short-term debts that the government had secured from other governments and international institutions. Therefore, high levels of debts are one of the causes of a currency crisis in Russia.

Russian Currency crisis was also caused nu the fall in the value of the Rule, weak banking system, and the reduction in the level of the foreign reserves. The Russian government tried to remedy the situation through the Central Bank by pegging the Russian Ruble to the US dollar with a narrow band. Several other studies have been conducted to establish the causes of the Russian financial crisis which had serious consequences to the economic and financial systems of other countries such as Turkey, Ukraine, and Moldova. The devaluation of the Russian Ruble also had negative implications on the Russia banks regarding assets and liabilities. There was also a reduction in the foreign exchange contracts because of the increase in the value of liabilities. Furthermore, the Russian government debts such as bonds and treasury bills that were used assets were reduced to worthless assets because of the defaults. As a result, most banks were closed which made a majority of the Russians to lose their savings. Lastly, the crisis caused political fallouts and frequent demonstrations of workers who were demanding a pay rise (Margolin, 2000).

The Russian currency crisis was resolved after intervention by the International Monetary Fund (IMF) which has the mandate of monitoring the economic and development policies enacted by various nations. The other responsibilities of the international body are to lend money to countries that are experiencing financial challenges and provision of technical assistance regarding research and training to countries that are in need. The IMF intervened in the Russian crisis by lending money that would help the government to escape the financial collapse. Despite the IMF lending money to the Russian government, the situation was already out of control since the money could only be used to take care of the short-term debts but not offer a permanent solution to the difficult situation.

For a country to survive a financial crisis, it requires a plan for the aid to be used in a manner that will help escape the situation. It is an excellent idea for the international body to issue financial aid, but the Russian government was not prepared to use the funds to evade the crisis. The government had lost control of the situation, and therefore it required more than financial aid to help the situations. The Russian government responded by coming up with a plan that would ensure the crisis does not happen again. The funds issued by the IMF were used in rescuing the banking system which plays a vital role in maintaining economic growth in a nation.

Conclusion

A currency crisis is one of the challenges that has been experienced by several countries especially the developing countries. Among the countries that have been affected by currency crisis include Mexico between 1994 and 1995, Russia in 1998, and Thailand in 1997. The crisis has severe implications on the economic and financial systems of an economy. The causes of the crisis vary from one nation to another, for instance, the crisis in Mexico was caused by reducing the level of Federal Reserve while excessive borrowing caused the Russian crisis. Once the countries are caught in such difficult situations, it the responsibility of the international bodies and other government to assist in escaping the situation. International Monetary Fund played a vital role in helping the above-discussed countries escape the harsh implication of currency crisis. The United States and Canada through the North American Framework Agreement (NAFA) assisted Mexico financial aid in helping rescue the situation.

References

Carbaugh, R. (2016). International Economics. Boston, MA: Cengage Learning.

Economist Intelligence Unit (1998). Russia: Country Report. London. pp. 42.

Gery, C. J. & Li, C. A. 2002. Vulnerability to welfare change during economic shocks: evidence from the 1998 Russian Crisis. Working Paper. University of Essex, Department of Economics, Discussion Papers.

Gil-Díaz, F. (1998). The Origin of Mexico’s 1994 Financial Crisis. Cato Journal, 17 (3), pp. 303-313.

Margolin, R. (2000). The Russian Financial Crisis: from craze to crash. The Stern Journal, New York University.

Ötker, I., Pazarbaşioğlu, C., International Monetary Fund, & International Monetary Fund. (1995). Speculative attacks and currency crisis: The Mexican experience. Washington, D.C.: International Monetary Fund, Treasurer’s Dept. and Monetary and Exchange Affairs Dept.

Tavlas, G. S. (1997). The Collapse of Exchange Rate Regimes: Causes, Consequences and Policy Responses. Boston, MA: Springer US.

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Circular Flow Model Economics Report

Circular Flow

Title: Economic Circular Flow. Everyday expenditure is determined by the current treads on the economic status of a country. The prices of commodities has been influenced greatly by the prices treads of the energy generating fuels such the prices of the petroleum products. In addition the economic stability of a country is another key factors that determine the prices. For example in a country that is experiencing inflation, the prices of most commodities are relatively high, a fact that is contributed by poor performances in exchange rate earnings.

In most cases, the interest rates are mostly determined by the central bank. They are used as the main monetary tool that is used by policy makers and the economist to control the supply of money in the economy thus regulating the inflation rate in the economy. The central bank is there to issue loans to the commercial banks so that they can circulate the money to the citizens. In addition the commercial bank gives the commercial banks the directives on the minimum rate at which they are going to lend their customers. Therefore the federal system is the main determinant of the interest rate irrespective of the market forces on demand and supply of money.

Basically interest rate are use as incentive as well as disincentives to the people willing to take loans from any commercial banks. As an incentive, the commercial banks well give out loans at an affordable interest rate that will attract many business and other people willing to take a loan. This will increase the aggregate money supply in the economy. This is commonly used in case an economic stimulus is necessary. On the other had high interest rates discourages business taking loans.

The action leads to reduced business transactions and hence less amount of money circulation in the economy. The action is used during the period of inflation. When the interest rates are high, the prices of commodities are also relatively high, the consequence is high cost of financing the loans. For this reason people tend to purchase commodities that are of lower prices, this is always subject to quality. During my purchased the interest rate were lower therefore the price of my vehicle was relatively low. At the period the interest rate was about 14% compounded on reducing balance.

The price of gasoline was relatively lower compared to the previous prices. In every economy the prices of the petroleum products greatly influence the prices of other commodities. This is due to the transportation of commodities from the area of manufacturing to the market. Lower prices of gasoline in during the time of the purchase therefore ensured that the prices were lower and affordable. The prices for the crude oil and other related products were also low. Therefore even the maintenance of the vehicle was cheaper. When I made my purchase the prices of gasoline were dropping which was an implication that the future prices are going to be lower. This was just a prediction that is always necessary thing to do before buying any consumable good.

Securing a loan requires collateral and other securities. Most banks will. Always give loans to individual who after a careful appraisal shows the ability to pay the loan. In addition to this banks prefer giving loans to the people who are employed or business people who show to have a sustainable businesses that can be able to finance the acquired loan. I went for a loan after I was employed having considered all the above factors. These are the once that led to a successful loan application.

During the recession period the economy is characterized by high inflation rate meaning that the prices of most commodities are considerably high. During the purchase the interest rates were lower a probable recession times. The lower interest rates in the commercial banks were to encourage more people to take loans. This is a move that facilitates the increment in the supply of money circulation in the economy. In addition to this reduced interest rate facilitates more investors to borrow loans to set up more investments. This action is there to improve the production business cycle that improve the production of an economy.

During recession period there are chance of unemployment and therefore it’s risky to take a loan during the period. However when taking a loan it is important to reconsider other sources of income that can fund the loan once the source of income is suddenly withdrawn. Before making my decision on whether to take the loan or not I had considered other factors that will finance my loan in case of such uncertainty.

Due to the great recession of 2008 that the country realized its impact the government is still operating on with the fiscal expansionary policy measures despite of the deficit that the country was experiencing. Fiscal policies involved reduction on taxes and adjustments on government expenditures. The tax relieve lowered the prices of the vehicles greatly which gave me a good opportunity to purchase a good Car of my choice.

In addition the international monetary fund study had realized a possibility of positive multiplier effect on the expansionary fiscal policies that had been set. The effect was subjected unemployment and future output. More output and employment implied better future of the economy. These were encouragement to the foreign and local investors, consequently there were prospects of high future productivity. This gave me a prediction that there is a larger probability of retaining my source of income as well as creation of more sources that will cater for the maintenance and financing my loan.

The united state environmental protection agency has been trying over the years to fight the environmental pollution has been a problem in our cities and towns. One of their effort is to encourage the vehicles and other fuel users to purchase machines that are fuel saving and those that operate with complete combustion of fuel to minimize the release of carbon monoxide to the environment.

These efforts should not be ignored as the implication on pollution is both health and economic problems, a fact that a well productive economy is composed of healthy people. For this reason I had to choose a simple vehicle that has low fuel consumption capacity.

The emissions such as carbon dioxide causes acid rain that has adverse effects on metallic structures which most of our houses and other structures are made of. In addition there is adverse effect on agriculture which is one of the source of raw materials for our industries. The emissions also may cause diseases after inhaling these poisonous diseases. This consequently minimizes the production level of the nationals and hence lower GDP.

Basically the circular flow model is made up of two sectors which determine income output and expenditure. Equilibrium state is arrived at when the tendency of income levels, expenditure and output does not exist. This is an implication that income, output and expenditure are equal. The buyer expenditure in this case becomes the sellers’ income. The income gained from sale of their product is also spent to pay for other factors of production. During the processes, there is transfer of income to the owners of these factors. These expenditures consequently leads to the circular flow of payments.

The Circular Flow Model

Circular Flow Model
Circular Flow Model

For many years the position of the circular flow economy has greatly influenced the prices. This is due to the monetary and fiscal policies that an economy takes either to control inflation or to correct a recession. Introduction of injections and stimulus of the economy also influence the expenditure. When the interest rate are high the money in circulation is reduced thus most consumers will have little money to consume. In addition due to uncertainty people will tend to hold money due to fears of the deflation and recession. Uncertainty about future tend to influence people to either hold money or use money in making future investment.

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