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 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.
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.).
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.
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.
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.
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.
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.
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.
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
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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Economics models are false and so government should ignore their predictions. Explain, discuss and evaluate the accuracy of this statement.
Price Elasticity – Economics models are the tools which economists use to predict future economic developments by measuring past relationships among variables such as household income, consumer spending, employment, interest rates, tax rates etc. and forecasting how changes in some of these variables will affect other variables. An economic model is said to be complete if it can accurately forecast many of the variables future course, however, no economic model can be complete in true sense. There are several forces outside the model that affect the calculation and forecasting of variables. There are two ways by which these outside factors affect the forecasting and economic predictions. The input errors are concerned with inaccurate assumption of outside variables and model errors which explains the deviation of the equation of economic model from the assumption to the actual. Hence, it can be said that economic models are subjective approximations of reality and are designed to explain the observation. Therefore, the model’s predictions should be moderated so that it can accommodate the effect of random data variables (Deming, 2000).
Many researchers believe that economic theories and models simply provide ways to look at systems and determine how changes in variables affect the overall outcome. It also explains advantages and disadvantages of various economic models and systems. However, predictions and subsequent policy decisions are made after following value judgement of policymakers or the government. Therefore, the government should view at economic model only as a framework which provide insight of a contextual theory. More empirical evidence and real life economic parameters should be considered while making policy decisions based on economic predictions (Godley & Lavoie, 2006).
No economic model can perfectly predict the real future. A good example of the economic model’s failure is to predict the reasons for the global financial crisis of 2008. The prevailing economic model was deficient to provide sufficient attention towards the relationship between demands, wealth, and excessive financial risk taking. There were considerable research which had been conducted to uncover the same and also a new behavioural equation was added to the existing economic models. The true test of the new model will happen when it will effectively flag financial risk levels that would need a precautionary policy change. This is an ongoing process which consist of constructing, testing, and revising models and outside forces so that economists and policymakers can predict the future course of economy (Taylor, 2009).
Government neither can overlook economic models’ forecasts nor make predictions completely based on them. It has also been seen that economists seem to put aside political factors outside their equation. Politics among other outside factors is the most important factor that helps to determine the outcome of economic policy. In view of these analysis, it is suggested to use structural models which makes several “what if” economic analysis on several input combinations. In this way, the policymakers would have substantial information on various numerical variables and the forecast can be recalculated whenever required (Diermeier, Eraslan & Merlo, 2003).
Identify estimates of the price elasticity of demand for at least three different products
The “law of demand” suggests that the higher the price of a good, the lesser demand from consumers. This is the fundamental law of all economic models to predict the economic forecasts. In order to predict consumer behaviour in more details, economists use several techniques which evaluate the sensitivity of consumers’ demands with respect to changes in price. The most commonly used technique is known as “price elasticity of demand”. In simple terms, it is the proportionate change in demand given a change in price. For example, if a one unit decline in the price of a product produces a one unit increase in demand for that product, the price elasticity of demand is said to be one (Green, Malpezzi & Mayo, 2005).
Numerous studies suggest that the majority of consumer goods and services falls in the price elasticity of between .5 and 1.5. Essential products to everyday living, which have fewer substitutes, typically have lower elasticity for example, staple foods. Since, staples such as cereals are necessities in the diet, and are usually cheaper so that people safeguard their income for spending on such essentials when prices increase. Furthermore, lower income households tend to have higher price elasticity for food items than high income households. As food products occupies a large share of total income in these households, price changes have a substantial impact on the allocation of budget. On the other hand, magnitude of the elasticity for animal source foods such as fish, meat and dairy are higher than staple cereals as these are considered as luxury food items and there are always many substitutes available for consumption of these food choices (Andreyeva, Long & Brownell, 2010).
Goods with many substitutes, or are considered luxuries as are not essential, or whose purchase can be easily postponed, have higher elasticity. For example, the demand of automobile is considered as elastic as there are three kind of substitution takes place. In response of a unit price change, consumer of a new car can delay the purchase, or can choose to purchase another category of car or chose not to buy a new car and use another mode of transport. Furthermore, in case of buying a particular model of car, it would be highly elastic demand as there will be a lot of substitutes. On the other hand, demand for cars in rural areas would be inelastic over the longer run. Because there are very few alternative mode of transports available (Parry, Walls & Harrington, 2007).
Another example can be taken from health care services, where the demand for health care expenditure is found to be price inelastic. A range of price elasticity estimates it to be -0.17, which means that a one unit increase in the price of health care will lead to a 0.17 unit reduction in health care expenditures. Moreover, the demand for health care is also found to be income inelastic as it is in the range of 0 to 0.2. The positive sign of the elasticity suggests that there will be increase for health care demand as income increases, however the low magnitude of the elasticity indicates that the demand response would be relatively very small (Duarte, 2012).
Andreyeva, T., Long, M. W., & Brownell, K. D. (2010). The impact of food prices on consumption: a systematic review of research on the price elasticity of demand for food. American journal of public health, 100(2), 216-222.
Deming, W. E. (2000). The new economics: for industry, government, education. MIT press.
Diermeier, D., Eraslan, H., & Merlo, A. (2003). A structural model of government formation. Econometrica, 71(1), 27-70.
Duarte, F. (2012). Price elasticity of expenditure across health care services. Journal of health economics, 31(6), 824-841.
Godley, W., & Lavoie, M. (2006). Monetary economics: an integrated approach to credit, money, income, production and wealth. Springer.
Green, R. K., Malpezzi, S., & Mayo, S. K. (2005). Metropolitan-specific estimates of the price elasticity of supply of housing, and their sources. The American Economic Review, 95(2), 334-339.
Parry, I. W., Walls, M., & Harrington, W. (2007). Automobile externalities and policies. Journal of economic literature, 45(2), 373-399.
Taylor, J. B. (2009). The financial crisis and the policy responses: An empirical analysis of what went wrong (No. w14631). National Bureau of Economic Research.
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This paper examines the European Union economic model as an example of a regional integration for economic prospects in the world. Since 1972, twelve nations of Europe namely, Austria, Belgium, Britain, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain co-operated economically under the treaty of European Economic Commission, EEC (Bartolini). However, the Union under examination in this paper came into effect on July 1987 when the single European Act came into force, thereby amending the founding treaties to cope with the transition into a single market. For a longer time, the European Union (EU) remains the most developed model in the regional integration examples. However, lately, severe economic crisis continue to shake the very foundation upon which the union stands. From debt crisis to refugee crisis, the challenges seem so great for some of the nation members to bear. Consequently, this now puts into question the economic benefits that accrue from the integration process (Hix and Høyland).
The lack of logical solutions to the EU’s frequent crisis ideally calls into question the very steadfastness of the union. The recent financial crisis that threatened Greece to decamp from the European Union reveals the institutional and structural cracks within the Eurozone. Two other countries of the union namely, Spain and Italy, now appear posed to go the Greece way. The economic decline of the EU comes in the wake of a new global economic order. Under this dispensation, there is now economic decline of the two world’s economic powerhouses, the United States of America (USA), and the European Union, but the rise in Asian and African economies. These economic realignments already threaten the social cohesion, and both the economic and political stability of the Eurozone (Kelegama 110-131). In the wake of these crises, the European Union’s status as the viable model of regional economics now is subject to threat. In the event that the European Union recovers from the crises that are threatening to tear it apart, it will emerge even stronger, and continue its role as the global leading model of regional integration.
The European Union Model Insights
The genesis of EU’s integration has its roots in the economic hardships of the early 1950s, following the conclusion of World War II. The success of the European Union as an economic and political conglomerate lies in a number of far reaching principles. First, the continent of Europe boasts of a number of visionary leaders. Among these are Germany’s Konrad Adenauer, and France’s Robert Schuman. The two leaders conceived a political alliance that operated on communal basis, and deviated from the traditional political model whose basis was the balance of power ((Bartolini). The United States’ support played a pivotal role at its conception was also crucial in the early years. Second, the Franco-German partnership was crucial in the integration process. For years, Berlin and Paris continue to be the engine of European amalgamation. Thirdly, the European political elite always share a common vision of sovereignty. This is instrumental in the common institutions that are strong, and legally binding on matters integration. Finally, Europeans share solidarity with their leaders on consensus approach based on tolerance. In this regard, the European decision makers try their best not isolate a member country (Bartolini. This approach saw Greece retain its membership in the wake of its recent economic crisis. The tolerance of policy makers in Europe encompasses an all-inclusive approach when dealing with a member nation. The basis of decisions, often, is on consensus, and political goodwill to offer colossal financial support to poorer member nations to take their rightful place in the union.
The four principles that continue to guide the European Union in crises, enables it to emerge stronger than ever whenever similar situations arise. This enables the union to ward off crises more easily. Some of the historical challenges that the EU warded off in the past include new treaties referendum failures. A case in hand is that of Ireland’s Lisbon Treaty in the year 2008 as well as the French and Dutch constitutional treaty. In each case, a referendum threw out each of the treaty. Another is the case of Charles de Gaulle who used “empty chair” tactic to withdraw his compatriots’ representation the political bodies of the union whenever these introduced the famed qualified majority voting (QMV). Charles de Gaulle ruled French during the 1958 to 1969 period (Dinan).
A more recent development involved the EU’s adoption of the flexible approach that resulted in a Europe divided into multiple layers of integration. However, not all the countries of Europe enjoy the Eurozone status. For instance, the United Kingdom trades in the Eurozone courtesy of the Schengen passport-free agreement. UK, however, continues to use the Sterling Pound as its currency. The EU allowed this arrangement to give leeway to Euro-sceptic nations to renege on certain obligations guarded by the union treaty (Volkens). Nonetheless, the EU remains committed to its core mandate that allows it the freedom to share sovereignty with any committed nation within the continent, while still committed to the values of strong common institutions.
Regional Groupings in Other Parts of the World
Other regions of the world continue to seek regional integration to push forward a common agenda. Notable here include associations such as the African Union (AU), the Mercosur of South America, the Association of South East Asian Nations (ASEAN), and the Gulf Cooperation Council (GCC). However, nothing in their progress mirrors the EU’s success. Amongst these the ASEAN model is second to in EU in performance. Perhaps this follows their efforts that saw them send delegations in a number of times to Europe to seek the European Union’s experiences from Brussels. However, throughout its existence, the ASEAN shows no interest in sharing sovereignty, and therefore, continues to be an inter-governmental body (Kelegama 110-131). The same applies for the other bodies mentioned above. Consequently, the EU remains the world’s most successful conglomerate of nations in terms of economic and political cooperation. Therefore, the union remains the globe’s best success story in integration.
Pronouncements on closer cooperation continue to dominate the political scenes in Africa, Latin America, South America, Asia, and the Middle East, but none of the declarations of these groupings matches the EU’s spirit of cooperation, integration, and political goodwill (Kelegama 110-131). Their pronouncements over time remains mere rhetorical expressions, for after these declaration are not matched with equal seriousness in action.
The EU’s success story arises from historical reconciliation over time. This is a vital factor if any political entity wishes to develop the matching good will, and step into the world of cooperation and, eventually, integration. The engine of EU’s success story rests on the historical frequent reconciliation of two Europe’s decision makers – Germany and France (Bartolini). Years of political resilience of the leaders of these two nations, often provide the fodder needed to take reconciliation, and cooperation forward. In sharp contrast, no other regional body, matches the EU’s ambitious efforts when it comes to political goodwill. For instance, in the East Asia case, unless Japan and China show similar commitment, there will never be a genuine integration, and the ASEAN model will always lag behind the European Union (Kelegama 110-131).
Similar reconciliation must also exist between Korea, and Japan. The mistrusts in political leaderships witnessed in East Asia is rife all over the world. Issues remain unsolved because a deeply lingering suspicion by the political players of the day. For instance, when one discusses this, India and Pakistan comes to mind. So is Argentina and Brazil, Iran and Saudi Arabia, and so on. The European Union model shows that cooperation, and integration is only possible after historical reconciliation amongst the warring nations. It only then that they can proceed gradually into the necessary steps crucial for creating a regional community. After this, the regional community can go a step further and create a customs union, a free-trade area, a common passport, a single market, a common foreign-policy, and eventually a common currency (Kelegama 110-131).
The Current State of the EU
The European Union stands tall as a secure, prosperous, and a safe haven in comparison to other regional bodies of this world. Following its recent economic turmoil, however, the European Union needs to tackle its perennial major challenges, if needs to remain a global player and influencer worth emulating. It needs to tackle these challenges now with urgency, and determination. Only then will the European Union remain the world’s leading model of cooperation, integration, and economic union. However, the European Union’s current problems arise from a number of factors. First, the European Union experiences a rapid expansion and integration. The number of member states currently stand at 28. This is in contract to only 12 members in 1972. This is not commensurate with the European Union’s economic, and political strengths.
The emerging differences, and economic gaps between the member nations require urgent attention necessary. The EU must coordinate and institute the expansion of its capacity building efforts to bring all players at the same level. Currently, though, Germany and France seem to be its major beneficiaries. For these two nations, the EU provides a readily available labour force and a vast market for their rapidly expanding domestic industries. The European Union member nations must find equal footing if their model of economic integration is to suggest lessons for other bodies pursuing regional integrations (Volkens). These lessons will remain vital particularly when these regional entities come to the later stages of economic cooperation, and integration.
The second challenge that the European Union must tackle is increased fiscal coordination. This is necessary in the wake a seemingly worsening economic position. The European Union’s financial systems require cleaning, in order to bring them into agreement with the austerity plans that now most member nations embrace. The European Union continues to roll through murky waters, though. The ever persistent present danger of disintegration, and euro collapse remains. More so in the wake of rising national debt situation in member countries. Portugal and Ireland have since found their footing. Greece is reeling out of a life threatening debt situation that almost forced it out of the union. Similarly, the economic situation of Spain and Italy look dim. In addition, dissenting voices are heard in Britain, the Netherlands, and other quarters that threaten the very existence of the union as it is today (Hix and Høyland).
The major factor that seems to deem the influence of the European Union stems from the dismal performances of the euro internationally. The union’s central bank is the European Central Bank (ECB). Presently, 17 of the 28 European Union member nations use the Euro as its currency. The fact is that euro comes second to the dollar in the forex market trading. This gives it an international appeal, and thereby makes it one of the leading global reserve currencies. The euro came into existence on 1 January 1999 (Damian 222-229). Consequently, the account currency placed the European Union member currencies at the same level of strength, and thereby, sent the entire member nations individual currencies into oblivion. At launch, only eleven of the EU states adopted the euro. These included Germany, France, Spain, Italy, Portugal, the Netherlands, Ireland, Finland, Luxembourg, Belgium, and Austria. Greece joined the union in 2001, and similarly adopted the euro as its currency. So did Slovenia in 2007. Cyprus and Malta followed suit in 2008, while Slovakia adopted the euro in 2009.
The latest entrant into the union is Latvian who joined the membership on 1 January 2014. A number of other countries outside the Eurozone also use the euro. These include the Vatican City, San Marino Republic, Monaco Principality, as well as the Andorra Principality. In addition, many territories of the Eurozone countries including Madeira Islands, the Canary Islands, the Azores, the Reunion, French Guiana, the Balearic Islands, Europa Island, Martinique, Guadeloupe, Saint Pierre, Mayotte, Juan de Nova, and Saint Martin among many others also use the euro in their day-to-day transactions. Equally, the North Korean Republic, Cuba, and Syria also use the euro. Most currencies of the world similarly exchange their currencies to the euro based on the prevailing market exchange rates (Damian 222-229).
The Eurozone Crisis
The major challenge that the EU faces today is the continued fragile economies of a given Eurozone member nations. These include Italy, Spain, and Greece. Greece recently received a third bailout package to the tune of 85 billion euros. Like before, the bailout came with stringent austerity measures. Spain and Italy faces renewed speculation on the ability to service their national debt portfolios in the financial markets (Hix and Høyland). Even though there appear to be some light at the end of the tunnel for many of the European Union countries, economists warn on possibilities of a “double dip” recession in the Eurozone.
Many attribute the European debt crisis to a number of financial guarantees by the EU nations that feared financial septicity, and by the global moneylender, International Monetary Fund (IMF). When ratings agencies downgrade the Eurozone debt, and even giving the Greek debt a junk status at one point, it creates a panic in the financial markets. Consequently, the basis of the bailout agreements requires the recipient countries to have stringent austerity plans aimed at reducing the national debt portfolio (Hix and Høyland).
The national debt crisis among the European Union member nations began in 2009. It stemmed from the inability of some Eurozone member countries to repay or refinance the nation debt of their countries. The nations affected included Cyprus, Portugal, Ireland, Spain, and Greece. They became unable to foot the loans of the beleaguered banks without European Central Bank inputs. Further assistance became necessary from the lenders such as the International Monetary Fund and the European Financial Stability Facility (EFSF). Seventeen of the member countries created the EFSF sometime in 2010 (Hix and Høyland). Its mandate was to offer solutions on the spiraling European debt crisis.
The EU’s debt crisis has its genesis from the financial crisis that plagued the world in 2007 and 2008. This gave rise to the recession in 2008 to 2012. The latter led to the property bubbles in a number of countries, including the United States, and consequently, led to the crisis in the real estate markets. The culmination of the recession was in 2009, and led to the Greece’s discovery that its previous government exceedingly under reported the national budget deficit. The pronouncements signaled Greece’s a violation of the EU treaty policy, and led to fears of the euro collapse, as it eroded investor levels. This led to unsustainable high interest rates in the euro bonds. The fear this sparked in the fiscal world led to beliefs that the Eurozone debts were unsustainable (Hix and Høyland).
In 2010, in the wake of the fear of unsustainable Eurozone sovereign debt, each lender began demanded higher interests on the EU member nations’ loans, and consequently, spiraled the debt out of control. This made most member countries fail to finance budget deficits. In the phase of negative economic growth, and shrinking Gross Domestic Products (GDP), some countries raised taxes to finance the deficit as most governments slashed their expenditures. The negative social vices and economic downturns followed. This even led to votes of no confidence in the leadership, especially in Greece. In view of this, rating agencies downgraded three Eurozone debt statuses to the junk, and thereby, worsened the investor fears. The countries affected included Ireland, Portugal, and Greece (Hix and Høyland).
The Greek Case
In the wake of the upheavals in the Eurozone in 2010, the national bond yields for a number of the EU countries shot up. Those affected included the Federal Republic of Germany, Portugal, Ireland, and Greece. The escalation in bond yields forced the Greek government to seek the country’s first assistance in May 2010 (Hix and Høyland). Now, Greece got two bailouts. All the assistance came from the EU over a five years period. During this time, the country undertook the EU-led austerity measures. It aimed to reduce costs in the phase of a biting economic recession, political, and social unrest. Come June 2015, the Greek government in a phase of political divisions amid the never ending recession, faced a default on its national debts amid calls to leave the EU altogether. To save the day, the Greek parliament voted for further austerity on 5 July 2015. This led to the third bailout to the country totalling 85 billion euros.
Ireland went the Greek way in its request for a bailout late in 2010, while Portugal came in next in the month of May 2011 (Hix and Høyland). Spain and Italy also found themselves in the rather precarious situation, and therefore, Spain put in her request to the EU for a bailout in June 2012; and so did Cyprus. Portugal also followed suit. However, come 2014, Spain, Portugal, and Ireland exited the bailout plan in the wake of domestic austerity actions, these countries’ fiscal reforms, and other favourable economic factors. Full economic recovery may still be far, but at least they are able to stand on their own. However, for Spain, a recent economic development in the country pushes it toward a second bailout plan.
For the European Union, the economic turmoil within the union comes amid momentous wealth shifts toward Asia and Africa. In the wake of this, the EU’s global GDP share dropped from 24 percent in 1990 to 22 percent in 2010. The emerging markets as those of China, India, Russia, and Brazil all compete the European Union for foreign direct investments, and growth resources like oil and gas. In addition, the European labour force ages drastically and now seeks leisure than work. Furthermore, the European Union lags behind in resource allocation to innovation. Innovation is the engine of growth, and where it lacks, stagnation quickly follows. The European Union’s Lisbon Strategy that aimed to turn the European Union into an economic powerhouse is conspicuously missing in action (Hix and Høyland). In addition, its latest 2020 plan, operating in an environment of lofty ambitions, certainly will not fare any better.
In this era of declining oil and commodity prices amid rising food prices economic recovery prospects for the European Union look grimmer. Simply put, future forecasts for the European Union paint a rather dark picture of the European Union, in the wake of its largely aging and immobile population. This gives the Union a competitive disadvantage in the wake of cheap labour markets in Asia and Africa, which now forces the union’s domestic enterprises to relocate to the two continents (Kelegama 110-131). This leaves the European Union economy overburdened by high unemployment rate amid rising health costs. In addition, the Asian communist and socialist development models now pose great challenges to the capitalist model of the Anglo-Saxon cooperation. Consequently, fewer Asian nations are eager to implement the American and European Union led reforms on environmental, labour, and social strata arguing this would greatly disadvantage their development plans at this critical juncture.
The third and critical challenge in the European Unionrevolves around finding a common identity. Member nations never speak with one voice, turning the union into a misdirected entity where opposing forces pull in different directions (Dinan). The current Syrian refugees’ crisis and the subsequent divisions it continues to cause in the leadership of Eurozone is a case at hand. Academicians describe it as one the greatest paradoxes of the European Union, in the phase of a widening and deepening rift. We have a European Union that progressively moved from the unification of its customs departments into a single-market economy, and currently boasts seventeen nations in its monetary union. We also have an EU that gradually increased the number of membership nations from just six at its onset to the current twenty-eight members. In this diversity that spans almost the entire continent, a common identity continues to be a great challenge.
Consequently, the European Union finds itself unable to strengthen the union’s political institutions further, in order to keep abreast with the deepening needs of this integration, in the wake of a heterogeneous membership. In the phase of a widespread public scepticism on the European Union’s vision of cooperation and integration, the citizens remain hooked to individual national values, and consequently, are reluctant in letting Brussels usurp the national powers. In addition, the two bearers of the EU’s vision, France and Germany are now openly divided on matters of economic governance (Hix and Høyland). Therefore, the union needs to find a common European voice in all matters that touch on global economic governance.
Many in the EU looked upon the Lisbon Treaty as a provider of the necessary impetus for deepening the economic prospects of the European Union, but the struggle seems to bare any fruit presently. As a result, national politicians are now reluctant to push forward the agenda for strengthening the European Union. The strongest proponent of the union, Germany, now relaxes its voice on closer integration (Hix and Høyland). This gives the sceptics raw fodder to publicly doubt the euro prospects. In this front, however, a number of European Union politicians, such as the former French president Nicolas Sarkozy, and Belgium’s former prime minister, Guy Verhofstad, who lead the liberals minds to the argument that the European Union now requires radical steps to best respond to its myriad political and economic crisis. This group believes that the European Union’s handicap stems from the weak central institutions of the European Union. Consequently, they assert that the European Union needs sufficient regulation that governs its energy and financial sectors. Unfortunately, for the group, lukewarm reception from Germany and a number of member nations continue to meet their recommendations.
The Validity of this Model
Recent political and economic crisis in the Eurozone puts heavy challenge on the European Union’s model of governance as an implantable system of governance. However, some scholars argue that this fallout is only temporary. History is rife with instances where the EU rebounded from the ashes. This group argues that the European Union will leverage its present day adversity, and move forward in its integration efforts. This group cite as an example, the 1954 case where the plan mooted for a common European defence system failed. It is this plan, however, that gave birth to the EEC in three years’ time. Another common point of reference is the empty-chairs crisis under the then French president Charles de Gaulle in 1965. His theatrical actions later resulted in the Single European Act in 1986 through a unilateral acceptance of QMV (Bartolini). In addition, the 1980s currency tribulations gave rise to the common European Monetary System, and eventually the euro.
In the wake of regional blocs’ dominance in the global economic and financial agenda, the European Union as a single player is unlikely to achieve much on its own. A long time ally, the United States, now presses for a reduction in the number of seats the European Union occupies in the Group of 20 (G20), and the global lending houses, including the World Bank, and the IMF (Hix and Høyland). In due course the changes could trigger stronger for the integration process.
In the phase of these crises, the EU continues to attract negative media attention. However, despite the critics, most governments of the member nations, and other regional groupings continue to show strong faith in this union. Of significance is the fact that despite the crises, neither the next door Russia, nor the now Asian economic giant China nor Russia sold their holdings of euros (Hix and Høyland).
Neither has the European Union’s problems dimmed other regional groupings’ quest for greater cooperation, and eventual integration. For instance, ASEAN continues to push forward its proposals for the establishment of its ambassadorial steering committee, in line with the arrangement in Brussels. They call theirs Coreper. Consequently, South Korea, China, and Japan continue to intensify the regional trilateral ministerial meetings. The aim is to establish closer ties in the East Asian cooperation (Kelegama 110-131).
Consequently, a lot exists for the benefit of many from the European Union model of integration. At the core of the matter is the fact that the European Union is a heterogeneous organization. Therefore, how the member countries manage crisis serves as a pointer to the emerging regional bodies. For instance, if one considers monetary union objectively, it becomes clear that an integrated economic and political system is necessary to evaluate the national debt of a member country, and consequently, defers speculation. This serves well those nations aspiring to forge a customs union and adopt a free market economy, which finally leads to a common currency (Kelegama 110-131).
Experts assert that the process of integration is very difficult indeed, as invariable setbacks and crises often arise. However, as one evaluates the European Union case, data available proves such sceptics wrong. The EU as a regional union boasts of an excellent record in tackling crises, and move forward ever strongly than previously. Experts attribute this to a very strong political will. Consequently, the valuable lessons from the European Union model gives an impetus on investment benefits member nations accrue from their goal to integrate regionally. In as much as the system may not prove politically convenient, however it is a platform that time testifies have great advantages to regional economies. Moreover, it is prudent to understand that integration only succeeds, in the arena where the citizens and governments believe in the cause as vital above national interests (Hix and Høyland). Consequently, where commitments lack, the regional grouping crumbles at the first bump on the road to this city called integration.
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Damian, Monica. “The Comparative Analysis of the Monetary Policy Strategies before the Adoption of the Euro Currency and the Impact upon the Maastricht Criteria.” Journal of Applied Economic Sciences (JAES) 3 (17 (2011): 222-229.
Dinan, Desmond. “Ever closer union: an introduction to European integration. “Boulder, USA–2005 (2004).
Hix, Simon, and Bjørn Høyland. The political system of the European Union. Palgrave Macmillan, 2011.
Kelegama, Saman “South Asia and other regional economic groupings.” South Asia (2010): 110-131.
Volkens, Andrea, et al. Mapping policy preferences II: estimates for parties, electors, and governments in Eastern Europe, European Union, and OECD 1990-2003. Oxford: Oxford University Press, 2006.