Core Theories on Economics Related To Economic Slowdown - Essay Example

?Multinational Enterprises Table of Contents Introduction 3 Economic Slowdown 4 Economic Condition (Theory) 6 Core Theories on Economics Related To Economic Slowdown 7 Relation among Recession, Economic Slowdown and Crisis 8 Key Drivers of Recession and Economic Slowdown 10 Impacts of Recession and Economic Slowdown on BP 12 Conceptual Map and Conclusion 16 References 18 Introduction A corporation or enterprise possessing its facilities as well as other resources in a minimum one country along with its home country is known as multinational enterprise. Most of the multinational companies’ offices as well as factories are in different countries where as the head office is centralized through which they co-ordinate global management (Investopedia, 2011). Supporters of the multinational enterprise state that it assists in the creation of jobs as well as wealth and thus helps in improving the technology in countries requiring such developments. It is also argued that multinational corporations have significant political impact over the governments. It can as well have a positive effect on the host nations; though at times create job losses in their home countries (Investopedia, 2011). In the study, the main objective is to identify the impact of economic slowdown and recession on BP Plc. The study will try to explain the key factors such as economic slowdown, economic conditions and will try to identify the key theories relevant for this study. The numerous drivers of the economic slowdown will also be studied in depth. Economic Slowdown Economic slowdown can be perceived as the condition in which the gross domestic product growth tends to slow down but it does not turn down. One of the ways of looking at the slowdown in the economy is through gauging the downward revisions in the Gross Domestic Product (GDP) (Narasimhan, 2011). Economic slowdown can also be identified as the difference obtained in the growth rate between two consecutive years of any particular country (Tjahjawandita & Et. Al., 2009). An economic downturn demonstrates that the economy of a particular country is entering into recession. The period in which the country suffers from negative economic growths, declining outputs and increasing unemployment is termed as recession. According to the official definition of recession, when the economy suffers from off-putting economic growth for two consecutive years then it is said to be recession. Prior to defining the economic downturn, it is significant to comprehend the main characteristics of economic downturn (Economic Forecast, 2009). A few of the characteristics of economic downturn are rising unemployment, rising additional capacity, low confidence and falling investment, increasing government borrowing, negative or too low economic growth (Economic Forecast, 2009). Certain problems related to recession or economic slowdowns are evident when there is decline in productivity. In such scenario, the production in the economy tends to be reduced which results to lesser real GDP and lower average income. Furthermore, the wage rates may raise either too slowly or may not rise at all. Unemployment is another problem related to economic downturn (Pettinger, 2011). Since the production is too less during the times of economic slowdown, the demand for the labor also declines thus leading to unemployment. During the times of economic slowdown, the finance of the government tends to worsen. People are not capable of paying much taxes and their spending on the unemployment benefits tends to rise (Pettinger, 2011). This leads to rise in government borrowing and in the rate of interest. With the increase in the bond yields, government is forced to reduce budget deficits via cutting the spending and tax rise. This worsens the recession and it becomes difficult for the economy to come out of it. It is often found that throughout the period of economic slowdown, there is devaluation in the exchange rates because during such period people tend to expect lower interest rates and therefore the demand for the currency declines (Pettinger, 2011). It has further been argued that during the period of economic downturns, even the temporary unemployment may turn into higher structural unemployment. A person unemployed for more than a year tends to become less employable. Declining assets price is also one of the significant issues faced during the times of economic downturn. People do not buy much fixed assets such as housing in such slowdowns. The fall in the prices of the houses may exacerbate the decline in the consumers spending and enhance bank losses (Pettinger, 2011). Share prices also tend to decline during economic slowdown because of lower profits. Economic slowdown leads to income inequality as well as high poverty among the people of particular nation. It is unemployment that leads to poverty. In order to respond to the global economic downturns, the countries need to respond with protectionist policies. This encourages reprisal and decreases the trade thus possessing negative effects (Pettinger, 2011). Economic Condition (Theory) Economic condition is a wider concept. It comprises of numerous issues that are related to a particular economy. In simple terms, economic growth can be perceived as scope of growth present in the economy of a particular country. Economic conditions are one of the significant components of economic analyses and studies. It is through economic condition, it becomes easier to identify the state of an economy. When conducting economic forecasts, it is quite significant. The economists who try to make economic forecasts, attempt to evaluate economic conditions prior to expressing their opinions regarding the particular nation’s economy. The quality of administration of a particular country can also be identified with the help of economic conditions. They help in demonstrating the manner in which the country is governed. It is interpreted that a country that is governed properly is generally in a healthy economic state (Economy Watch, 2010). Economic theory tends to offer a platform for research in all the fields of economics. It supports the researchers with adequate theoretical reasoning and the research is based upon the topics related to mathematics which are endorsed with the analysis of the economic problems (Glycopantis & Yannelis, 2004). Wealth is the subject matter of economic theory. The main objective of the economic theory is to demonstrate how the concrete interactions are applied in the context of wealth. Although economic theory needs to be conducted abstractly, it is not a self-sufficient and independent body of knowledge. This body of knowledge can only be made fully intelligible if it is considered in the context of political structure (Levine, 2006). Core Theories on Economics Related To Economic Slowdown There are numerous theories of economics. One of them has been Keynesian theory which states that during the period of economic downturn when the rate of unemployment is quite high and the goods and the services are produced at comparatively lower level, it is quite significant for the national government to increase its spending and therefore reduce the taxes for the purpose of inspiring the economy (Free, 2010). According to the Keynesian economic theory, it is quite vital to make use of the fiscal policy which is the mixture of the tax policy and the spending policy for the purpose of the betterment of the health of the economy (Free, 2010). Supply-side economics is considered as an alternative to the Keynesian theory. It states that instead of increasing the spending of the government, it would be suggestible to cut the taxes for the purpose of enhancing the economic productivity and to urge the economy (Harrison, 2010). According to the view of supply-side theory, by imposing high tax rates the money is taken out of the economy, which could have been invested in the production of goods and services. If there is lower taxes the money flows back to the economy and therefore businesses are enhanced and new jobs are created, thereby increasing the overall productivity (Harrison, 2010). The other economic theory is related to monetarism which has been proposed by famous economist Milton Friedman. He mentions that the role of the government is to promote a healthy economy by means of using its own power for regulating the money supply so that the rate of inflation remains low. It is often believed by the monetarists that if the money in circulation is quite high then it may lead to higher inflation rate (Free, 2010). Whereas, if there is too less money in circulation then it denotes that there is less investment and therefore new jobs are not created which may hinder the process of growth leading to economic slowdown (Free, 2010). Relation among Recession, Economic Slowdown and Crisis Recession poses social, political and economic challenges. The challenge is in context of collective and mutual adaptation along with radically altered situations (Srivastava, 2010). If the recession is closely linked with the financial crisis then the outcomes are generally severe. One of the main reasons behind the economic slowdown thereby resulting to recession is cash flow blockage in the market (Srivastava, 2010). It has been observed that recession is the concept of mutual exclusion. The main reason behind the recession is the economic slowdown in the market (Srivastava, 2010). Economic crisis tends to take place in case if there is decrease in the monetary wealth of the private as well as public sectors. On the other hand, by the term recession it can be comprehended as the situation when there is pertinent decline in the real GDP of the country (Allen, 1999). It has been observed that there are three main responses to financial crisis that can be taken by the government (Richardson, 2011). Government can print money via a programme of quantitative easing. It can reduce public spending and therefore raise income tax. The government can also consider mixed approach by taking into account all the three measures (Richardson, 2011). One of the manifestations of the economic crisis has been raising unemployment (Rabinnovich & Shaked, 1988). It can be noted that the damaging impacts of economic slowdowns such as softening demands, declining growth in corporate profits, accumulating inventories as well as falling stock prices lead to recession. Therefore, when such circumstances arise in the company then the investors may consider selling their shares at the earlier stage in the context of economic slowdown. A small decline in the real GDP of any economy say from 5% to 2% on a year-to-year basis can impact the profit of the company adversely and therefore may produce a bear market (Ellis, 2005). Recession may not be significant for material and stock market damage to occur (Ellis, 2005). Recession is essentially explained as two consecutive quarters of decline in the real GDP of any nation. An economic slowdown that is not capable of reaching recessionary proportion is defined as soft landing or growth recession. It is particularly observed as an event which is not worthy of much concern. Recessions do not occur as frequently as economic slowdown (Ellis, 2005). Key Drivers of Recession and Economic Slowdown When the rate of inflation of a particular country is quite high in comparison to any other country, currency and export become expensive and therefore the exports come down. This in turn lowers the rate of economic growth (Beek, 2010). With the decline in the prices of the assets, there is decline in the investment and the consumption which in turn reduces the demand. An external factor may lead to higher savings and subsequently lower investment environment (Beek, 2010). When the nation faces the period experiencing lower demand because of the demographics, anxiety regarding the future or demand is incapable of stimulating because of lower interest rates. In such circumstances, the economy tends to be in a liquidity trap (Beek, 2010). The factors that lead to economic slowdown and recession can be explained with the help of the diagram that has been presented below: Source: (Beek, 2010). Impacts of Recession and Economic Slowdown on BP The company that has been chosen for the study is BP Plc. BP Plc is one of the primary international oil as well as gas companies in the world. The company’s main products are fuel for the purpose of transportation, energy for the purpose of heat and light along with petroleum products and retail services for daily use items (BP Plc, 2011). During the course of economic slowdown and recession, it can be observed that the prices of the gasoline may fluctuate. The reason behind such fluctuations may range from taxes to politics. The price of the crude oil is determined by supply and demand. Supply tends to get impacted because of geopolitics or it may as well get affected because of weather conditions. Demand tends to get impacted because of the change in season or may as well be impacted because of people’s reaction towards challenges of the environment. Exchange rates also impact the prices of the products (BP Plc, 2011). The recent economic recession took place in the year 2009 when most of the sectors of the economy was badly affected. The energy sector was also impacted adversely because of the credit crunch along with adverse business climate (International Energy Agency, 2009). A decline in the investment levels as well as transformation in the patterns of investment all over the economy comprises a central component of procedure of structural modification to weaker demand. This process was expanding because of the credit crunch. It was later found that there was decline in the overall supply of oil and gas wells, pipelines, power stations and refineries (International Energy Agency, 2009). The capital allocation done for the energy sector also altered substantially. It was found that the investment made by the business houses in the energy-consuming appliances, vehicles and equipment was also impacted (International Energy Agency, 2009). The impact of recession was also evident in case of BP which is one of the largest oil companies in Europe. It was noted that the company faced losses in the fourth quarter because the recession reduced the demand for oil in the year 2009 (Gismatullin & Kaskey, 2009). It was after seven years, the company faced first quarterly losses. The company incurred a net income of $4.4 billion in the year 2008 and in the year 2009 it had a shortfall of nearly $3.3 billion (Gismatullin & Kaskey, 2009). BPs’ Chief Executive Officer, Tony Hayward predicted that the year 2010 was supposed to be more challenging with decline in demand of oil (Gismatullin & Kaskey, 2009). During the period of economic slowdown, the main disadvantage for the shareholders had been the decreasing price of the oil with considerable uncertainty in the economy. The government and the global partners were trying hard to advance their share on profits (Hunter, 2009). However, on the flip side, high inventory level and weak demand for the oil demonstrated challenging business environment for the group’s refining business (Hunter, 2009). It was noted that there was significant improvement in the level of production and because of the group’s restructuring measures undertaken like that of cost saving initiatives were more prominent and the payment of dividend was also highly endorsing (Hunter, 2009). BP was in a period of major transition. Tony Hayward implemented restructuring plan. Implementation of such plan led to the removal of layers of middle management and loss of jobs. The company tried to focus its attention in regions such as China, India as well as Russia. However, there was major dispute with Russian partners which outdid the strategy (Hunter, 2009). It was the pattern of energy consumption which depicted recession as well as recovery. Primary energy consumption reduced by 1.1 percent in the year 2009. It was noted that in stabilizing the global demand, the role of Chinese government has been significant since it implemented economic stimulus policy package (BP Plc, 2010). It was because of the China’s movement in the energy sector during the period of economic downturn and economic recovery that resulted in global economic recovery (BP Plc, 2010). It was found that although there was sharp decline in the consumption rate of energy in the world, China was capable of maintaining 8.8% ten-year-average growth rate. Furthermore, the share of the country towards global energy consumption also surmounted (BP Plc, 2010). It was stated by Tony Hayward that “I promise to focus like a laser on safe and reliable operations” (Darlington, 2011). This depicts that there was strong leadership skills of the CEO of the company which helped the company to overcome the issues of recession on a later date (Darlington, 2011). The company’s CEO Tony Hayward adopted turnaround strategy by cutting the costs and enhancing the outputs for approximately two years (China Daily, 2011). Colin Morton who is a team member for BWD Rensburg Ltd in the UK stated that it was difficult for BP to control the prices of the oil since it is a factor beyond organizational control and is basically determined by market forces (China Daily, 2011). However, one aspect which is controllable by BP is to operate the business in an efficient way so that the losses can be covered and thus the organisation can cope up with the negative impacts of recession and economic slowdown immediately (China Daily, 2011). Conceptual Map and Conclusion The conceptual map that has been presented below demonstrates the relationship among economic slowdown, financial crisis and recession. It can be noted that initially economic slowdown is evident which turns to recession at a later date thereby leading to financial or economic crisis to the economy. Fig: Conceptual Map Demonstrating Relation Among The Three Variables The main drivers of recession are the damaging impacts of economic slowdown. During the times of economic slowdown, there is reduced demand for the products and the profits of the corporate tend to decline. Furthermore, the companies are left with high inventories and declining stock prices. All these factors lead to recession. Economic slowdown arises because of the financial crisis (Ellis, 2005). Therefore, it can be observed that all the three variables such as economic slowdown, recession and economic crisis are actually in a loop. When any one of the factors triggers in the economy, the remaining two factors also get affected. Economic slowdown, recession and financial crisis impacted BP to a great extent. The demand for the oil and other energy consumption was quite low. During such times, leaders have a significant role to play. The CEOs may not be capable of controlling the macro environmental factors but they must focus upon innovation and therefore must assure that they are running their organization in an efficient manner by adopting strategies that can help them cope up with such economic hurdles. References Allen, R. E., 1999. Financial Crises and Recession in the Global Economy. Edward Elgar Publishing. Beek, V., 2010. Factors contributing to Economic Growth and Causes for Recession and Economic Crisis. Trend Signal. [Online] available at: http://www.stocktrendinvesting.com/blog/factors-contributing-economic-growth-and-causes-recession-and-economic-crisis [Accessed November 23, 2011]. BP Plc, 2010. 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