Effects of the Fall in Demand for Goods in Asia on British Consumers and Producers in Europe - Essay Example

EFFECTS OF THE FALL IN DEMAND FOR GOODS IN ASIA ON BRITISH CONSUMERS AND PRODUCERS OF CONSUMER GOODS IN EUROPE Introduction The reduction in the demand for goods and services in foreign countries that provide market for goods and services produced in Britain and other European countries has very significant effects on the demand for exports. The net exports of the country contribute greatly to the national income of the country. The value of exports is among the factors that constitutes the aggregate demand of a country. A reduction in exports definitely means a reduction in the aggregate demand, which in turn leads to a decline in the economy. A decline in the economy affects production, consumption and the standards of living of the people. This paper aims at examining the effects of the reduction in demand for goods in Asia, on consumers and producers of consumer goods in Britain. Effects of the fall in Demand According to the law of demand and supply, a reduction in the demand for goods will result to a reduction in the prices of goods (Gale 1955). In turn, a reduction in the prices of goods will result to low profits to the suppliers. To the consumers, it is going to be an advantage since they are going to be capable of buying more goods from the same income. However, to the suppliers, it is very disadvantageous since they will lose revenue. For the case of Asia, a reduction in the demand for consumer goods means that they are going to buy fewer goods imported from Britain. This means that the demand for the goods produced in Britain is going to reduce hence a decline in production. Declining production activities means that producers have to reduce the number of workers in their firms resulting to reduced employment opportunities. On the other hand, unemployment will result to a low income for consumers in the country. This in turn will result to reduced purchasing power (Zhou 1997). Consumers will not be capable of buying the goods and services they need. Consequently, the standards of living in the country will decline. The value of goods exported abroad affects the gross domestic product (GDP) of the country. GDP = C + I + G + (Ex - Im). In this equation, C is the consumption of goods and services by the consumers in the country and I, is the investments while G refers to government expenditure. The term (Ex - Im) refers to the value of exports minus the value of imports. The term (Ex - Im) may be either positive or negative. If the term is positive, as explained by Blanchard & Quah (1990) it means that the value of exports is higher than that of imports. On the other hand, if the term is negative, it means that the value of imports is higher than that of exports. In other words, the favourable condition for the country’s GDP is an increase in the value of the term and the unfavourable condition for the country’s GDP is a reduction in the value of the term (Goldstein & Khan 1978). Obviously, a reduction in the demand for consumer goods in Asia means that the prices of goods in the region, including those imported from Britain will reduce. Consequently, the value of exports in Britain will reduce leading to a reduction in the term (Ex - Im). This on the other hand will result to a reduction in the country’s GDP. A decrease in the country’s GDP will have a negative effect on the growth of the economy. To add on that, when the prices for exports declines, producers in the country will tend to reduce the amount of goods they export to the region. This is because, according to the law of supply, a reduction in the price of goods will lead to a reduction in the quantity of goods supplied. This is because supplies are ready to increase their supplies only when they are making more profits. Therefore, according to the explanation given by Von Stackelberg (1952) a reduction in supply means that they will have to lower production that in turn will reduce employment opportunities in the country. In addition, the reduction in the prices of goods means that producers will want to reduce their cost of production. This is because lowering the cost of production is the only way of maintaining their profit margin. If no other factors of production can vary, then the producers may resolve into lowering the cost of labour. This in turn means that the firms will opt to lower salaries and wages for their workers. Consequently, workers will not be happy with the reduction in payments and this causes strikes and demonstrations, which cause interruption in production activities. This therefore will result to industrial unrest that lowers the economy and the standards of living (Salter 1959). Figure1. Relationship between demand, production and income The figure above shows the relationship between the demand of goods, production and the income of the people. A reduction in the demand will cause a reduction in the production activities that in turn causes a reduction in the income of the consumers. A reduction in the income of consumers will cause a further reduction in the demand and this creates a vicious cycle (Clark 1917). The reduction in the demand for exports according to Clower (1965) can also influence producers to increase the prices of domestic products. When the financial institutions in the country identify the possibility of increases in prices, they will increase the interest rates on loans. The payment of mortgages by the consumers will increase and this will further reduce their income. This means that consumers are less likely going to borrow money and this in turn reduces the demand for real assets. The reduction in borrowing means that banks are going to make less earnings and this may in turn lead to a collapse in the country’s financial system. Banks will lack the capability of lending, which result to less money in circulation that will result to a further reduction in consumer purchasing power. In addition, higher interest rates means that producers are also not going to borrow additional capital from banks and other financial institutions for fear of making loses. This in turn will result to a reduction in investment that in turn results to increased unemployment (Baron 1976). Figure 2. Shift in aggregate demand. In figure 2 above, the aggregate demand has shifted from AD to AD2 causing an increase in GDP from Y1 to Y2. This phenomenon occurs because of an increase in consumers’ income, reduction in interest rates that encourages borrowing, increase in salaries and wages as well as increased confidence in consumers concerning the future status of the economy. In addition, increased investment or production activities will cause a shift to the right as illustrated on the graph. Unemployment caused by a reduction in the demand for goods means that consumers will reduce expenditure because they have little money to spend. However, the demand for essential goods according to Arrow (1959) does not change significantly since they need them for survival. Government revenue may reduce because of the reduction in consumption in the country. For example, the government will lose revenue collected from luxurious goods such as sport cars. To respond to this, the government may target goods that have low elasticity of price to maintain their annual revenue (Arrow 1959). These may include habitual goods such as alcohol, wine and cigarettes in which the consumer has no otherwise but to buy. Since consumers must buy these products, they may respond by increasing the working hours to obtain the additional income they need. In addition, consumers can demand for higher payments that in turn increase the cost of production. Again, this creates a vicious cycle leading to industrial unrest that will further have negative consequences on the economy (Bhagwati 1958). The fall in the demand of goods in the Asian region means that producers in Britain will have to look for means of restoring the demand. A reduction in demand is a symptom of economic difficulties in the Asian region. Producers will therefore look for means of lowering the prices of their goods without sacrificing profits Voss (2003). This may influence them to introduce efficient methods of production to lower the cost of production. The invention of better methods of production will only come because of good research in the production methods. The cost of conducting research for firms will increase and thus may take some time before the firms can start benefiting from the exercise. This means that before coming up with new methods productivity will be low. In addition, the necessity of introducing better methods of production will increase the demand for the highly experienced labour. This in turn means that skilled labour will be expensive and difficult to acquire. Competition for the skilled labour means that some firms will not be able to access it and this may lead to their collapse. This may also result to mergers of smaller firms to obtain larger financial strength and survive in the industry leading to the rise of monopolies in the industries. Consequently, this will lead to reduced competition that in turn will raise the prices of goods and services (Hildenbrand 1983). Increased prices of goods and services reflects to less purchase of goods and hence less consumer satisfaction and lower quality of life. In this condition, the country will be in crisis (Artus 1970). Automation is a major characteristic of efficient methods of production. This is because, automation reduce the number of workers needed for performing operations. While the demand for skilled labour increases because of the need for improved production techniques, the demand for the unskilled and semi-skilled labour reduces leading to increased unemployment. Most of the workers will therefore look for additional training to meet the qualifications required in the market. However, before they can achieve this, they will go through a difficult period when securing employment will be very difficult for them. A further reduction in the demand for goods in the market will cause the process to recur (Kenen 1994) As a means of survival, producers in the country will have to look for means of maintaining profits and remaining relevant in the market. For those firms that are capable of diversifying their products, they will respond by increasing their production and creating new brands for each class of consumers. However, for smaller producers who are not capable of diversifying their products, they respond by limiting production to the products they can produce at the lowest costs. This therefore, may cause some firms to shift into producing the goods that have an inelastic demand. In the end, it may create excess supply of certain goods and a low supply of some other goods. This therefore some goods will sell at a very lower price while other goods will sell at a very high price. This means, consumers will have difficulty in accessing certain goods and services (Hooper & Kohlhagen 1978). As a means of enhancing the demand for exports, the government may be compelled to devalue the local currency to make exports cheaper. However, according to Alejandro (1963) this will also increase the price for imports. Consequently, consumers will have difficulty in accessing some of the essential goods imported from abroad. The process of devaluation will generally, increase the overall prices of commodities in the country leading to reduced consumer purchasing power. This may eventually, lower the demand for domestic products leading to reduced production. A continuous reduction in the prices of goods in the Asian region may therefore cause the process to recur leading to a crisis in the country and deterioration of the living standards (Salter 1959). Conclusion The economy and the living conditions in a country depend largely on the demand of goods and services. Production can only occur when there is market for the goods. If the demand for the goods reduces then production will also reduce leading to unemployment in the country. Unemployment in turn will reduce the income leading to lower standards of leading. This explains how the country experiences crisis and industrial unrest. The tendency of the condition to recur means that good planning is necessary if the country aims at achieving a permanent solution. Bibliography Alejandro, C., F.1963, ‘A Note on the Impact of Devaluation and the Redistributive Effect’, The Journal of Political Economy, Vol 71, no. 6, pp. 577-580. Arrow, K., J. 1959, ‘Toward a theory of price adjustment’, The allocation of economic resources, Vol. 41, pp. 51. Artus, J., R. 1970, ‘The Short-Run Effects of Domestic Demand Pressure on British Export Performance’, Staff Papers-International Monetary Fund, Vol 17, no. 2, pp. 247-276. Baron, D., P. 1976, ‘Fluctuating exchange rates and the pricing of exports’, Economic Inquiry, Vol. 14, no. 3, pp. 425-438. 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