Analysis Of The Switzerland's Economic - Assignment Example

Analysis Of The Switzerland's Economic The economic performance of Switzerland is superior to those of many nations in the Euro zone. The reason for the success is clear and transparent laws, the availability of a highly skilled labor, a well organized and better-performing capital market among other reasons. Switzerland has been able to successfully compete with other countries in the Euro zone by confirming its trade and other laws (The World Factbook 2014). A U.S. based firm is considering an investment in the Country. Prior to the actual investment, a research has been done to identify important economic issues. The issues are concerning the factors influencing the economic growth, the inflation rate and the exchange rate of a country. The following factors have been identified to influence the economic growth: income equality among members of a nation, demographic factors, the amount and the value of natural resources, and Technological development. On a similar note, the rate of inflation is affected by the factors mentioned. However, the exchange rate is influenced by factors such as the level of demand for the local currency, the interest rate and the economic performance of a country (McDowell 2012). An analysis of Switzerland’s economic performance for the year 2000 to 2011 shows a good economic performance. The company’s real gross domestic product steadily increased over the period of study. A similar trend has been seen in the employment and population growth rate. Therefore, the economic performance analyses reveal that Switzerland is an attractive investment location. Table of contents Analysis Of The Switzerland's Economic 1 Table of contents 2 Introduction 3 Switzerland 3 The economic indicators 4 The economic growth 4 Inflation rate 6 The exchange rate 6 Importance of the indicators to the company 7 The analysis of the economic performance of Switzerland since 2000 8 Conclusion 9 Reference List 10 Introduction A Low cost of raw material has a negative impact on the company’s cost of sales (lowers the costs of sales) thus, increases the profitability levels. In turn, the net profitability of a company is positively influenced. These among other factors such as the availability of an idle market and trade policies must be considered when planning an expansion into a foreign market. For the purpose of this report, a U.S. based company is considering an expansion into Switzerland market. As a result, there will be a discussion on the following: First, factors that influence the economic growth, inflation and the exchange rate of a country. Second, the significance of the discussed factors to the U.S. based company. In addition, the report presents a brief analysis of the economic performance of Switzerland since 2000 and the prospect of the country. The analysis will be based on the information regarding the number of population, number of employed persons, real gross domestic product index, exchange rate (local currency against per U.S dollar), the share of household consumption in GDP, the share of gross capital formation (investment) in GDP, and the consumer price index. Switzerland The country’s environment is peaceful and conducive for both local and international investments. The labor force in Switzerland is highly skilled thus has contributed to the high employment rate. The economic performance of the country as measured by the gross domestic product is among the leading worldwide. The high economic growth in the country is boosted by the service sector of the economy. Switzerland is amongst the top performing and highly competitive countries in the world due to its transparent legal systems, well-organized capital markets, low tax rates on corporations and outstanding infrastructural development (The World Factbook 2014). In order to fairly compete in the Euro zone, Switzerland has aligned its economic practices with those of other countries in Europe. Almost half of its total exports have their destinations within Europe. The country’s economy is more stable than for most of the countries in the Euro zone. The condition has led to an increase in the value of the Swiss Franc against other currencies in the Euro zone. A stable currency is an indicator of a viable investment opportunity (The World Factbook 2014). The economic indicators In order to conform to the requirement of this report, factors influencing the following three economic indicators are to be discussed: economic growth, the inflation rate, and the exchange rate. The economic growth of a country is the rise in the market value of outputs (goods and services) that are produced in a country within a period, usually one year (McDowell 2012). The economic growth The following factors influence the economic growth rate: income equality, demographic factors, the amount and the value of natural resources, and Technological development. First, income inequality means unequal wealth ownership. The society is made of both extreme ends. That is, the rich and the poor. In order to produce, inputs must be made available. However, in an economy with a wide gap between the rich and the poor, only the rich have the capability to acquire the necessary inputs in a production process. If the gap between the rich and the poor was narrowed, more people would have the financial capability to produce. More goods and services would be made available compared to the contrary situation. Therefore, the economy would grow as a result of increased production (McDowell 2012). Second, changes in the demographic factors such as the gender ratio, the number of the employable age group affect the rate of economic growth. The existence of gender-sensitive tasks requires the availability of the appropriate number of the required gender. The shortage in supply of the required gender-type would negatively affect the rate of production in the sector. A decrease in the rate of production would slow down the aggregate economic growth in a country. Similarly, an increase in the employable age group increases the labor supply, which in turn, increases the production level. On the other hand, a decrease in the employable age group reduces the availability of employees, thus increases the cost of production and at the same time lower the productivity rate (McDowell 2012). Third, natural resources such as oil deposits, coal, gold, diamond, and copper among others are important factors affecting the growth rate of an economy. The mentioned natural resources are raw materials to some of the most valuable products in the world market. Countries with sufficient natural resources, experience lower cost of production. In such countries, the production process is cheap thus production levels increase annually. On the other hand, countries with insufficient natural resources import the necessary input. Production of goods and services in such countries is high due to the high cost of importing bulky raw materials. Therefore, the production levels are generally constrained thus the economic growth is negatively influenced (McDowell 2012). Last, technology impact on the production processes and other operating mechanisms of corporations. New production technology could be invented and implemented to help reduce the cost of production. An increase in the production efficiency through embracing the new technology is the modern way of reducing production costs and at the same time increase the productivity level (McDowell 2012). Inflation rate The rate at which the consumer prices increase is determined, primarily, by the rate of economic production. Product prices increase if the demand for a product is higher than the supply. Low supply of products is caused by the low production rate. The production rate, on the other hand, is influenced by factors discussed above among others (International Monetary Fund 1984). The exchange rate Among the factors influencing the exchange rate, only three are discussed in this report. They are as follows: the interest rate, currency demand, and the economic performance of a country. First, the interest rates- the difference in the rate of interest between countries is one of the major causes of future price movements. If a country's monetary authority decides to increase the money supply in an economy, the demand for the local goods would be higher than the supply, assuming that the production rate is constant. The increase in demand would lead to an increase in the prices of the local commodities. The effect would reduce the purchasing power of the local currency, thus the value would reduce (International Monetary Fund 1984). The purchasing power of a foreign currency would, therefore, be greater than that the local currency. These series of activities would eventually cause lower the price of the local currency. If the effect is projected to continue further into the future, the future currency prices would be lower too because the price of the underlying asset would be lower (International Monetary Fund 1984). Second, demand- just like commodity prices goes up when the demand is higher than the supply, currency prices are also affected in the same manner. If the demand for a particular currency in a future transaction is high, the price of that currency goes up. For instance, if the demand for US$ is higher for the future transaction than any other denomination, the price of US$ against the other currencies would increase thus an increase in the future prices. A sharp fall in the demand for the same currency for the future would lower its price, thus the future price (Krueger 1983). Last, the economic performance- the economic performance of a country as measured by the gross domestic product influences the exchange rate. A country with a high gross domestic product experiences a high level of production. A country with a higher GDP has more products in the local market (Ho & Yuen 2003). A high supply of commodities causes a reduction in the commodity prices, thus a lower rate of inflation. Low inflation rate lowers the rate of interest. The value of the currency in countries with low inflation rate is higher as compared to the currency values of countries experiencing high rate of inflation (Krueger 1983) Importance of the indicators to the company First, it is important to have a prior knowledge of the economic performance of a market of interest. The information is used by the company to make plans regarding productive levels, sources of raw materials and the method of production to be adopted. Second, the inflation rate influences the affordability of local products as compared to foreign products. Inflation also reduces the value of the currency. Therefore, a prior knowledge of inflation trends in Switzerland helps in risk assessment. That is the risk of losing the value of an investment. Last, the knowledge of the strength of Swiss Franc can be used by the U.S Company to formulate hedging strategies involving the use of derivatives such as exchange rate forwards. The analysis of the economic performance of Switzerland since 2000 Population Versus the employment rate From the above graph, the employment rate in Switzerland increases with an increase in population from the year 2000 to 2011. The increase in the employment rate signifies an increasing economic performance. The trend is expected to continue into the future. Real gross domestic product index In the above graph, the real GDP of Switzerland increases steadily from the year 2000 to 2011. An increase in the real GDP is an indicator of an increase in production. Therefore, the economic performance of the country is growing. The trend is expected to continue into the future, thus, the economic performance of the country is expected to continue growing in the future. Conclusion The issues factors affecting economic growth of a country are income inequality, demographic issues, availability of natural resources, and the technological advancement. Similarly, the inflation rate is influenced by the mentioned factors. On the other hand, the exchange rate is influenced by the interest rate, the level of local currency demand and the economic performance of a country. Prior knowledge of these factors is suggested to facilitate the formulation of strategy such as risk management. Lastly, the economic performance of Switzerland from 2000 to 2011, as measured by the real GDP and employment rate, has been steadily increasing. The trend is expected to continue into the future, depicting that the country provides a good environment for investment. Therefore, the U.S Company should consider investing in Switzerland. Reference List International Monetary Fund 1984, Exchange rate volatility and world trade. Washington (D.C.), International monetary fund. Krueger, A. O 1983, Exchange-rate determination. Cambridge [Cambridgeshire], Cambridge University Press. Mcdowell, M 2012, Principles of economics. New York, McGraw-Hill Higher Education. The World Factbook 2014, Viewed 19 November 2014, https://www.cia.gov/library/publications/the-world-factbook/geos/sz.html Read More