How Lower Prices Could Actually Hurt the Economy - Essay Example

Economic Journal Summaries Robert J. Samuelson Recovery Killer How lower prices could actually hurt the economy. Magazine: Newsweek Publication date: November 10, 2008 Summary: Many people know that inflation is the increase in most prices and deflation is the decrease. However, it seems that people are just afraid of inflation but not of deflation. But as stated in the article, deflation can also impose problems in the economy. Although lower prices are good, it can still have its detrimental effects in the economy in the long run. One harmful effect of deflation is that debts would be harder to pay for companies. This is because prices decrease while debts remain fixed. This will in turn result to bankruptcy and increase in the unemployment rate. In the case of households, debts will also be hard to repay because wages will fall. Another effect is that consumers would tend to consume less today and wait until the prices still lower in the future. People will think that if prices are low to day, it will still decrease further in the future. Analysis: Inflation is indeed harmful to the economy especially when it is paired with unemployment. However, deflation can also be detrimental to the economy. Lower prices tend to make buyers postpone their shopping thinking that prices would still lower in the future. Although it may seem that this is not a bad thing, it can affect the demand and supply of commodities in the economy. Since the consumers don't want to spend, commodities will be oversupplied and supply will swamp demand. According to Paul Krugman, "deflation discourages borrowing and spending, the very things the depressed economy needs to get going." ("What is deflation, what are the risks of deflation, and how can the Fed combat deflation")Since people do not want to spend their money, there is a tendency for firms to incur losses. This will in turn affect the employees of the company and there is a tendency for wages to drop and increase unemployment rate. Also, since deflation makes it difficult for firms to repay their debts, bankruptcy is most likely to occur and jobs will be lost. Yes, lower prices at first might seem to be pro-poor or more of an advantage to those who cannot afford some commodities. But in the long run, households and the people in the economy are still the ones who will suffer since they might lose their jobs and can add up to the problem of recession. Author: Justin Fox Title: The Economy Really Is Fundamentally Strong Magazine: TIME Publication date: October 16, 2008 Summary: It is known to everyone that America is experiencing problems with their economy. That is why when presidential candidate John McCain said that the fundamentals of the US economy are strong, many eyebrows were raised and his opponent Barack Obama didn't miss the opportunity to mock his statement. McCain's running mate Sarah Palin defended that McCain was talking about their workforce and the ingenuity of the American people. She was actually right because the American workforce and their being skillful remain to be strong in the midst of economic meltdown. Many economists assert that it is productivity growth that signals the economic well-being of a country. Productivity growth refers to the economic output per hour worked. This productivity growth was actually the reason why America was able to rise during the Industrial revolution despite the stagnation. What really caused the productivity growth during the industrial revolution is the dependence of the US in technology, electricity, combustion engine, and communication. In the mid-1990s, the engine was replaced with computers and the internet. After that, productivity growth continued to fluctuate. High productivity growth does not guarantee a good economy but it makes it more possible to have economic growth. With all these talks about productivity growth, maybe McCain was right that the fundamentals of the American economy are still strong. Analysis: The workforce of a country is very essential to the economy. Perhaps human capital is one of the most important factors in the economy. However, economic growth, I think, does not solely depend on human capital and productivity alone. In fact, productivity growth is not always good for all the stakeholders in the economy. According to Nordhaus, as cited by Balls, higher productivity growth may lead to unemployment for individual companies and industries. For example, the rise of personal computer resulted to a decline in employment in the typewriter manufacturing industry (Balls). However, higher productivity may also result to a decrease in price since more outputs are produced in lesser time. This will in turn increase the demand for those products. I also believe that although higher productivity does not guarantee economic growth, it can help a lot especially during these times of recession in the US. The use of technology makes it easier for people to produce more goods using less hours of works. So, more output will be produced in the economy. Since one of the indicators of growth is GDP (Moffatt), higher productivity growth can help increase the GDP of a country which can help the economy move from recession to recovery. Author: No author Title: Reserve army of underemployed Magazine: The Economist Publication date: September 4, 2008 Summary: Many global companies depend on China for their labor. That is why the idea that China is running out of cheap labor threatens not only China's economy but also the rest of the world. Over the past few years, many factories have complained that cheap labor is running out and wages are increasing. This is thought to have caused by the country's one-child policy. An economist named Jonathan Anderson said that the shift of workers from agriculture to industry will slow down in the coming years. There are also forecasts that the population of working age will increase at an annual rate until 2015 but will decline after that. Other reasons why some people say that China's supply of labor has been declining is that the working population is now ageing. Workers with the age of 20-29 have been declining in number. However, these forecasts are said to be premature. According to the article, poor data is available regarding China's supply of labor. Some data do not include the rural labor force and some even considers those who are working in rural industries to belong to farming. Also, Stephen Green of Standard Chartered argued that even though the workforce population is ageing, the baby boomers' children will join the workforce by 2015. The World Bank even aggress that China's supply of labor has not yet been exhausted. Migrant workers are usually excluded in some data and they make up a large part of the country's labor force. Analysis: I believe that China's labor has not yet been exhausted because it is not just the population that the drives up the labor force of a country. Of course, that is one great factor but as the article said, it is not just demographics that determine the labor supply of a country. It think there is really no labor shortage but there is a shortage for good jobs. For many years, companies around the world has been exploiting China's labor because of cheap. The reason why it's cheap is because there are no enough jobs in their country that will cater to their population. The surplus of labor prevents wage inflation. Because of this, Chinese people are satisfied with low wages rather than not having a job at all. Also, migration has a lot of effects on China's labor force. Those people in the countryside who used to do farming for a living now choose to migrate in the cities to work in the factories. This is primarily caused by wage differentials. The salary in the city, although still cheap, is relatively higher than the salary they get in the rural areas. Applying some concepts in labor economics, these people will only go back to the rural areas if the wage in that area will be relatively higher that in the urban areas. Today, this might seem impossible to happen. I think China's labor will eventually dry up just like any other economics factor that is scarce, but I believe that this is not yet the time for that to happen. Author: Bryan Walsh Title: 5 Best Places to Travel in a Recession Magazine: TIME Publication date: November 4, 2008 Summary: Economies all over the world are experiencing some kind of a meltdown. Because of this, many people tend to decrease their spending. However, it seems that the economic meltdown in some parts of the globe has made it more possible for tourists to visit these countries. Because of the economic turmoil, countries that seem to be expensive for travel before are now relatively cheaper - well, at least for the Americans. These countries include Iceland, Canada, Australia, Great Britain and South Korea. Iceland, which is a developed country, has surprisingly experienced a credit crunch with the collapse of its banking system and its currency. Its currency value dropped by 51% since a year ago. In Canada, however, a 21% decrease in their currency value made it possible for Americans to go to their country. In Australia, their dollar is now equivalent to only 60 cents because of the 28% drop in their currency value. The currency value of Great Britain and South Korea dropped by 23% and 30% respectively. Analysis: The article is funny in such a way that it is a bit ironic. You see, the economic meltdown in America and other parts of the world has been very alarming and yet there are still some advantages. However, it is not only the currency of the country that should be the basis for its economic status. Many people have this impression that a strong currency is always good for the economy and a weak one is bad for the economy. I think this is one of the misconceptions when the issue of currency is being talked about. With a weak currency, it would be easy for a country to export and it can add up to their GDP. Author: Daniel Gross Title: Is America Losing At Globalization Magazine: Newsweek Publication date: September 8, 2008 Summary: America has been known for its economic hegemony over the years. However, it seems that the country's supremacy in the economy race has been deteriorating. Even economist Edward Gresser said that the results of the recently held Olympics reflected the status of the US in the global economy race. Although the US won the overall medals, China got most of the gold. A poll done by the LA times/Bloomberg resulted that 50% of the respondents said that free trade hurt the economy. Today, emerging markets are growing and the weak dollar and wage growth made it difficult for foreign buyers to invest in the US. Other indicators that America has been losing in this globalization age is that cell phone services are better in Cambodia, broadband penetration is higher in South Korea and other countries, China's fast trains compared to the poor condition of roads in America. Analysis: With the ongoing globalization process, I believe that there is a need for public intervention by the policy makers. Globalization enables firms around the world to enter the global market freely. With this, the exports and imports of the country would most likely be affected. Because of globalization, countries can import goods from other countries easily. This is why we need the government to impose tariffs and quotas on these imports. Without tariffs and quotas, imports would most likely skyrocket and hurt the local industries in the country. This would also affect the price of the goods. Legal barriers might also work. This might help America keep in pace with globalization but still protect their economy somehow. Author: No Author Title: Inflated Claims Magazine: The Economist Publication date: August 14, 2008 Summary: Almost every commodity available in the market is now made in China. Some people in America and Europe even think that inflation is also "made in China". Goods from China caused some decrease in the price of goods in other countries because of their cheaper price. But now that prices and wage in China already increased, people can't help but blame the country for this inflation. They say that China's increasing demand and consumption for food, oil, and raw materials resulted to the increase in prices in other parts of the world. However, the article argued that although prices in China have already increases, they are still cheaper compared to the prices in America and other developed country. China's demand for oil decreased by 4% last year and their production and export of food increased. Also, because of cheaper Chinese goods, local companies in the US and other rich countries are forced to lower their prices to keep up with the competition. So it is not right to blame China for the inflation around the world. Analysis: I believe in the article that blaming China for causing the inflation in some countries might just be a scapegoat for some. Although it is true that China makes up a huge chunk of the world's overall consumption of food, oil, and other raw materials, it is not enough to pull up the prices around the world. China also contributes to a big part of exports in the world and I think it can offset their huge demand. Also, inflation is not just cased by the increase in demand. It can also be caused by improper monetary policies. A large money supply with so little goods and commodities will cause prices in the market to skyrocket. So, maybe it some monetary policies in the US should also be considered and not just blame it all to China's increasing demand. Works Cited Samuelson, Robert. "Recovery Killer How lower prices could actually hurt the economy", Newsweek, 10 November 2008. 14 November 2008. Fox, Justin. "The Economy Really Is Fundamentally Strong", TIME, 16 October 2008. 14 November 2008. < http://www.time.com/time/business/article/0,8599,1850909,00.html> "Reserve army of underemployed", The Economist, 4 September 2008. 15 November 2008. < http://www.economist.com/finance/economicsfocus/PrinterFriendly.cfmstory_id=12052315> Balls, Andrew. "Productivity Growth and Employment", National Bureau of Economic Research, 16 November 2008. < http://www.nber.org/digest/nov05/w11354.html> "What is deflation, what are the risks of deflation, and how can the Fed combat deflation", Federal Reserve Bank of San Francisco, May 2003. 16 November 2008. < http://www.frbsf.org/education/activities/drecon/2003/0305.html> Moffatt, Mike. "What is the Business Cycle", About.com. 16 November 2008. < http://economics.about.com/cs/studentresources/f/business_cycle.htm> Gross, Daniel. "Is America Losing at Globalization", Newsweek. 8 September 2008. 18 November 2008. < http://www.newsweek.com/id/15634> "Inflated Claims", The Economist, 14 August 2008. 18 November 2008. < http://www.economist.com/finance/economicsfocus/displaystory.cfmstory_id=11920640> Walsh, Bryan. "5 Best Places to Travel in a Recession", TIME, 4 November 2008. 18 November 2008. < http://www.time.com/time/travel/article/0,31542,1855690,00.html> Read More