The Effects of Global Recession on Local Economies - Essay Example

Introduction Global recession is an economic issue that prevails these recent years. With recession, the economic activities of a country slowly go downhill over a period of time in a business cycle. A business cycle is the economy-wide economic activity over several months or years. It is the fluctuations in the production of the economy for a period of time. During recession, business profits, capacity utilization, investment spending, employment, Gross Domestic Product and household income and budgeting are all affected negatively. With the slowdown of the global economy, there are a lot of areas which are affected. Multinational and international industries, local industries, government establishments and the consumers themselves are all affected by the changes in the economic standing of the country. Global recession has a great impact on the value of local and international currencies, generally affecting end-users and households. In effect, the buying capability of the consumers goes down. Factors to be Considered in Developing a Business The general concept in putting up a business is simple, to profit from it. However, this simple concept requires a lot of fields to be taken into consideration before investors or businessmen can make it happen. In a basic business planning, the structure of study for putting up a business or developing an existing one is as follows: investment, resources and raw materials, market demand and profit and loss forecast. Investment Investment is the capital cost is one of the most common things that are taken into consideration in a large or small medium business setup (Northcott 1992). This is the total amount of currency or money a businessman or a corporation invests to put up or develop an existing business. The total cost of the investment will be a basis for the company to determine the total cost of their liabilities. There should also be funds or a part of the budget that goes to the emergency funds for unexpected situation. These are part of the investment cost and are called funds margin or more commonly known as petty cash. Although this is the type of fund that should be replenished every month, quarter or year depending on the initial business funding structure of the company. Its initial will still be included in the total investment cost. Resources and raw materials Resource is also one of the major factors to be considered in putting up or developing an existing business. Raw materials are products that are bought together for the use for production purposes (Blair and Hitchcock 2001). There are two major types of categories in the business industry: the manufacturing industry, covering consumer goods or anything that falls under production and the service industry, may it be in entertainment, legal, maintenance or anything that falls under manpower. The conventional view is that services appear in response to the manufacturing industry; however the possibility of the difference in both areas would depend on the regions market demand and supply (Daniels 1985). Distribution of manpower resources in operating departments must be recognized (Schultz 1980). Businesses cater businesses. Every business provides a specific need for another business and this is a cycle that goes in any field of business. A simple example that every business needs is paper trail. Every company needs paper for documents, receipts and more, and they get paper from paper manufacturing business so on and so forth. Without the sufficient or proper supply of the resources needed to make a business run or operate, the productivity and efficiency is compromised in a very serious level. Market and demand It is important to know which segment of the market the business intends to serve and to price products and services accordingly (Lindeman and Friedman 2005). Whatever the business field a business is catering, the market and its demands should also always be taken into consideration. The study of market and demand basically covers and determines how healthy and strong the market is in terms of competition and demand. Compared to the old trading industry, end users or consumers settle for anything that is available. Quality is never an issue at that time, but as the business industry evolves end users or consumers get more choices and features they can choose from to suit their needs and requirements. Product and service development are also considered in this study. Businesses must be aware and knowledgeable of the competition and must be at par with the demands of the market in terms of quality and price. Quality and price go hand in hand these days, and companies always take that into consideration when determining their requirement for a certain product or service they offer in their respected field in the business industry. Profit and loss forecast Every investor or businessman wants to know how much profit they will earn in investing a relatively large amount of money. A profit and loss forecast is a study of how much you will sell the products or services and how much profit you will gain from it (McKeever 2007). This study will set the (ROI) return of investment for the business. This study will show the amount on how much the production cost spent for a product or service and determining its price in contrast to competitors and the demands of the market. From there, they can set a price with a profit margin, then from the profit margin set, they will be able to determine how long or how much time would it take them to get the initial capital or investment back and profit income thereafter in the following months. These are the basic factors that investors or businessmen have to consider in starting up a business or developing an existing one. Having all of this information at hand, every company should be in their best status and prepared for the competition that awaits, and profiting in the way that the business is supposed and intended to earn them. More often than not, large multinational companies, small and medium businesses have their own scope which they cater in the market. Large companies provide or cater to small and medium companies, and vice versa. These are also the main factors that are being affected by global recession causing the downfall of local economies. The Concept of Global Recession Global recession is an economic issue that has been around these past few years, the effects that it brings to the global economy is historical. It is an issue not only do the business sector is concerned of, but world governments as well. These businesses large, small and medium all depend on the value of their currencies or strength of their money, because of globalization the opportunity for foreign investors coming in and becoming one of the business players in a business sector was made possible. Globalization is a process of interaction and integration among the people, companies, and governments of different nations. The business of export and import grew rapidly. The Effects of Global Recession with Currency The relevance of globalization and global recession is in currency, most of the time foreign investors do all their business planning and profiting forecast based in their own currency. One good example of this would be NIKE, a brand that manufactures shoes and other sporting materials and apparels, a major player in globalization and in the manufacturing industry. They have extended some sectors of their business in other countries, and they may be exporting raw materials from other countries or even getting it at the U.S but does their production in countries like China and Korea where the cost of man power in much cheaper compared to the business’s country of origin. To generate additional sales, multinational companies invest in their subsidiaries to produce offshore goods that were made available to markets back home and abroad (Eden 1994). This is how they raise their profit, by cutting out their production expenses and extending their market abroad, originally, the business plan and profiting forecast is based on their local currency which is the dollar. If their budget for local production will reach a certain amount, then definitely that amount will be lowered if they had their production in a country that has a lower currency value compared to the currency the budget was originally planned for. The dollar is one of the strongest currencies in the world market for a very long time. Foreign investors and stock holders want to get a relatively large amount of dollar shares for their business to ensure its strength in the world market. USA has enjoyed sustainable economic development with cushion of low inflation rates over last two decades (Gandhi n.d.). This resulted into complete ignorance of essential business cycle of economy (Gandhi n.d.). Because of this, multinational companies, investors and even small and medium companies are greatly affected every time the value in currency fluctuates; this may be in favor for the business or could mean loss in revenue. Today, in every country, the economic standing is based on the value of the country’s local currency and its strength in the world market. And most of the time large multinational companies have the capability to set a bench mark price in their products or services depending on a lot of factors. Given all of these factors, if the majority of the multinational companies are greatly affected with the global recession, then the effects on the local economy will be greater. The Negative Effects of Global Recession on Local Economies Local businesses in local economies cater and supply to the demands of the local industry. The concentration of these companies is set in a manner of servicing the local market and its needs. Global recession is bad news to local economies as it widely affects the economical order and balance. The cycle of business in local economies is greatly affected by global recession due to the fluctuations in currency, and because the value of currency changes from time to time, the development planning and forecasting of businesses is also affected. One of the major effects that globalization brings is the depreciation of the value of both local and foreign currencies, this results to higher product prices or cost. When prices of raw materials, consumer products and services go high in the market the number of demands also changes. With the slow growth rate of money supply, which can be affected by the changes in the market demand, there will also be a slow rate of production growth. The quantity theory of money explains this relationship through emphasizing that the overall prices or the nominal value of expenditures is positively correlated to the quantity of money. Since there is a slow growth in money supply, the production of the companies is affected. Thus, “the overall level of prices in an economy is determined by the amount of money in circulation” (Clegg et al. 1986). With the change in market demand and the inflation of currency, there is slow growth in money supply. The companies then have to change their production and investment cost planning and development. With this, the companies need to adapt to these negative changes. Cost-cutting is one way for businesses and even households do just to get by, spending power or spending capabilities is clearly compromised by this event. The growth in consumer expenditures has slowed or declined considerably in the recent years covering the increase in overall consumer spending (Sweet and Shetty 1995). If the spending power of the consumers decrease the demands for products and services will decrease accordingly, resulting for companies to lessen their production and services they offer. Higher cost in products and services and the decrease of demands of end users or consumers in the market means is a result of a weakening economic status. It clearly shows the alarming effects in the major aspects of a business, because of the depreciation in value of the currency, companies are having second thoughts of investing more in their capital. When prices of services and raw materials go up, prices of finished products made available to the consumers go up as well, the service industry would also deal with the event on raising their service cost (legal services, medical services, etc) or lessen the value and scope of the service they are providing. Because of all the price increase in products and services, the buying power of consumers and end users also declines, affecting their budget which leads to a rapid decrease of demands in the market. One of the biggest company names in the production is Unilever, an article in the Seattle times stated that the company will be closing down a manufacturing branch located at Hagerstown MD, having 460 people employed. It was also stated the Unilever’s volume has edged amid the global recession (Unilever has closed 2009). If large manufacturing companies like this would have a decrease in production, and results to closure of business, then other companies will be affected by it as well. Unilever also has companies that supply their production needs like, paper, plastic, inks, petrol for transportation, electricity for machines, phone connections and more. Another industry that is affected is the publishing and printing industry. Generally, the newspaper industry also expressed the effects on their industry. Local US newspaper owners said that their advertising revenue is evaporating, their circulation is declining and their market is going online to get news for free (Lefkow 2009). With this, it shows that the local newspaper business is being cut off their market since the household is resorting to cheaper and more economical ways to cope up with their tight budget, a result of the cost-cutting of companies and the increase in market prices. These companies will also have a decreased demand in their market and will result to a decreased number in production and may also lead to closure. If this happens, even more people will be out of jobs, affecting a large number of household and families. The government who generates income from taxes to give services to their citizens and provide jobs will also be affected. The effects of these kinds of events that are caused by global recession to the world economy and local economies would have a ripple effect, not only affecting businesses but even other sectors like the government, education, end users and households. The financial capability or buying power of each household will also be affected because of jobs lost, if people stop buying a certain product or service there will be a ripple effect on the economy (Duska 2006). With this, the theory of supply and demand can be used to explain the reason for the failure of local economies. With the decrease of market demand, there will be a decrease in the production supply. Because of the decrease of demand and supply, the companies will have lower rate of revenue in profit. This will result to a downward spiral of the economy since the local market has less demand for the supply of the economy. Combining all of these, its effect in businesses in the local economy is devastating, that may lead to profit loss or even bankruptcy. These alarming chains of events in the local economy will most likely trigger businesses to cut expenses on raw materials that will then lead to poor product quality, cut expenses on manufacturing leading to limited production of products, and less production of products and in services means less demand of man power, which in result will lead to loss of jobs. Loss of jobs will have a great effect in household, it will also lessen the revenue that the government gets from taxes to generate more jobs. Using Keynes’ theory that the government needed to intervene in the investment and spending of companies to correct the market, which he sees as not self-correcting, it can be summed up that companies need an external boost from the state to prevent a crisis in confidence that could send companies on a downward spiral. Since local companies are directly affected by global recession in terms of investment spending and currency inflation, the government needs to use spending to stimulate the economy. Local economies need a constant circular flow of income and profit. This can only be gained if there is an effective market demand. But if the government cannot generate income to create a constant flow of income and profit for local economies, the local economies may be restricted in their investment spending and profit generates. Conclusion Global recession results to fluctuations in currency thus, affecting businesses that are mainly in the local economy. Local economies cater to the demands of the local market. They are dependent on the changes within their market. Local market demands are dependent on household and end-users budget and expenditures. When currency fluctuates, prices change affecting the production costs of companies and affecting the income and profit of end-users. This causes the market to have less demand due to buying power. This shows the effect of the circular flow of money supply in end-users and companies. The slower the growth rate of money supply, the lower the companies’ investment spending and production costs. Depending on the local competition, there could be a higher price change. Higher prices results to lower buying power of the end-users. Local economies thrive on the local market. If their market cannot afford the products the local companies produce then this will significantly affect the supply and demand, and the production and investment of the companies. With this, companies tend to resort to cost-cutting, trying to keep up with the fluctuations in currency and the lower demands of their market. In the end, if they cannot adapt and keep up to these changes, the local company will fail and eventually get bankrupt. Works Cited Blair, Alasdair and Hitchcock, David. (2001). Environment and Business. Routledge. Clegg, Stewart et al. (1986). Class, Politics and the Economy. Routledge. Daniels, P.W. (1985). Service Industries: A Geographical Appraisal. Routledge. Duska, Ronald. (2006). Contemporary Reflections on Business Ethics. Springer. Eden, Lorraine. (1994). Multinationals in North America. University of Calgary Press. Gandhi, Jennie (n.d.). Global Recession – Causes. Ezine Articles. June 9, 2009 http://ezinearticles.com/?Global-Recession---Causes&id=1597698 Lefkow, Chris. (2009). US Newspaper Owners are “Mad as Hell.” The Inquirer. 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