Day 248 Budgeting

Budgeting

In my opinion, there are five stages involved in creating an efficient and accurate budget. First of all, managers must determine the goal of the business, which the budget must comply. It will be an important factor to evaluate the budget and provide guideline during the preparation process. In the second stage, management will decide the type and period of the budget. These attributes should correspond to the objective from the first stage. Thirdly, the detailed budgets are developed through cross-department coordination (participative budget) or top management decisions (top-to-bottom implementation). During this stage, managers have to make reasonable assumptions on business future performance in specific areas. Such predictions are base on the managers’ perceptions and company’s past performance. Moreover, the bottlenecks (limitations) forecasts should be aware by the management to enable efficient resource allocation. After the planning stage, the budget committee is responsible for generating a further evaluation of the budget effectiveness. The committee assesses all factors such as systematic risks, potential conflicts with the current system, or internal business conditions. According to the result, management will make necessary adjustments to ensure the budget sufficiently support the objectives. At last, the final budget will be communicated to stakeholders, where all relevant matters should be clearly represented.

Managers participate in two major roles in budget preparation: developing and controlling. In fact, managers provide the data used in budget creation, where all the forecasts are suggested by their experience and assumptions. Also, a successful implementation of the budget depends on manager’s participation. Top management is responsible for communicating the budget to stakeholders and design simulation package for meeting the budget targets. Hence, managers control the preparation process to maintain the budget efficiency and effectiveness.

On the other hand, the budget committee oversees the budget establishment. It is their responsibility to make sure that the budget complies with the company goal. They are also required to resolve conflicts and impediments incurred during the preparation. (Garrison, Noreen & Brewer, 2015) Besides, the committee coordinates cross-functional departments to generate the budget, and the committee will evaluate the outcome before implementation.

Day 232 The GFC and monetary policy in U.S.

The GFC and monetary policy in U.S.

The Global Financial Crisis(GFC) is also referred as the U.S. sub-prime mortgage market crush between 2007 and 2008. This is because the collapse on sub-prime mortgage companies leaded the domino effect on the global financial markets. The drastic crush on the Mortgage Backed Securities MBS hit the bank hard and generated the chain reaction on the U.S. economy. 

According to the data, the U.S. economy experienced a nil to negative growth on GDP during 2008 and 2009. Both consumer expenditure and investment suffered a decline during the same period. Especially in the residential investment market, the burst of real-estate bubble immensely reduced the investment on related area. In addition, the export and import have been hit as well. The government expenditure increased due to the fiscal stimulation plan in 2008 and 2009.  

In response to the crisis, the Federal Reserve Bank (FRB) has lowered the effective interest rate since the GFC, which indicates a typical expansionary monetary policy. In fact, the federal fund rate has been reduced to 0.16 percent in 2009, and this near-zero interest rate generated several effects. Firstly, the low interest rate boosted households’ expenditure, since there were fewer incentives for them to invest money. The interest rate is treated as the premium to compensate investors’ risk bearing, therefore, the reduced interest rate became insufficient to perform such function. Consequently, the consumers’ consumption increased, as well as GDP. Secondly, the low interest rate encouraged firms to borrow funds, due to the cost of borrowing decreased. These debt capitals transferred into the company's asset, which was anticipated to create future economic benefits and employment opportunities. Thirdly, the implication of monetary policy is achieved by open market operations, where the FRB buys and sells securities to alter the money supply. Hence the FRB expansionary policy from 2007 increased the money supply by purchasing government bonds, for the purpose to reduce the interest rate. Obviously, the government obtained more funds to use on the fiscal stimulation package, which made the economy better off. Fourthly, the low interest rate had a negative impact on demand of U.S. currency, thereby the deprecation on the exchange rate benefited the net export as well). As a matter of fact, this expansionary monetary policy was very effective. According to the data in previous section, the U.S economy recovered in 2010. The growth rate on GDP, personal consumption expenditures and gross private investment were successfully inverted back to positive. In addition, the export and import also started to increase. The government expenditure declined, corresponding to the reduced requirement on economy stimulation policy. Besides controlling the interest rate, the FRB also enforced the communication to shape the market expectation. Several actions were taken to provide investors better understanding of the expansionary policy, including the Federal Open Market Committee (FOMC) indicated that exceptionally low" levels of the federal funds rate were to be maintained for an 'extended period' in 2009.

In conclusion, this expansionary policy combined with other fiscal economy stimulation package immensely eased the crisis and helped the U.S. economy get back on track.

Day 231 Greece debt crisis and effect over Australian economy

Greece debt crisis and effect over Australian economy

The European Debt Crisis, or Greece Debt Crisis fluctuated the world market once again since 2010. The problem was derived from the risk of Greece defaulting its public debt. The Global Financial Crisis had negative impact on Greece borrowing cost, which leaded to this huge government budget deficit.

The fluctuation in the Eurozone substantially reduced the export form China and U.S., so the Australia economy was indirectly impaired through these connections. 

According to data, the Reserve Bank Australia (RBA) has been continuously reducing the target cash rate from 2011. This expansionary monetary policy was aiming to carry the Australian economy out from its downturn. However, in our perspective, the policy seems quite ineffective on economy stimulation, even though the target cash rate has been successfully reached. In fact, the low interest rate did perform part of its role on spending aggregation. For example, the GDP growth rate was brought back to 4 percent, and the import increase 5.6 percent on 2014. Besides that, our export and private investment still showed a downward trend, and the household consumption growth dropped to 4.1% in 2015. There were several factors that hindering the effective expansionary policy implication. First of all, the mining boom has ended, suggested by the total private investment growth. This made the total demand of funds from the business sector dropped, hence the investment expenditure was shrinking. In addition, the EDC substantially affected the Chinese economy, which tremendously hurt Australian’s export to China (majorly iron ores and other minerals). Therefore, the net export was unstable as well. Moreover, the low interest rate did not provide much stimulation over households' spending. The recession on Australian business cycle and the global economy fluctuation caused a high unemployment rate, which increased individual’s precautionary need to hold money, instead of spend it. Furthermore, the cutting interest rate provided speculative opportunities on the real-estate market. The property price in Sydney and Melbourne was skyrocketing, which created another bubble. In fact, the APRA had to pass new regulations to raise the residential investment loan rate. 

In conclusion, the expansionary monetary policy aggregated the expenditure in a less effective manner, due to the factors we discussed above.   

Day 230 The RBA monetary policy effectiveness

The RBA monetary policy effectiveness

As the Greece Debt Crisis fluctuated the world economy, and Australia was indirectly affected through the connections with China and U.S.. As we can observe from the table, the Reserve Bank Australia (RBA) has been continuously reducing the target cash rate from 2011. This expansionary monetary policy was aiming to carry the Australian economy out from its downturn. However, in our perspective, the policy seems quite ineffective on economy stimulation, even though the target cash rate has been successfully reached. In fact, the low interest rate did perform part of its role on spending aggregation. For example, the GDP growth rate was brought back to 4 percent, and the import increase 5.6 percent on 2014. Besides that, our export and private investment still showed a downward trend, and the household consumption growth dropped to 4.1% in 2015. There were several factors that hindering the effective expansionary policy implication. First of all, the mining boom has ended, suggested by the total private investment growth. This made the total demand of funds from the business sector dropped, hence the investment expenditure was shrinking. In addition, the EDC substantially affected the Chinese economy, which tremendously hurt Australian’s export to China (majorly iron ores and other minerals). Therefore, the net export was unstable as well. Moreover, the low interest rate did not provide much stimulation over households' spending. The recession on Australian business cycle and the global economy fluctuation caused a high unemployment rate, which increased individual’s precautionary need to hold money, instead of spend it. Furthermore, the cutting interest rate provided speculative opportunities on the real-estate market. The property price in Sydney and Melbourne was skyrocketing, which created another bubble. In fact, the APRA had to pass new regulations to raise the residential investment loan rate.

In conclusion, the expansionary monetary policy aggregated the expenditure in a less effective manner, due to the factors we discussed above.  

Day 229 Savings and wealth

Savings and wealth

Saving and wealth are two essential measures of macroeconomic performance. They are separate factors yet hold mutual impact. 

Wealth is the value of assets minus total liabilities, and saving is the disposable income less current spending. Wealth is the stock figure which represents a value at a point of time, and saving is the flow represents the rate of change in wealth. In some extent, wealth will affect consumer’s saving pattern, on the other hand, change in wealth equals to saving plus net capital gain. The main motivation of savings are: life-cycle, precautionary and bequest saving. However, other outside factors like real interest rate, self-control and demonstration effects also have a substantial impact over saving behavior. The national saving level is the key determinant for the economy’s future growth, it is considered with two sectors, private and public saving. The private sector is the combined savings of households plus business. It equals to the after-tax income minus consumption expenditures. The public saving is the amount remains after the government covers its spending by the net tax collected(tax-transfer payments to the public). A negative public saving can be interpreted to government budget deficit, and a positive public saving means the government is experiencing the budget surplus. Even though some countries like Australia may have a low household saving level, it may not cause a problem due to the business saving, and public saving is large enough to cover it. As stated before, the saving defines the national ability to supply funds that used for investment on new capital goods. This relationship is directed by the real interest rate. It is straight-forward, since the high interest rate will increase the supply of saving and decrease the firm’s willingness to borrow for investment, vice versa. Moreover, the requirement of new technology will stimulate the demand of investment, therefore, raise the real interest rate. 

However, economist need to be aware of government budget deficit .It dramatically reduces the national saving supply, hence push the real interest rate as well. This is the crowding out effect that harms the economy’s propensity to invest on new capital goods, which will benefit the economy in the future.

Day 228 Globalization

Globalization

The globalization has become the trend of development in the past decade. When the economy opens to the world for trade, it is very common to see that domestic industry to be hurt by the foreign imported products. Since the imported goods will generally have lower price or higher quality.

The effect of this increased foreign import may have serious consequences. The demand of labor in the domestic industry will decline, due to the value of marginal product has dropped. The reduced real wage and employment quantities will drive workers mobilized to the exporting industry market, which benefited by the globalization. This market will offer more place and higher wages, since the firms are earning more than before. During this worker mobility process, government may provide transition aid such as training to workers. As we know, the technology change will boost the productivity of workers, but it may vary the real wage differently on different workers. For instance, the skill-biased technological effects the marginal products of higher-skilled workers differently from lower-skilled workers. Thus the firm will seek more higher-skilled workers and fewer lower-skilled workers. In addition, an accountant may lose his job, due to the fast development of accounting software such as MYOB, Quicken simply reduce the quantity needed for perform the task. By studying the labor market, we observe the quantity of labor demanded can be less than the labor supplied. Therefore, there are people experiencing unemployment. The unemployment is considered to be a cost for the society, due to the workforce is not fully utilized. It also creates physiological and social costs that make the society unstable. The unemployment has been divided into for types: firstly, there are always natural unemployment rates, which is independent of the economy’s performance. In addition, the frictional unemployment is less concerned because is the short-term situation caused by the workers searching for the right job. Besides the last two types of unemployment, the structural unemployment is the true burden over the government. People are unemployed due to the lack of skills of aspirations leads this long-term and chronic unemployment. Furthermore, the cyclical unemployment occurs when the economy is experiencing contraction. 

As an economist, the aim to fully utilize the workforce to product the maximum output, but there are other impediments to full employment. To illustrate, the minimum wage laws, labor unions, and other employee beneficiary regulations that increase the unit labor cost will prevent to an employer to hire the social optimal level of labors.

Day 219 Aggregate demand curve and the inflation rate

Aggregate demand curve and the inflation rate

The aggregate demand curve is used to describe the relation between the output (aggregate spending) and the inflation rate. It is downward sloping due to the higher inflation rate will create uncertainties for expenditure, reduce the wealth holding and enormously reduce the export value. 

Changes in exogenous factors that are independent from output or real interest rate will shift the aggregate demand curve. In addition, addition, the tighter monetary policy that set interest higher for each given rate of inflation will reduce the aggregate demand and shift it to the left. The aggregate supply is based on the short/long-run inflation rate. In short-term, we assume that firms do not adjust their price corresponding to the demand, so the SRAS is a horizontal line. The long-run aggregate supply indicates the economy potential output. The short-run equilibrium indicates the actual output level under the current inflation rate, the economy tends to correct itself when there is an output gap. Thus, if there is an expansionary gap, firms will raise the price to match the excess demand. It there is a contractionary gap, firms will cut the price as to sell more. As a result, a result, giving enough period of time, the economy itself will eliminate the output gap and achieve long-run equilibrium. By studying the AD-AS model, the source of inflation is clear. It can be caused by the increase in exogenous components that shift the AD curve to the right. That will create an expansionary gap, so the inflation will rise as stated before. Another source of inflation change is the inflation shock, which adverse inflation shock raises the current inflation rate, and favorable inflation shock reduces the inflation rate. The adverse inflation shock will bring the inflation rate up, therefore the reserve bank may choose to ease its monetary policy to eliminate the recessionary output gap. There is another type of shock to potential output, that will decrease the long-run aggregate supply, hence create an expansionary gap. As a consequence, the inflation rate will increase till the new long-run equilibrium. Both of the adverse shock in inflation and the shock to potential output are the aggregate supply shock, which will reduce output and increase inflation. For the purpose of inflation control, the central may choose to tighter their monetary police before an anticipated rise in inflation. This will deliberately create a recessionary gap with shifting the AD curve to the left, thereby the inflation rate can be expected to fall. 

Generally, the public’s expectation and the inflation rate are mutually affected. The higher the predicted inflation, the more proportion of wages people will ask to rise. This will make the firm to raise the price to cover the cost, so the inflation will increase. And vice versa.