BAXTER MAGAZINE - An Overview of Economics

The field of economics studies the way a nation handles the problems of making, distributing, and buying all the various items that its people want and need. Economics is a social science that is affected by three basic things - natural resources, labour, and capital. In order to obtain such items, an exchange occurs either by a form of money, barter system, or modern means by technology.

There exists two types of economics, micro and macro economics. Micro economics focuses on a small scale of economics. Macro economics deals with a bigger picture of economics. Such issues are, inflation, unemployment and the business cycle both domestically and internationally. With the aid of Government intervention, certain policies prevail to obtain a level of equilibrium. These policies are fiscal and monetary policy.

With the constant changing of modern technology, and international trade obtaining a normal level of equilibrium becomes difficult. As a result, economies collapse, underground economies are created and new means of trade evolves, such as e-commerce, smart cards. Unfortunately, with the changing economies, the necessary policies required to produce an equal supply and demand for goods and services becomes more and more difficult for today’s government.

The United States bestrides the globe like a colossus much like the Statue of Liberty herself. It dominates business, commerce and communications. Its economy is the world's most successful, its military is second to none. Yet the strength of the statue is uncertain. Having so much power, it seems the United States does not know how to behave. Since the collapse of the Soviet 'enemy' - no one has spelled out what America's interests are.

Should America act alone and unhindered on the world stage, since it can? Or should it willingly dilute its power in co-operation with others. Within the U.S. Congress there is confusion on every aspect of foreign policy.

Other questions asked: Is the United States at the height of its business cycle and heading for a decline or will the United States be a world leader of humanizing globalization? If America refuses multilateral entanglements, will the United States be a leader with no one to lead, in a world made unstable by its own isolation?

Money is a tool...a necessity of life. Like any other tool, it is destined to change and to improve over a period of time. However, such a change must be made gradually.

Existing from Third World Countries to the borders within North America is the world of the Underground Economy. Crimes committed are anything from monies 'paid under the table' for services and products to the Central Banks of Russia, and organized gangs. Organized crime, like so many businesses in the 1990's is seeking mergers, not only at home in their own countries, but mergers with crime gangs in other countries as well. Domestic and international police are uncovering forms of international partnerships, such as Russian and Asian links dealing in drugs, counterfeiting, weapons, phoney passports, and money laundering. It does not matter what the crime is, but what it comes down to is money. Money for personal gain and money lost to revenue to governments at home and abroad.

With changing times for global economies and advancement of technology is there a need for an International Macro Cop? The International Macro Cop’s role would be to regulate the international monetary currency, be it the Yen, Euro or even the U.S. dollar. When a single common currency is adopted within a continent or a region, there is the potential for a unified economy to result. Such a trend can lead to individual national economies becoming redundant, all part of the modern ideology of globalization.

Kent Edward Baxter
Anabela Medeiros
Sharon O’Connor
November 1999

Three essential words that basically describe economics are; scarcity, choice and time. Without them, the requirement for economics within a nation would not be
required.

One of the basic economic problem is scarcity. Individuals have unlimited wants that exceed the available resources to satisfy them, as a result choices must be made. Therefore, a form of economic behaviour arises because individuals must choose the best or optimal use of the available resources. If resources were unlimited, there would be no need to use them economically. Therefore, economics can be defined as the study of how people cope with the problem of scarcity.

Resources are both desirable and scarce, but a choice must be made as to how to allocate them. As a result, individuals require a choose between one thing or another when they’re unable to obtain both. For example, if you’re a $20 million lottery winner and you wanted to purchase a house and go on a trip, you can do both. You won’t have to choose between these items. So, economics can be consider the study of choice.

In order to make a choice, an opportunity cost of the alternative foregone results.

Time is an important factor in economics, especially if it’s consider a form of resources. For example, the $20 million lottery winner would have to decide to spend time shopping in Europe, or spend time with friends. Another example, is when a purchase is "free"- no cost. But in fact there is a cost, and that’s your time. You can’t put a dollar value on your time because it varies from situation to situation. But could utilize your time to study for Macro economics, rather than going out to get the ‘free dress’ at a friends house.

The effectiveness of fiscal policy depends on the government’s ability to perceive a problem, and to react appropriately to it. The essence of fiscal policy is the government changing its taxes and its spending to offset any deviation that would occur in other autonomous expenditures, thereby keeping the economy at its potential level of income.

1. Expansionary fiscal policy-this reflects a decrease in taxes and an increase in government spending. Actual income is below target income.
2. Contractionary fiscal policy - this reflects an increase in taxes and a decrease in government spending. Actual income is above target income

Historically, the growth of public sector has increased the nation’s tax bill both absolutely, and a percentage of national income. In Keynesian view, and increase in taxes represents a withdrawal of purchasing power from economy and therefore have a contractionary or anti-inflationary effect. Supply-side opinion, sooner or later most taxes are incorporated into business costs and shifted forward to consumers in the form of higher taxes. Taxes, in short, entail a cost-push effect. Many taxes constitute a "wedge" between costs of resources and the price of a product. For instance, in 1990’s local and provincial government increased municipal and sales taxes. Also, the Federal Government boosted compulsory social insurance contribution. Therefore, these taxes were incorporated in business costs which are reflected in higher costs. Or, the Reagan-era of supply-side economics.

Through trade and other linkages, each country’s economy, regardless of whether it is large or small, is influenced by other countries’ actions.

It’s believed that if people are rational, they can form rational expectations of predictable future events. For instance, if the government starts to boost spending or increase the money supply when the economy seems to be heading for a downturn, everyone will eventually learn that and adjust their behaviour accordingly. Which means, that regular government efforts to control the business cycle simply cannot work.

As things change in our daily lives, with increasing development of new technologies and different thinking perspectives, what was once believed as traditional economics with theories of general equilibrium that worked out for the best, have moved to multiple equilibriums that may not.

From a colonial economy based largely on mining, the economy has diversified to include strong agriculture, petroleum and industry sectors. Strong growth from 1940-80 interrupted by series of economic crises, caused in part by massive over borrowing. Government spending outpaced revenues. 1980's was marked by inflation and a lowering of the standard of living.

Introduction of free-market policies led to a period of growth from 1990-94. Membership in NAFTA led to hopes or continued economic growth. However the growing trade deficit and overvalued exchange rate and poor fiscal policy along with political shocks caused investor panic. Inflation soared, and massive foreign intervention was required to stabilize economy.

As a result of the government's stringent economic stabilization program, the fiscal deficit was eliminated, international reserves rebuilt and export growth restored, but at the cost of lower real wages and extensive unemployment.

To control persistently high inflation and restore growth and international competitiveness, the government pursued a major policy reorientation in the late 1980's. It reduced state involvement in economic production and regulation and integrated Mexico more fully into the world economy. The government reached agreement with its external creditors on extensive debt restructuring and reduction.

Deregulation and enacting extensive trade measures including elimination of trade import barriers and pursuit of free-trade agreements with Mexico's trading partners, especially the United States. The Mexican economy remains fundamentally strong, but lack of confidence makes short-term prospects for a strong growth unlikely.

Nations are classified into groups that indicate their economic strengths and weaknesses as well as their stage of development. Industrial or developed nations are those that have achieved substantial manufacturing and service capability in addition to advanced techniques in agriculture and raw material extraction.

The leading Western, free (noncommunist) industrial nations have been referred to as the First World. The Second World has included the socialist-communist nations. But, these second world nations and states are being included as developing countries as they adopt more market-oriented democratic principles.

The Third World has covered developing countries and the resource-poor nations in the Third World are now being grouped as the Fourth World.

The United States of America is a clear winner in the world's economic contest. The American economy has gone from strength to strength. America dominates business, commerce and communications. Its economy is the world's most successful, its' military second to none.

The conclusion is that all countries, rich and poor, should adopt the American model of flexible labour and product market, and shareholder free enterprise.

The American Economy is superior in three measures: growth in output; productivity; and job creation. America has succeeded over the past seven years (1992- 1998) with average annual GDP growth. Growth in the third quarter of 1999 zoomed ahead to an annual rate of 5.5% a surprise to economists.

Productivity in America remains higher than elsewhere and in recent years the rate of increase has quickened.

America also clearly outperforms in job creation: unemployment has fallen to 4.2% of the labour force. Economic studies suggest that the best recipe for growth is a long one, but with no single ingredient: it includes high saving, low taxes, openness to trade, good education, the rule of law and sound monetary and fiscal policies. Each model emphasizes particular ingredients, giving it particular strengths.

America's increased performance over the past decade is that the ideal model changes with economic circumstances.

The measure of the USA's output of goods and services is changing from the "fixed" method to the new "chain-weighted" system in order to retool for a new era - one that recognizes that business has been globalized, deregulation is increasing business activity and relative prices for goods change quickly and dramatically. The "chain" system also recognizes that output for computers , telecommunications equipment and health services is growing much faster than other parts of the economy. The new "chain" method forces the government to recalibrate the relative prices of goods-and their relative importance to the economy – every year instead of every 5 years under the "fixed" system.

Past globalization policies have contributed to all the above, NAFTA (North American Free Trade Agreement) and other trade agreements (GATT) have all attributed to the boom and to the economic growth of the United States.

Gaps are widening in Americas' political party though on free trade agreements. "The U.S. should slow the trend towards globalization because it hurts American workers." Clinton's policymaking is still highly in favour of free-trade and breaking down trade barriers further America's first interest is that the world should be stable, increasingly democratic and at peace. "Globalization, President Clinton told WTO ministers in Geneva last year, "Is not a policy choice – it is a fact".

Evidence from studies shows that economies embracing open trade and investment policies have done better on average than more closed economies.

Socialism is defined as a centrally planned economy in which the government controls all means of production - has been the tragic failure of the twentieth century.

Through the sixties the Soviet economy continued to report strong overall growth roughly twice that of the United States- but observers began to spot signs of impending trouble. Outputs in terms that would maximize the well being of everyone in the economy continued but did not coincided with the supply and demand model. Economic flow became increasingly clogged and clotted, production took the form of "stormings" at the end of each quarter or year to meet preassigned targets.

Targets were unplanned and therfore unobtainable inputs to achieve production goals. Absence of the right to buy own supplies or to hire or fire their own workers, factories set up fabricating shops, then commissaries, and finally their own worker housing to maintain control over bailiwicks.

By the eighties the Soviet Union officially acknowledged a near end to growth that was an unofficial decline. In 1987 the first official law embodying restructuring took effect. President Mikhail Gorbachev announced his intention to revamp the economy from top to bottom by introducing the market, reestablishing private ownership, and opening the system to free economic interchange with the West. Seventy years of socialist rise had come to an end.

An equilibrium in the market for supply and demand was not implemented through willingness to respond to the signals of changing markets. A capitalist firm responds to changing prices because failure to do so will cause it to lose money. A socialist ministry ignores changing inventories because doing something will get them in trouble than doing nothing.

Ordinary people who have long been trained to be suspicious of the pursuit of wealth showed hostility to the market system and the transition from socialism to nonsocialism. Transformations of such magnitude must be measured in decades or generations, not years.

International banks dumped billions of dollars of aid into the economy. Russian leaders pledged that tough economic reform would improve their lives. Instead corruption, watered down reform measures and the lack of an economic safety net are to blame for the erosion of their quality of life.

Monies from the IMF devoted to Russian aid are largely resourced into developing strategic missile defence capabilities and not injected into the economy to stimulate economic growth, nor fiscal and monetary policies are implemented.

As economics and overall cost have brought in new formats of currency, paper money, specifically in lower denominations, has been converted into coinage due to opportunity costs, mainly being that coinage lasts longer than paper currency, especially in lower denominations where is is in greater usage, such as vending and change machines.

Paper currency has additional expenses, not only in production and replacement, but in design - banknotes have changed not only for aesthetics, but due to security reasons. Holograms and complex designs have been implemented on higher denominations to deal with the problems of counterfeiting.

In comparison to credit cards, cheques and debit cards, cash offers two obvious benefits:
- Universal acceptance
- An immediate transfer of value is provided, eliminating the need for remote authorization, such as with a debit machine.

Moreover, cash offers more practicality for everyday purchases such as buying a newspaper or buying an item from a vending machine. Credit, debit and cheques are not only too impractical for such common purchases, they're often not a possible alternative.

However, cash too has its limitations. Cash is:
- expensive to produce, requiring replacement over time due to wear and tear.
- awkward to handle
- vulnerable to theft - difficult to trace and recover

Electronic cash, such as the SmartCard is becoming an increasingly popular alternative to bank notes and coinage due to its convenience, faster and simpler transactions, and lower handling costs for both merchants and financial institutions. Security features such as a PIN code make theft or loss much less of a problem than conventional currency.

Develpoment of modern [electronic] currency has been advocated and acted on by the private sector, i.e banks, rather than governments and central national banks, such as the Bank of Canada. The smart card is a joint venture between banks and data technology companies, such as Mondex. While not all [Canadian] financial institutions have experimented with electronic currency, the few that are using the format are introducing it in a limited market segment, such as communities, rather than large cities or provinces as a whole.

All parties who are likely to be affected - public, private, businesses and consumers - must have the opportunity to experience the usage of new currency technology. Feedback on all aspects of modern currency technology must be collected and dealt with before any larger-scale implementation is attempted. Importantly, the technology for the SmartCard service must be made available at an affordable rate to those seeking to use it, and accessibility must be provided in all areas of the
country, not just urban or developed ares, but in isolated (sic) places such as rural areas or the northern territories.

The underground economy is composed of illegal activities, informal and unrecorded transactions, and income that is not reported.

Some economists estimate that as much as 25 million Americans earn a large part of their income from underground activities. Economists estimate that the U.S. underground economy equals about 10 percent of GDP and it is believed that the size may be larger. In Europe, it accounts for 20% -30% of Italy's, Spain's and Belgium's GDP.

One clue to the size of the underground economic activity in the U.S. is the popularity of $100 bills. $100 bills are not seen at grocery checkouts but as of last year $100 bills represented 60% of the value of all U.S. currency in circulation.

International political pressure following allegations of corruption a deceit of the centre of the Russian state. 40% of family income is said to be unreported to Russian Tax and statistic collectors. The Central Bank, one of Russia's most influential institutions of the Soviet era is facing a challenge to its secrecy and power.

A currency that came into operation on January 1 1999. It replaces all the separate currencies of the individual countries of the European Union.

In 1992, the Treaty of Maastricht was signed by all the countries of the European Union. Unfortunately, due to the Treaty conditions not all countries automatically joined, such as Greece.

The convergence criteria relate to inflation, to public expenditure and to government borrowing in each country.

1. inflation must be low, between 2-3%
2. public debt of a country must not be more than 60% of the a country’s GDP
3. government borrowing deficit must not be more than 3% then the country’s GDP

Under the Treaty of Maastricht, a European Centre bank would have to establish control of interest rates and supply of money in an economy. The banks main concern is to establish low inflation.

The benefits of one currency would be a reduction of cost in converting one currency into another. Elimination of exchange rates between European countries, eliminates unforeseen exchange rate revaluations or devaluations. Also, direct comparability of prices and wages will increase competition across Europe, leading to lower prices for consumers and improved investment opportunities for businesses.

The large Euro zone will integrate the national financial markets, leading to higher efficiency in the allocation of capital in Europe. One country can no longer devalue its currency against another member country in a bid to increase the competitiveness of its exporters. With a single currency, other governments have an interest in bringing countries with a lack of fiscal discipline into line. Also, a European currency would strengthen the European identity.

The disadvantages of one currency would be: Consumers and businesses will have to convert their bills and coins into new ones, and convert all prices and wages into the new currency. This will result in some costs because banks and businesses will need to update their computer software for accounting purposes, update price lists. Also, since there’ll be a Europe-wide interest rate, individual countries that increase their debt will raise interest rates in all other countries. European countries may have to increase their intra-european transfer payments to help regions in need. Another reason, in a recession a country can no longer stimulate its economy by devaluing its currency and increasing exports.

The advantages for Canada using the American dollar as its currency (as advocated by American Senator Connie Mack and several Canadian Economists) are the opportunity to live by and prosper under the world's strongest economy, greater purchasing power for Canadians, as with free trade, the a weak Canadian dollar was beneficial only to American investors. As many countries in Central and South America are seeking to use the American Dollar, there is a high potential for a greater increase in trade between those nations, which Canada has been aiming for. Moreover, European and Asian countries may see the American dollar attractive for investment in Canada. It should be noted, as a semi-standard of operations, most multinational firms have been keeping their books in American dollars.

As a further benefit to Canada, the Bank of Canada would no longer have to face the dilemma of currency problems, such as devaluation, and a floating exchange rate that, in according to some Canadian economists, 'does not seem to work'. A reduction of the burden of monetary policy could mean that time, energy and resources could be put to better use in increased stimulation of the economy.

For South and Central America, indeed the case worldwide, many deals are preferred to be made in American dollars. This unofficial status has made the American Currency the official world currency, according to the theories of Robert Mundell, lending credence to the unknown whereabouts of the majority of close to $400-Billion produced by the U.S. Federal Reserve Board over many years .

Disadvantages for Canada adapting the American currency would be in a nationalistic aspect. In addition to a form of Canadian soveriegnty disappearing, (the basis for opposition by the federal government) which many feel is bound to happen due to the preceived 'branch-plant economy', Canada may be subject to any laws or regulations that arise from the American currency market which may not be in the best interest for Canada. Such regulations may be similar to those of the Helms-Burton Treaty, or sanctions against countries that Canada may not have any dispute with.

The Asia-Pacific rim has become, over the past few decades, a major industrial and financial centre, forming the basis for APEC (The Asia-Pacific Economic Community). The strength of the Yen has allowed for Japanese corporations to 'set up shop' in most Asian countries, such as Taiwan, Korea, Malaysia, Indonesia and Singapore. China, although a Communist country, has been liberalizing trade and investment barriers plus introducing limited capitalism over the greater part of a decade. Automobiles and electronics have been the top exports of the Asia-Pacific region.

Currency blocks, developed or in advocation, will generally serve the developed and developing world - The Americas, Europe, and the Far East.

The need to establish a form of macro cop has arisen due to the changing financial and economic environment that the world is faced with. A macro cop would improve the stability of the international financial system. With the aid of the central banks, there would be a global financial architecture that would prevent or minimize economic crises in the future.

Macroeconomics - Canada in the Global Environment (third edition).
Michael Parkin, Robin Bade

"U.S. senator pushes for monetary union with Canada"
National Post, Wednesday, November 17, 1999 Robert Fife, Ottawa Bureau Chief

"The gold in money's future"
National Post, Monday, November 15, 1999 Robert Mundell

"Police bust uncovers strange merger of crime gangs."
National Post, October 7, 1999 by Chris Eby

www.keele.ac.uk/socs/ks40/labeuro.htm
(The Single European Currency - Your Questions Answered)

www.ex.ac.uk/~RDavies/arian/euro.html
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