The understanding of economics is vital regardless if you are a startup company or if you have a company. The economy has a great impact on the performance of a company, when the economy is going well the company is more likely to do well, whereas, if the economy is in a recession then the company is more likely to struggle. The understanding of economics can help the companies to take precaution to avoid distress when the economy is at its lowest point.
When the economy is peaking
When the economy is at peak it is best to have precautionary savings for the company or make use of the economic peak to diversify the companies market and business. The diversification of the market can help the company to sustain during an economic recession within a country. If the company is doing well in Country A then it is most advisable to expand the market to Country B so that when the economy of Country A is in a recession the income from Country B will support the losses. The diversification of business can help the company to sustain when one business is doing bad the other business might do well during economics downfall. When the economy is at its peak most the people have jobs, therefore, they have disposable income to spend on the things they desire. Whereas during the recession the unemployment rate is high, therefore, most of the people do not have enough income to spend. Therefore, it is best to take advantage of the economic peak rather than ignoring that the economy will not remain at peak.
When the economy at recession
When the economy at the recession, there are not much can be done but to survive the recession, during economic recession multinational companies can survive the recession but during a global recession then even the multinational companies have less chance of surviving. If the recession is within a specific country then it is best to increase the export to other countries. In a recession, the government usually reduce the tax to boost the economy, therefore, it is best to take the opportunity to export. The local market does not have enough disposable income for spending, therefore spending is low during the recession. The economic downfall usually encourages the employees to work hard to keep their job, this can also be taken into an advantage by increasing the quality and efficiency of the production. An increased quality of product and services are in high demand in international level.
The companies that are at peak should take advantage of the extra cash for sustainability of the company by taking the projects are that have positive NPV. Some of the companies with extra cash take bad projects with an ambition in expanding the company.
Rule of the markets
Forex rates and markets
Monetary policy and Quantitative easing
Friedman also influenced other fields that have an impact on the economy like education and military policy. Many aspects of free markets and attendant government regulations today can be attributed to the works of Friedman.
Basic things you need to know about the low interest rate and how it is impacting the banking industry in Q and A format
The Economy have changed since 2008, when the inflation rate was high the central bank used to increase the interest rate to reduce inflation rate, where people would save their money instead of investing or doing business to get a high return on interest. People used to investor start-up business when the interest rate was low because the cost of low cost of borrowing. The interest rate could be understood well by using Taylor Rule by John Taylor.
These questions can give better understanding of the current economy:
The Fed reduced the interest rate to 0.25 percent after the 2008 global economic crisis, since then the central bank of developed countries have reduced the interest rate close to zero or even to negative interest rate.
Why did they reduce the interest rate to close to zero?
Reducing the interest rate to close to zero increases the economic activity and increases the production. Low-interest rate means low cost of financing the business.
What is the macroprudential policy?
Macroprudential policy is to ensure the stability of financial health of an economy.
How will macroprudential policy foster financial stability?
The financial stability can be achieved through macroprudential instruments which are:
Is it here to stay for the long term?
Yes, macroprudential policy is here to stay for long term maybe even permanently.
Is low-interest rate good for the banks?
Low-interest rates have some advantages for the banks, but one of the biggest advantages is it allows banks to obtain loans at a low cost.
Is low-interest rate bad for the banks?
Yes and No, for the answer yes was answered above but for the answer no is: The low-interest rate means that banks have a lot of money that they can’t use due to restrictions by macroprudential policies. The low-interest rate is meant to reduce the cost of financing but it actually increases the cost of holding so much money for the banks. The banks increase their revenue by giving loans to customers but due to the restrictions by macroprudential instruments, the giving loans become harder for the banks. One of a good example is Liquidity Coverage Ratio (LCR) where banks have to have 100 percent or more of the deposits over the period of 30 must be held by the banks, that means the short term depositors are a cost for the banks. Another example is Liquidity risk charges where banks get penalized for short-term funding or leverage ratio where banks have to maintain low leverage ratio.
Do banks earn money from Bond?
This is where it gets interesting when the interest rates fell the banks cannot make money through selling bonds, because not many people are interested in buying bonds, therefore, the demand for bonds have fallen. Think about it, the why would investors buy bonds that give only 0.25 percent return where they have to keep their money for a long period of time. Short-term bonds are still understandable but long term bonds such as 5 years to 30 years maturity are hard to attract investors with a low-interest rate. If the banks bought government bonds then they are highly likely that they will keep those bonds because they will still be getting their returns at the high-interest rate when it was issued.
What are the alternative solutions?
It is hard to give suggestion but the large banks have branches all around the world and not all the countries have implemented low-interest rates and macroprudential policy. The banks should make some research on the countries with high-interest rates and try to diversify their business to those countries with high-interest rates, that way they can obtain the low cost of capital and earn the higher interest rate. Like what Milton Friedman said, "in an economy, both parties can gain, it does not mean one has to gain and another has to lose".
Are we going to have another global crisis?
If I knew that I would be so rich, but actually even if we knew it, we wouldn’t be able to do anything about it due to our ignorance. It has been talked a lot by many people if we are going to have a global crisis again, well most of the countries are already seeing economic fall due to a reduction in the price of crude oil, natural gas, and coal. It is hard to tell if European and US economy will have an economic crisis because they have always been the buyers of the oil and gas and low cost these commodities reduce their cost of buying these commodities.
The number of businesses in private sector is growing every year in United Kingdom, according to fsb.org.uk there were 5.4 businesses registered in UK which grew by about 2.7% from 2014. These are the list of top 3 economic reasons why businesses fail, based on our finding from other resources.
In perfect competition there are a lot of businesses that offers identical products and services. Higher the number of companies register the higher the competition. According to gov.uk the problem in market sector is when market is working well companies compete by offering cheaper and better product to their customers.
Fail to pay tax
According to simplybusiness.co.uk one of the reasons why businesses fail in UK is because they are unable to pay taxes. It is highly likely that most companies are unable to pay their tax on time and according to Simply Business the firms should HMRC immediately when they are having difficulties in paying their tax.
Another economic reason why businesses fail in UK is due to the lack of enough budget. According to the intuit.co.uk 29 percent of the small business failure is due to not having enough cash. Based on an article published at telegraph.co.uk the businesses fail due to lack of banks lending. The companies likely to fail with small budget and when there is limitation in borrowing money from banks to finance the operation of their business.
Malaysia is open economic country with stable economy. According to World Bank Malaysia has the largest economy in South East Asia with the growth of over 7 percent per year for over 25 years. Based on the 2016 report by heritage.org the freedom score increased by 0.7 points with new score being 71.5, it makes Malaysia 29th in Global Ranking. The corporate tax rate in Malaysia is 25 percent and income tax rate is 26 percent.
Malaysian education is among the top around the world, the quality and affordability of education is one of the greatest contributors for skilled employees in Malaysia. In 1997 the government established government loan called Perbadanan Tabung Pendidikan Tinggi Nasional or in short it is know as PTPTN loan. The loan is made by the government with 1 percent interest per annum and every Malaysian who wish to study should not be denied to get a loan due to financial background. This loan encourages Malaysians to study and be educated employees. Malaysia is among the best countries in terms of skilled employees and it makes it ideal location to invest and conduct business.
The technology is one of the main exported goods of Malaysia, according to OEC the 12 percent of Malaysian export in 2014 was Electronic Microcircuits, 1.8 percent was computers and 1.9 percent was computer parts. The electronics such as computers are essential in conducting business and these products are relatively cheap in Malaysia and it helps the investors to reduce cost in their initial startups. There are other technologies available to export from Malaysia the quality of Malaysian products are considered favorable around the world.
The current interest rate in Malaysia is 3.25 percent and the inflation rate is at 3.5 percent, if Bank Negara Malaysia or Central Bank of Malaysia reduced the interest rate the inflation rate would increase in Malaysia. In an economy when there is too much money the inflation rate increases, reduction in interest rate will discourage from depositing and it will encourage in borrowing. The low interest rate reduces the cost of borrowing due to this most of the people will finance their cars, houses, businesses and investments by borrowing money from the bank. The interest rate is relatively low in current economy of US and Europe, but the central bank put restriction on Banks in lending money, that is why the inflation rate is low even that the interest rate is low. The central bank of US and other developed countries control the banks through Macroprudential policy.
Why would inflation rate increase if Bank Negara Malaysia reduced interest rate?
The inflation rate will increase if Bank Negara Malaysia reduced interest rate because they would be too much money in the economy of Malaysia. For many years Malaysian government has been battling with high inflation rate that is why they have been giving subsidiary in petrol, utility and other things. If the central bank of Malaysia reduces the interest rate then there will be an increase in inflation rate, but if the central bank of Malaysia also introduces Macroprudential policy then they will be slowing down of output. The restriction on banks to give loans to consumers and businesses will reduce the output because most of the people finance their houses and cars through bank loans. The current interest rate of Malaysia is in optimal point and it takes time to reduce inflation rate.
Most people dream of owning their own company, but there is fear in many people to start up their company because of risk factors. According to gov.uk in UK there are about 3.4 million active registered companies, whereas in Europe there are over ten million registered companies. Many people have great ideas and knowledge to start up their company and as well as to make it successful but even then there are many companies that fail. There many other reasons why businesses fail but this article focus on the economic reasons. It is hard for the companies to manage the economic activities because they cannot manage or control the monetary policies and fiscal policies.
Increase in Tax
An increase in tax forces the companies to increase the price of their goods which results in reduction in sale. The reduction in revenue will forces the company to reduce wages and the number of employees in the company to reduce cost. If their sale keeps declining then these companies will not be able to bare the cost of running the businesses, which will force their business to fail.
Increase in Interest Rate
When central bank increase interest rate then it increases the cost of borrowing, these are directly effected by small companies because they depend on taking loans to operate their businesses. It also has an impact on the big companies because their employees will have to pay higher interest rate on their mortgage which will reduce their disposable income. Reduction in disposable income will reduce the sale for many companies, which will force their business to fail in the long run.
Export and Import Policies
High export duty is not advisable for most of the countries because then these companies also have to pay import tax in another country which will increase the price of their products, that way they will have low sale. High export tax reduces the market size of the businesses therefore they will depend on the local market. It puts barriers for them to expand their businesses where in long run their business will fail because of an increase in competition. Import duty is very hard for the government to set, because reduction in import duty will increase in imported goods which will increase the competition for local businesses. Increase in import duty will also course the businesses to fail because there many import companies.
Businesses fail because of high unemployment in economy. If people do not have a job then they will not have any income, when people do not have money to spend, therefore businesses will not be able to sell their products and services. They will shut down their company because of low revenue, they will not be able to pay the salary of employees and other expenses.
The standard of the living of people in a country depends on the economy of that specific country with the influence of international economy. The economy is important for all the countries, therefore with the correct use of key economic factors most of the countries can have high economic growth. The resources of the earth are limited but the desires of the people are unlimited. According to Hyman.D.N (1986) economy is a study that allocates the resources among alternative uses. However there are some other similar definitions of economy, the two types of economy: which are microeconomic which focuses economic in details on the domestic economy and the macroeconomic which focuses on the economy of the entire country. The key economic factors that is important for a country depends on the macroeconomic situation of a country. The natural resources, human capital and foreign direct investment (FDI) are the key economic factors that are important for economic growth of a country. One method of showing how key economic factors can contribute to the growth of economy in a specific country is by comparing the relation of natural resources, human capital and foreign direct investment with gross domestic product (GDP) of that country in two different years.
Impact of Foreign Direct Investment (FDI) to Economy
Foreign direct investment is one of the key important factors which are important for economic growth. Foreign direct investment (FDI) is when a country encourages the companies from different countries to invest their capital, technology and skilled employees in their country. Foreign companies buy the local currency to invest in local economy, this increases the demand for local currency, which makes it stronger. Strength of currency is vital for the economic growth it helps to keep the inflation rate lower, and reduce the price of imported goods. It helps to increase the standard of living, most of the citizens can afford to buy imported goods at lower cost.
However, there are disadvantages of FDI, the main issue is bankruptcy of local companies, and most of the local companies cannot compete with the foreign companies due to the cost and efficiency of production. Foreign companies have more capital and technology to reduce the cost of production, therefore they can reduce the price of goods they sell to the public. Local companies do not have the technology and capital to produce in mass production and due to these reasons they cannot reduce the cost of production. However, government implement’s barriers to protect the local companies from bankruptcy. The major government policy is an increase in tax for foreign companies. An increase in tax forces the foreign companies to raise the price of goods they sell.
Impact of Human Capital to Economy
One of the main goals of economy of a country is to minimize the unemployment rate. The human capital is important for the companies to maximize the production at minimum cost. The productivity of employees depends on the education and experience, therefore the governments try to improve the quality of the education. The education is the biggest contributor for the human capital. The education prepares the students to become valuable employees and in return the employees increase production of goods in the country. Another factor that contributes to the human capital is the foreign direct investment.
However, according to Soboleva (2011) there are two situations when human capital is undervalued or overvalued. An undervalued employee situation accurse when the employees perform low skilled works. The overvalued accurse when the employees are given jobs to perform that are beyond their capability. These two situations are common issues of human capital in an economy. An increasing globalized economy, these issues decreased dramatically and in return it created opportunities in international market (Soboleva 2011).
In conclusion, the economy is becoming more internationalized, the economy of one country has big impact on the economy of another country. It is important to have good relationship with other countries to maintain stable economy.
On Monday Pound Sterling went down to 1.41 against US dollar, after announcing of Boris Johnson that he wants to campaign to leave EU on Sunday 21st of February. This is not something new and it was predicted that Boris Johnson would campaign for UK to leave European Union. People were aware of it for a while but yet the market did not respond to it as it did on Monday 22nd of February.
Efficient Market Hypothesis
In the last 30 years of last century, efficient market theory has been widely accepted and dominant in academic finance and economics. It is linked with “random walk”. According to Osborne (1964), the change of all stock prices is random and unpredictable. Because stock prices and exchange rates fully reflect all the information, if the information is changed, stock prices and exchange rates will immediately reflect the news. However, this information cannot be known in advance, the situation leads investors not to depend on previous stock prices and exchange rates to predict future prices and rates. Followed in 1965 and 1970, Eugene Fama for the first time mentioned the concept of efficient market. He made some assumptions that in the efficient market, there are a large number of rational investors who expect to obtain maximize returns. Every investor is able to acquire important information and tries to predict the future price of a single stock. Due to the intense competition among investors, this condition makes the market price of a single stock completely represent all the things in the whole time.
The latest news for UK to leave EU is weak form of efficient market.
In a weak form efficiency hypothesis, price of market securities can reflect historical information, including stock prices and exchange rates , trading volume, short selling amount, financing amount and so on. In this case, investors will fail to acquire abnormal return by forecasting stock prices movements from market information in the past. This means technical analysis is no longer helpful. Nevertheless, fundamental analysis can still result in abnormal returns. It was known that Boris Johnson wanted UK to leave European Union, but yet the market did not respond until Monday.
Malaysian Ringgit was strong and steady in 2012 and 2013 but then it started to lose it's value against US dollar, Euro and GBP. The biggest impact in RM was the oil price. Malaysia still heavily dependent on oil price. If we look at the graph RM started to lose it's value after April 2015. During these times when US and Europe wanted to impose sanction on Russia. US started to get their currency strong so that Russian Ruble can be weak. It was even addressed by President Obama that US made Russian Ruble weaker.
What Malaysia can do is to increase the demand for RM with in Malaysia and also in internationally. One of the ways countries increase demand for their currency is by having currency futures agreement with other countries because it increases the demand for RM and also it can increase the foreign currency available in Malaysia.
Reducing the Interest Rate
The interest rate in Malaysia is still very high, it is above 3.2 percent, the interest rate in US and in Europe is below 0.5 percent. When interest rates are low it reduces the cost of financing, therefore it increases the demand for money. Low interest rates discourages the consumers to deposit their money because the return is low, therefore they will invest their money or spend it. In conclusion Malaysian Ringgit can go back to RM3 to 1 US dollars.