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Friday, May 18th, 2012
Devaluations by many other nations, shattering the system of pegged exchange rates and returning the world to the chaotic and destructive conditions of the 1930′s, in which uncertainties regarding exchange rates would reduce international trade and possibly cause a worldwide depression. Consequently, due to the special role of the US dollar in the international monetary system, devaluation of the US dollar was seen only as a last resort.
Much more attractive to the USA would be the upward revaluation of other currencies, particularly the deutschemark and the yen. This would avoid the complications and risks of devaluing the US dollar. However, Japan and West Germany were very reluctant to agree to this, because by making their currencies more expensive relative to the US dollar they would risk reducing their own exports to the vast US market, which would increase unemployment in their countries. Accordingly, Germany and Japan persisted in buying US dollars and selling their own currencies, in order to keep the price of the US dollar at its pegged (and high) level, against the wishes of the USA.
Finally, the USA forced other nations to revalue their currencies upward in 1971, by imposing a heavy import tax on foreign imports to the USA. (The USA would only withdraw the tax if other nations agreed to let the price of their currencies rise.) As a result of this move, the deutschemark rose by 31 percent against the US dollar, the yen rose 26 percent, the Swiss franc rose 23 percent and the British pound rose 6 percent. Also, the USA suspended the gold convertibility, or backing, of the US dollar, to prevent a further depletion of the nation’s gold holdings and a possible loss of confidence in the dollar.
It was hoped that these increases in the prices of other currencies would correct the US payments deficits, but this did not work out. While the deficits were reduced, they did not disappear, and the outflow of US dollars continued. Finally, the USA was left with no alternative but to devalue its dollar against other currencies. In February 1973 the USA announced that the dollar would be devalued, officially by about 8 1/2 percent. However, the significance of this event went far beyond a devaluation of 8 1/2 percent.
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Tags: British Pound, Buying Us Dollars, Currencies, Deutschemark, Devaluation, Exchange Rates, Gold Convertibility, Gold Holdings, Import Tax, International Monetary System, International Trade, Last Resort, Outflow, Revaluation, Swiss Franc, Uncertainties, Unemployment, West Germany, Worldwide Depression, Yen
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Monday, May 14th, 2012
Of all the aspects of a free enterprise economy, the most misunderstood is profits. The very word “profit” evokes among many people images of exploitation of workers and consumers. The level of profits is greatly exaggerated by the general public. While surveys indicate that the public believes profits to amount to 30 or 40 cents per dollar of sales, they actually amount to about 7 to 10 cents per dollar. (Ironically, the public believes 20 cents per dollar of sales to be a “fair” profit). After taxes, most manufacturers’ profits amount to 4 or 5 cents per dollar of sales. The Canadian steel company Dofasco’s 1975 profit of $55.3 million sounds less excessive when viewed in the following perspective: on a capital investment of $800 million, it represents a rate of return of just under 7 percent – less than the return on Canada Savings Bonds. In general, the average after-tax rate of return on capital invested in manufacturing in Canada is in the 10- to 12-percent range.
The public also has many misconceptions concerning the uses of profits, which are widely regarded as being hoarded away in corporate coffers or being paid out lavishly as dividends to wealthy shareholders or “capitalists.”
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Tags: Auto Industry, Canada Bonds, Canada Savings Bonds, Canadian Steel Company, Capital Investment, Capitalists, Coffers, Consumers, Dividends, Free Enterprise Economy, Information Blog, Misconceptions, Perspective, Profits, Rate Of Return, Return On Capital, Shareholders, Surveys, Tax Rate, Winnipeg
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Wednesday, May 9th, 2012
The division of the economic pie among various individuals and groups is influenced by many factors, the most important one being the interplay between the supply of and the demand for various productive skills. For example, highly skilled people are in short supply as compared to the demand for them, so their incomes (and share of the economic pie) tend to be quite high. There may be an even larger demand or semi-skilled labor (as measured by the numbers employed),but their incomes are quite low because of the large supply of them as compared to the demand for them. As the contrasts between the incomes of professional athletes, nurses and farm laborers show, market forces (supply and demand) can generate some incomes that are extremely high and others that are extremely low, in a way that is quite unrelated to how hard people work or to most people’s view of the social value of the work done. On the other hand, such a system provides strong incentives for people to move into occupations that are in demand and to work harder. Both of these factors contribute to society’s economic prosperity.
Thus, people’s incomes (and thus the division of the economic pie) are basically determined in markets, by the forces of supply and demand. There are, of course, other factors, including labor unions and government policies such as minimum wage laws and taxation policies, that influence the distribution of society’s output among various groups and individuals. These matters, however, are “microeconomic” in nature and are therefore considered in a separate text.
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Tags: Contrasts, Economic Pie, Economic Prosperity, Farm Laborers, Fishing Charters, Government Policies, Incentives, Incomes, Interplay, Labor Unions, Minimum Wage Laws, Nurses, Occupations, People, Productive Skills, Professional Athletes, Puerto Morelos, Skilled Labor, Supply And Demand, Taxation Policies
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Saturday, May 5th, 2012
The operation of this market system provides a strong contrast with the command type of economic system. In a very decentralized way, without any direction or control from the government, the people of the island community have themselves provided answers to the three basic questions.
What to produce is decided by the demand of consumers, as the profit he motive and price changes give producers an economic incentive to produce what consumers want.
How to produce each product is decided by the producers. The profit motive provides an incentive for each producer to use the most efficient production methods available, thus contributing to the economic efficiency and prosperity of the society.
The question of for whom to produce it, or how to divide the economy’s output among various individuals and groups, is a more complex matter. The answer is determined by the incomes of individuals and groups, which are in turn determined in the marketplace by the supply of and demand for each type of productive skill. The demand for a particular productive skill depends ultimately on the demand for the product produced by it. The supply of that type of labor depends on the number of people who are willing and able to do that type of work. Thus, in a very real sense, no one “decides” incomes and the division of the economic pie – this is determined quite impersonally in the marketplace, by supply and demand.
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Tags: Basic Questions, Bud, Consumers, Control, Economic Efficiency, Economic Incentive, Economic Pie, Economic System, Economy, Incomes, Marketplace, People, Price Changes, Producers, Productive Skill, Profit Motive, Prosperity, Spud, Supply And Demand, Winnipeg
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Tuesday, May 1st, 2012
Suppose that a particular productive input, such as the fertilizer used in farming, were to become less plentiful. Obviously, it would be economically desirable to use less of this scarce resource. In a market system, the price of this fertilizer, would rise, increasing farmers’ costs and reducing their profits, creating an economic incentive for them to use less of this fertilizer or to turn to an alternative. Furthermore, the higher price of this fertilizer would provide an incentive for fertilizer producers to increase their production of it or of alternatives to it. As before, the necessary economic adjustments take place automatically, in response to price changes.
The foregoing examples show how a market type of economic system adapts to changing circumstances: the system adjusts its production or production methods automatically as people respond to the economic incentives created by price changes. Because of the key role played by prices and price changes in such a system, the market system is sometimes referred to as the “price system.”
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Friday, April 27th, 2012
In the simple desert island economy, individual people were both producers and consumers of products. In a modern economic system, the production of goods and services is done by privately owned businesses – mostly by corporations (owned by many shareholders and managed by hired professional managers) and also by smaller enterprises owned by one or more individuals (sole proprietorships and partnerships, respectively). Consumption, on the other hand, is done by households, which buy and use consumer goods and services. Members of households contribute to the production of goods and services by providing businesses with productive inputs, the most important of which is labor. Also, by purchasing stocks and bonds issued by businesses, households provide businesses with funds (capital) for the purchase of capital equipment. In exchange for productive inputs such as these, businesses pay households incomes in the form of wages, salaries, interest and dividends.
This process involves two pairs of “flows” within the economy. The dotted lines represent the flows of money between the business and household sectors, while the solid lines depict the “real flows” of real goods and services and real productive inputs. The real flows depict the most basic and essential economic activities – the production and distribution of goods and services.
A modern market-system economy (also known as a “free enterprise” or “capitalist” system) answers the three basic questions of economics in essentially the same way as our simplified desert island market system did. Since the fundamental goal of business is to earn a profit, businesses will produce those goods and services that are in demand. Therefore, ultimately, the question of what to produce can be said to be decided by the consumer. This process is described by the phrases “consumer sovereignty” (meaning that the consumer’s purchase of a product is, in effect, “casting a vote” for the production of that product).
The question of how to produce it is decided by producers, or businesses, who will strive for the most efficient possible method of producing the product. Lower costs mean higher profits, and, in a highly competitive industry, may mean survival.
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Tags: Basic Questions, Capitalist System, Consumer Goods, Consumer Sovereignty, Consumption, Corporations, Desert Island, Desert People, Dotted Lines, Economic Activities, Economic System, Free Enterprise, Fundamental Goal, Households, Incomes, Island Economy, Market Economy, Partnerships, Producers And Consumers, Professional Managers, Profit Businesses, Real Goods, Shareholders, Smaller Enterprises, Sole Proprietorships, Stocks And Bonds
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