Business and Economy 101

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Leonel JB

Business and Economy 101

Post by Leonel JB » Tue Aug 09, 2005 7:54 am

I know for sure that Jean-Marie and some of you will come to my rescue on this topic or questions:

1) How is it that the English pound (£) is stronger than the Euro which itself is stronger than Dollar?

2) Can the Economy be stable when Unemployment is climbing?

3) How do you calculate Inflations (causes and effects)? Or can a Booming economy cause inflation?

Sorry guys, we deal with these terms or problems everyday, but a lot of us (including me) do not Jack S..about them... I feel bad about it!

Donc attacchez vos ceintures, la classe va commencer. On attend l'Honnorable Professeur de WOH University.

leonel

T-dodo

Post by T-dodo » Tue Aug 09, 2005 10:30 am

Ayayay! Nèg leonel sa a, li anmègdan wi!

leonel,

I am not an economist, but I can share with you what I know about these subjects, which is not much but enough to give you a good idea. The answers require more than one explanation and I will have to spend some time later or tomorrow to try to do so. Remind me if I forget.

T-dodo

Post by T-dodo » Tue Aug 09, 2005 10:29 pm

[quote]]1) How is it that the English pound (£) is stronger than the Euro which itself is stronger than Dollar? [/quote]

Answer: The value of the currency of one country to the currency of another country supposes to reflect the demand or supply for one currency by the other. Demand and supply are reflected in their trade and current account balances. In other words, the more you buy from a country, the more demand there is for the currency of the country which is selling. The more demand for that currency the stronger it becomes in comparison to that other currency. (It follows the laws of demand and supply whereby the more people want to buy something the higher its price becomes, assuming the supply does not change to affect the equation).

I suppose the exchange rate between two currencies today reflect the trade and current account balance over time since the currencies
of those two countries have been floating freely. According to the US Department of Commerce, the US has been running a trade deficit with Great Britain since 1999 and was over $10 billion in 2004. But don't forget that investments and other flows of money between two countries also affect their current account balance and thus their currency exchange. If an American wants to invest in a company traded on the London Stock Exchange, he would likely pay in pounds, creating a demand for the sterling pound and, thus, likely to boost the exchange rate of the pound compared to the US dollar.

The same thing that applies to the relationship between the pound sterling and the US dollar applies to the relationship between the US dollar and the Euro. The strength of the Euro in comparison to the dollar likely reflects a strong demand for Euro country products by buyers in the United States, also keeping in mind that investments, or the current account balance, affect the demand for Euros as well.

[quote]2) Can the Economy be stable when Unemployment is climbing?[/quote]

Answer: It depends on what you mean by stable. In the US, once the economy grows from year to year, it is considered good. It is measured by the growth of GDP (gross domestic product).The US administrators are happy to grow the US economy at about 3% a year. For some economists and politicians that would be considered stable. GDP represents the value of output in a country or what the country produces in one year. Output is the sum of all products and services. As an example, the potato the farmer produces or the new chicken he raises, the car manufactured by an automaker, the haircut by a hairdresser are all parts of output. All of them have a price: the haircut is $15, the automobile $15,000, the chicken$3, the potato $0.15. If you add them together, the output would have been $15,018.15. If the economy was made of these products and services o
nly the GDP would have been $15,018.15 for the year. This is just an illustration, but in reality the computation is more complicated than that. But if at the same time during a year, more (young) people enter the workforce while a sizable number is laid off and the output growth was not enough to provide jobs to all of the young people and the laid-off workers, you may have rising unemployment while GDP may have grown moderately. In this case you would have rising unemployment while the economy still grew slightly. Note that I did not include all factors to remain brief, such as job growth, rising prices, productivity growth, etc.

[quote]]3) How do you calculate Inflations (causes and effects)? Or can a Booming economy cause inflation? [/quote]

Answer:Inflation is calculated by comparing price for the same thing from one year to the other. It is a complicated formula that uses prices of a basket of goods in 1967
as being 100 and then what it is from year to year after that. As an example, let's say that basket of goods represented a loaf of bread in 1967 and cost $1 then. If in 1968 the same loaf of bread cost $1.10, inflation would have been 10%.To answer your question, inflation tends to start with a booming economy. That is why every time the economy is booming, or expanding, Greenspan intervened to slow it down to avoid inflation.

When a country produces a lot, producers have to pay workers for example to maintain the production level. The payment to employees creates demand for more products. People leave the jobs with money earned, then go out to buy products. The more products they buy, the more jobs supposed to become available to produce them. Some times, more products are produced because of production improvement and not necessitating more workers. Anyway, normally increase demand for products cause people to have lot of jobs available in order to produce those products. More products mean that ou
tput is expanding and that GDP, or the economy, is growing, or booming like you said. If the demand for more products is higher than the supply of them, i.e. companies cannot produce as much as workers want to buy, the price of these products will rise. As an example, that higher demand can be caused by workers having jobs and feeling good about the future and they borrow to buy products after the money they earned by producing run out. That borrowed money they use to buy those products was not generated by production. Therefore, production did not grow enough to meet the new demand by consumers, such as workers. Therefore, it will be more demand for products that there are products available. That will cost their prices to rise because there are fewer products for sale than people ready to buy them, which is inflation. People with money do not like inflation because the value of their money falls when there is inflation. In other words, if they have $1,000 and could buy a refrigerator with it before inflatio
n, if the refrigerator costs $1,100 now after inflation, they lost $100.This is particularly true for fixed income debt creditors, such as bonds. The creditor loses value because the $1,000 is worth less now. It is not enough to buy that refrigerator, as the creditor of that $1,000 bond.

Leonel, I am sure I have a lot of lies in these answers. I invite others who understand these concepts to correct my lies or provide better explanations. So, don't quote me on these feeble attempts at providing an answer to Leonel's questions.

A la nèg anmègdan se leonel!

Leonel JB

Post by Leonel JB » Wed Aug 10, 2005 3:38 am

I really thank you Jean-Marie. I am beginning to understand a little bit (I have attention deficit, it will take me a little longer to comprehend everything).

Anyway, I thank you once more.

Mwen pat vle anmEde w, men mwen konnen ou pa tap mind bam oun ti limiE nan kozman sa.

In terms of the pound (£), what do the British produce to make it so strong??

Guys, sorry for that silly question.
leonel

T-dodo

Post by T-dodo » Wed Aug 10, 2005 6:42 am

[quote]In terms of the pound (£), what do the British produce to make it so strong??[/quote]

leonel,

Here is a link to the page at the U.S. Department of Commerce that shows a detailed listing of trades between the U.S. and the United Kingdom from 1999 to 2004. On the left hand side of the site, you need to make sure you bubble Individual Countries in the TRADE PARTNER Section. Below, a pull down of countries will appear and you should choose United Kingdom. In the next section, choose whether you want Exports to United Kingdom, or Imports from the United Kingdom, or Balance for trade balance between them. Remember that the numbers are expressed from the US viewpoint, therefore in the trade balance numbers, a negative means that there are more imports (from the UK to the USA) than exports (from the US to the UK).

Once you get the chart and detailed numbers page for import or expor
t or balance, on the top right hand side (where it says CHANGE DATA) you can switch from TOTAL IMPORTS to TOTAL EXPORTS to TOTAL TRADE BALANCE between the two powerhouses. Let me know if you have more questions or if you have problems with accessing that page on the DOC website.

Jean-Marie


http://tse.export.gov/NTDChartDisplay.a ... ow=Balance

T-dodo

Post by T-dodo » Wed Aug 10, 2005 9:01 am

[quote]What determine and give the ok for a country to have its own stock exchange, does Haiti can dream about that? [/quote]

The answer is the market forces in the country together with government help. After the fall of the Duvalier regimes, I thought about it and quickly dismissed the idea. To me the most important factor besides the Haitian market itself is a justice system that is able to resolve disputes between market participants. Primarily, you have to be able to enforce property rights. For someone to go on the exchange and buy a financial asset, such as a share of Sogebank, he has to make sure he gets what he paid for and that he can go to court to enforce it. Our justice system is not there yet, for it cannot even enforce the laws to common criminals.

To me a real functionning stock exchange in Haiti will not be during our lifetime. Too many pieces are missing. Besides the judicial syste
m problem, you must have a market for it. By that, I mean having business people with money who want to buy financial instruments (shares and bonds). Both the people with money and the financial instruments are in short supply in Haiti. While ther is the need in Haiti to raise capital to invest in businesses, the latter must have the potential for being profitable. With per capita income of about $1 a day, there is not enough purchasing power for businesses to make money. In other words, even if you can raise the money to invest, there are very little profitable entreprises to put it in it. That is why some international leneders tell you there is not enough capacity to lend money to Haiti. Even if they they send the money to Haiti, we cannot use it.

Going back to the fiancial and economic environment, you must have rules or laws that provide full financial disclosure by the companies who issue the shares or bonds. Without dependable financial disclosures, the investors will not know what he is bu
ying. Haitians with money hate full financial disclosure. That is one of the reasons why none of the Haitian banks have an affiliate here in the US, like many other foreign banks do. Every time a Haitian group tries to open a bank here and the US Government asked them to provide full financial disclosure and source of their financial wealth, they withdraw the application.

Without rules and enforcement mechanisms to protect investors, you would have things happened similar to the Cooperatives scandal during the Aristide administration, or all kind of Ponze schemes and outright misrepresentations and thefts. In other words, nobody would buy if they are not sure of what they are buying. If there is no confidence, you cannot have a market.

Palmis, it is more complicated than that, but you have an idea. Besides, the size of our market is so small that the benefit of having the stock exchange will not be enough for a long time to absorb the cost. In addition, there is not enough business activitie
s in Haiti to justify it. Certainly, the country would have benefitted if business people can get the average guy to invest his money in a business venture. But, remember what happened in the 1930s in the US. When stock exchange market does not have the proper bases, it can destroy the economy of a country as people who invested money loses their wealth. That can lead to all kinds of upheaval.

I hope that at least, this partially answered your questions. Remember, I am not an expert in these things and have not had personal experience in them. So, do not quote me on them. I am more comfortable with banking issues.

Leonel JB

Post by Leonel JB » Fri Aug 12, 2005 1:24 pm

JG, you didn't pay your money for a part time job... Please ask more questions, I know that I have a lot more. But, I don't waanna look stupid and fail the class. Cause Jean-Marie doesn't play. Lap bay tout moun Zero.
leonel

T-dodo

Post by T-dodo » Fri Aug 12, 2005 2:53 pm

Leonel or Palmis,

Feel free to ask more questions. It is not exam time yet, we are just reviewing. The time to ask is now.

By the way, were you able to review the list of products Great Britain exports to the US on the DOC website? Did you have any surprise there?

Jean-Marie

T-dodo

Post by T-dodo » Sat Aug 13, 2005 6:38 pm

[quote]The list of the problems seems to be quite long. In the meantime, Is there anything that can be done or do we have to wait for the political stability and eventually a new judicial system ?[/quote]

It would be presomptuous for me to pretend knowing the answer to that question from the comfort of our lives here in the United States. I have been out of the country for a long time. The answer to your question requires an intimate knowledge of the current business environment.

All I hear is that nothing is working now. I know business people who just close their businesses and go out of the country to take a respite. At this point now, it seems that returning stabilty so business activities can resume is paramount. Remember, a functioning market requires a free flow of the goods. When instability interferes with it, business activies are interrupted. Returning access to retailers by consumers a
nd access to suppliers by wholesalers will be what need to be done in the meantime.

Many countries function better than we are without a stock exchange. We don't have to have it to improve things in Haiti. Again, I am just speculating on the current business environment in Haiti.

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