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Time value of money also known as the present discounted value of money is based on the premise that money held right now has a greater value in the future (Maria & Kennedy 115). This is because the amount of money that one has at the moment has the potential of earning interest and therefore in the future it will be worth much more than its value in the current time (Dwivedi 87).
Compound interest can be used to calculate the value of an amount in the future. The process of compounding is based on the concept of exponential growth of an investment along with the initial principal. In this case, the initial amount changes at every end of the stated compounding period. For instance if an investor has $10,000 and would like to invest it in a project that earns him a compounded interest of 1% per month then each month the principle will have increased by 1% so that by the end of the year the principle itself will be a larger amount than the initial 10,000 invested.
In the case that the investor would like to know the value of his $10,000 after a year, he can simply use the compound interest formulae illustrated below and come to a conclusion on whether he is interested in the investment.
How is the word "risk" used in financial economics and what is the difference between diversifiable and non-diversifiable risk?
A risk is situation that could possibly lead to losses. When the possibilities of a loss are more eminent that the situation is termed as high risk and when the probability of the risk occurring are low the situation is low risk(Dwivedi 120).Diversifiable risks are also referred to as unsystematic risks are when a significant part of the asset is exposed to certain risks that can be reduced by diversification. The causes of the risks are random and can occur at any given point in time. Firms can be able to plan well in advance for the diversifiable risks and this means that they can be avoided through the implementation of relevant and effective business and marketing strategies.
Non-diversifiable risks also referred to as systematic risks are caused by external factors in the market and the industry at large. The risks cannot be eliminated by diversification because their impact is felt throughout a certain industry. Although firms can be able to plan in advance as to what they can do in case these types of risks do happen, at times preventing the effects of these risks may be futile or at best an uphill task (Maria & Kennedy 104). These risks involve market share control risks that affect the volume of sales and consequently the revenue earned, the other risk is purchasing power parity and the level of interest rates. It is safe to say that diversifiable risks are at the micro level while the non-diversifiable are at the macro level.
Protectionism is a condition that is placed in order to limit the amount of trade that can take place between two countries. Protectionism, as the name purports, is aimed at protecting the local industries and nurturing them as they develop. It is based on the premise that developed countries have better equipment that can produce large volumes and consequently experience economies of scale; this stifles local industries that cannot keep up with the lower prices of internationally renowned companies. Protectionism is ensured by placing low quotas and high tariffs for importing goods and this discourages importers and encourages consumer to consume locally produced goods.
Protectionism may hinder international trade conversely it protects upcoming domestic companies and encourages domestic entrepreneurship and consumption. In this case the GDP of a less developed country increases as consumption is within the boundaries and there is no leak of income to outside countries (Deardorff 178). This improves the living standards of the people and further develops the less developed economies. Additionally, it also encourages major companies to franchise in developing economies in an effort to capture the consumers within that locality. This not only increases the amount of investment and income that the less developed economy earns but also improves on the technological know-how of the people which improves innovation and invention.
Tariff is the amount of tax that is imposed on imported goods while quotas are the set amounts of a specific product that can be imported within a country. When the government increases the tariff of a specific good, the importers in an effort not to experience financial losses pass on this increment to the consumer by increasing the price of the product. In a normal goods market, an increase in the price of a commodity leads to a decrease in the quantity demanded. This means in case there is are close substitutes that are produced locally, the consumers will demand the local goods more than the imported. This will reduce the quantity imported.
When the government reduces the amount of a specific product that can be imported, it creates a shortage. This shortage makes the consumers to seek more readily available substitutes. Needless to say, shortages at times bring panic in a market and consequently the prices of the products can increase, this further aggravates the situation as the demand further decreases and the need to import more of the product reduces. The reverse of the aforementioned situation is also true (Deardorff 145). A decrease in the tariff decreases the price of imported goods and increases its demand, consequently reducing the demand of domestically produced substitutes. An increase in quotas increases the demand of the product as price reduces.
First, clearly and fully differentiate among specialization, absolute advantage, and comparative advantage. Then, please clearly explain why these concepts are important in the U.S. and in ROW (rest of world) economies
Specialization means that a firm has the only skill, knowhow and technique to produce a certain product. This means that other firms have tried but cannot be able to meet the standards, functionality and innovative level of the specialized firm. Comparative advantage is determined by the amount of resources that a country or firm has access to at a lower cost. These resources include both capital and human resources (Maria & Kennedy 75). Comparative advantage often leads to specialization especially in instances where the scope of a market is limited and prices are determinants comparative advantage always leads to specialization. Additionally it also changes the market structure from monopolistic to oligopolistic.
Absolute advantage on the other hand requires the ability to do something in a way no one else can be able to do it. For instance japan firms can be able to manufacture cars and other automobile related products faster than any United States firm (Maria & Kennedy 55). This gives them an absolute advantage because they have the technology that allows for their new products to hit the international market before any other country has even launched theirs. In this case the skill of manufacturing automobile is not exclusive to firms in Japan as other countries can be able to produce the same. Conversely the technology to manufacture them faster is only exclusive to Japan and consequently they have an absolute advantage in the automobile industry.
The recent trade deficit was caused by an increase in the imports and a decrease in the export. Increased costs of production, operation and manufacturing in the United States made many companies to outsource resources including the human resource (Dunning 96). Additionally many companies franchised to other different countries and left the headquarters in United States. This meant that all the benefits associated with production, packaging and marketing were all experienced in other countries while the sale was expected to happen in the United States. Consumers ended up consuming product produced in other countries.
The major consequence of the trade deficit is that there was an increase in the level of aggregate unemployment of both capital and human resource. This reduces the purchasing power parity of the country as there is a decrease in the level of income and interest earned from employment and investment respectively. This forms a chain reaction that leads to a reduction in the aggregate demand, supply, level of investment and GDP. Additionally the cost of living is bound to increase and the living standards reduce because the revenue that is supposed to be earned by the government has reduced. Needless to say, internationally the trade deficit is a positive occurrence as it ensures that other countries benefit at the expense of the U.S economy.
The balance of payment is the balance sheet that is used by the United States to determine the amount of international payments made and those received. When the country makes a payment it is placed on the credit side of the balance sheet and when it receives a payment it is placed on the debit side. Ideally, the balance of payments should always be zero, all that was paid out equals what was received (Dunning 118). During rare occurrences can a balance of payments be zero, when it has a positive then it has a surplus and when it has a negative then it has a deficit.
A surplus indicates that the country is exporting more than it is importing meaning that there is under-utilization of the available resources. Additionally there is a chance to increase the aggregate income earned through tariffs. When there is a deficit, it means that the country is consuming more than it is producing. This means income is flowing more outside than country than it is flowing into the country. It also means that there is a certain level of unemployment of resources and potential is not fully utilized. When the balance of payment reveals whether a country is experiencing a deficit or a surplus, it kick-starts actions by a government to either increase or reduce tariffs and quotas.
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