US international Trade

The top five trading partners for the US in 2017were China, Canada, Mexico , Japan and Germany and the trade was worth $577.8 , $533.7,$ 512.2,$185.8 and $155.6 Billion in that order (United States Census Bureau, 2017).  China was the largest export market for US products that included agricultural produce, aircraft, machinery, electrical machinery and vehicles. The major agricultural product exports comprised of coarse grains, soya beans, port and its products, skins and hides.  The major imports from China included processed agricultural products and fresh produce and some services in form of transport and research, travel and development services (USTR NEWS, n.d).  The US exports to Canada comprise of vehicles, machinery, electrical machinery, mineral fuels and plastics, fresh and processed food products. The products imported from Canada include mineral fuels, vehicles, plastics, machinery, fresh and processed products.  The major exports to Mexico and Germany from US includes machinery, mineral fuel, pharmaceutical products and medical and optic instruments. The major imports from the two countries include organic chemicals, Vehicles, medical and optic equipments (USTR NEWS, n.d).

The total dollar value for the trade between US and the major trade partners up to November 2017 was 1.4529 trillion dollars (United States Census Bureau, 2017).  . The imports and exports trade balance shows that there is a trade deficit for the US in trading with its top five partners. The US runs a trade deficit with these partners because of various factors: the products costs in these countries are lower than US; there is not market for products that are best made in US; the partners many things US, but US imports are higher than exports.  However, US net services exports are normally higher than imports which lead to a trade surplus, which means that US services have a better competitive edge in the market.  An increase in trade deficit normally has negative effects on an economy since debts are incurred to finance the deficit (Arnold, 2010).

 The Current Account Deficit is widely used to measure trade deficit and other relevant components. Trade Deficit represents the biggest part of Current Account Deficit and describes a country’s trade balances or highlights the relationships between products imported and products exported including goods and services. A country will experience a trade deficit if the overall goods’ and services value imported are greater than overall exports value.  Trade relations are important to the US economy, including exports and imports, because they normally have an impact on the labor market. In fact, more than 41 million jobs in the US are supported by trade with international partners (US Chamber of Commerce, n.d). This indicates that over one in each five jobs in US relates to trade over the recent years. Every state in United States has experienced net employment benefits that can directly be traced to trade.  The opportunities arising along with exports and import trends indicate that trade is an important aspect in creation of jobs in the country, and this has been on the increase after the 2008-2009 economic recessions (US Chamber of Commerce, n.d). s.  The US trade with partners has largely been based on open market which, even though has led to increased imports, has contributed to creation of jobs. However, imposing of trade restrictions such as tariff is likely to lead to a retaliatory increment on rates of tariffs.  This means that US exports would fall which would in turn lead to job losses.

References

Marketing term paper

Promotion and establishment of demand curve

Promotion involves activities such as advertising, sales promotion, personal selling, public relations and even direct marketing.  Sales promotion comprises of different incentive tools that are majorly short-term and whose aim is to stimulate buyers to so as to fasten the buying process or even increase the sales’ quantity.  Promotion can elicit a direct effect on a company’s consumers buying behavior and more so sales promotion which has a direct impact on the decision of the buyer to buy products or services. The promotion process, therefore, leads to increased demand for a product or services especially over the short-term (Anderson & Aryal, 2015).  The increase in the demand of the product or service will lead to a shift of the demand curve to the right.

Promotion and changes in Price Elasticity of Demand

Promotion activities undertaken by a firm may take different forms; either an increase in awareness of products through displays, demonstration and campaigns; and using incentives to lure customers in buying products through rebates or coupons. A firm may run such a program using higher prices strategy or even increased prices for customers who are already existing and acquisition of new customers through rebates (Fibich et al. 2005). In such a scenario, there is a relationship between promotion and prices. Increasing awareness are programs ran concurrently with a decrease in prices. The aim is to achieve maximum consumer awareness and in such a situation, there correlation between promotion and prices is negative (Fibich et al. 2005).  In both scenarios the quantity’s demanded elasticity is shown by the responsiveness of demand of the products due to change in prices.

 Promotion activities help in stimulating demand during the off-peak season for organizations like tourism firms. These activities help in attracting customers for the services provided and ensure that the resources are not under-utilized when the demand is low.  Promotion activities such as discounts ensure that that a stream of customers is maintained and that carrying costs are do not become unbearable (Fibich et al. 2005).

Establishing advertising method budget

Percentage of sales method

This method is more applicable in a market whose sales pattern is stable and hence predictable. The firm may set their advertising budget in a way that it is consistent with a given proportion of sales and which helps in preventing advertising wars that can have negative effects on profits.  The percentage set mat also varies with the prevailing sales’ condition. There is also a clear relationship between advertising costs and the sales (Shimp & Andrews, 2013).

Objective and Task method

Thus method comprises of setting some marketing goals on the basis of the tasks to be completed through the advertising process. The aforesaid tasks may be financial or involving marketing activities that arise out of the campaigns. The financial tasks are normally aimed at achieving a given rise in profits or sales.  Hence, the marketers are called upon to establish advertising budgets through definition of their objectives and determining tasks whose performance will lead to attainment of the objectives and estimation of the cost involved in performance of the said tasks.  In this approach, the tasks to be performed have to be aligned with the goals of the firms and the firm’s past performance (Shimp & Andrews, 2013).

Competitive parity method

The method is mostly used when there is a good establishment of patterns in predictable sales. The basic assumption in this approach is that the industry has an average expenditure that will work well for major firms in that particular market. A firm will, therefore, set the budget only on the basis of expenditures incurred by its competitors.  The expenditure by the competitors is perceived to be the best for the industry and the sustained competitive parity help in averting promotion wars in the market. The major defense advance for this method is that it helps in checking the efforts or attacks employed by competitors (Shimp & Andrews, 2013). The amount of funds spent by one firm is not a reflection of  how much it will spend comfortably so that the marginal costs equals the marginal benefits. Therefore, there is no clear relationship between the size of a given form and the budget outlay. The major advantage arising from this method is that it’s simple and can be used securely. The organization has to gather important data relating to competitors and follows them is it is easy to do so.  A major shortfall of the program is that there is no uniqueness for the firm, which is forced to have similar identity with competitors in the industry. The method also encourages a firm to not pay attention to effectiveness of the funds used in the process and preventing an organization with unique competitive advantages from expanding its market share by increase the budget beyond the market average (Shimp & Andrews, 2013).

Affordable method

The basis of this approach is that the budget is based on the residual in the firm after catering for other expenses. This method does not try to relate the objectives of marketing and the advertising levels.  This means that in a normal year, a lot of funds can be wasted while fewer sales can be expected in a bad year (Shimp & Andrews, 2013).

Role of integrated marketing communication in relationship marketing

The aim of relationship marketing is normally to create a connection between the customer and a brand that is emotional and strong. The goal of this connection is to bring about a continuous business and a passage of information from buyers that can lead to marketing leads. Integrated marketing communication enables a firm to enhance brands relationship with customers and other relevant shareholders.  The integrated marketing communication normally places its focus on development of a brand through databases creation through which market needs of the customer are monitored and responded to (Percy, 2014).  The process uses the information in the database to link messages that are constantly and consistently refined to the target customers in an understandable way.  For instance, the information in the database depends on obtaining direct response normally in form of using direct mails by using a list that is segmented by various features such as age, household members and income.  A firm is able to have a message that is more specific and personalized which increases the chances of the marketing effort in reaching the intended customer and hence, induce a response (Percy, 2014).  This improves interactions with the customer and hence, enhances the brand loyalty.  This integrated marketing communication may take various forms such as in person, mails or phones and even creating a relationship through an online platform.  With increasing information in such a platform, the access to information about a brand can be tailored to a particular person and hence influence their views on the product.  The process is able to combine a two-way communication with consumers by tracking their activities and offering information that is tailored to their needs considering their activities.  The collection of consumers’ demographic data and promoting products in line with such information makes advertisement’s mass customization and other market communication methods possible (Percy, 2014).

Integrated marketing communication concept

 This concept comprises of a marketing strategy that aims at linking the conventional strategies of marketing with modern strategies so as to create a tool that is reliable and efficient in conveying the brand of a firm to intended stakeholders.  This kind of linkage ensures that communication process harnesses the most effective modern and tradition approaches in communication.  It involves effective communication that allows messages to be passed with good clarity and without disruption.  Such kind of communication enhances the relationship between forms and the targeted customers and audience. The overall effect is to improve the interaction between the firm and the customer and thus, ensuring that the relevant information which is personalized is conveyed to them (Percy, 2014).  The aim improved relationship between the customer and the firm is maintained which allows potential clients to be convinced of the product offered by a firm.  A firm that places its focus on traditional marketing – transactional marketing - aims at increasing quantity of individual sales.   The firm with the traditional approach may have acquisition cost of the customer that is not significant.  The marketing strategy of the firm may convince the customer to choose their brand one time but lacks a strong relationship with him or her to bring them back (Percy, 2014).

References

Anderson, K., & Aryal, R. N. (2015). Growth and Cycles in Australia's Wine Industry: A Statistical Compendium, 1843 to 2013. s.l: University of Adelaide Press

Fibich, G., Gavious, A., & Lowengart, O. (2005). The dynamics of price elasticity of demand in the presence of reference price effects. Journal of the Academy of Marketing Science, 33(1), 66-78.

Shimp, T. A., & Andrews, J. C. (2013). Advertising, promotion, and other aspects of integrated marketing communications. Mason, Ohio: South-Western Cengage Learning. 220

Percy, L. (2014). Strategic integrated marketing communications. Routledge. 6-11

Rhetorical Analysis of Aaron E. Carroll

    Aaron E. Carroll’s article is a review on why early start to the day for teenagers is affecting their performance as it is against their nature. Carroll’s entire career has been well-established in and around health research and policy. He started off his career as a professor of pediatrics and is currently a successful blogger and author on health-related issues. One of his main claims of argument in this article comes from Carroll’s passionate advocacy of delayed school start times for high school students. He asserts that forcing high school students to wake up early is against their will. However, this customary habit from parents who expect their children to wake up early isn’t just a bad for their health well being, but is rather more detrimental to the economy as well. In the article, Carroll published in 13th September 2017, Carroll Aaron E. successfully utilizes his experience in health research to appeal to teenagers needs to convince both parents and teachers that sleeping late is not the issue; rather the issue is all about waking up so early as this reduces the amount of sleep consumed by teenagers.

    The purpose of this article is to convince parents and teachers that waking up so early is not a worthwhile thing for teenagers to do since it has its own negative effects which are outweighed by the positive effects of delayed early start days. Carroll Aaron wrote this article affirming his negative opinion of early start an to the day by the teenagers and thus he is strongly against this customary act (Carroll n.p).  

    One example of Carroll’s position is his comparison of effects of sleeping later and waking early between young children and high school students, teenagers. This is an appeal to logos. Carroll wants the reader to take his or her time to compare and consider how sleep and wake timing transforms later in teenagers during the second decade of their lives. He, therefore, continues to argue that having a delayed sleep phase for teenagers will increase sleeping hours for teenagers and this will definitely translate to higher academic performance for them. however, he continues to assert that the benefits of having a delayed start time during the day are not only limited to economics and academic performance, but rather the benefits are also witnessed in the Health status of teenagers. This is because having enough sleep which can only be enhanced by sleeping a little later helps to reduce stress and depression (Carroll n.p).

    Carroll appeals to logos by quoting Hafner, Stepanek and Troxel’s analyses on the fiscal repercussion of a worldwide change of teenagers start times. Carroll also builds on her character which is an appeal to ethos, by quoting renowned health research institutions with whom they offered a professional viewpoint on the subject of sleep. By referring to the expert’s opinion, “The National Heart, Lung and Blood Institute recommends that teenagers get between nine and 10 hours of sleep”, Carroll is acknowledging his need for additional counsel for this subject matter (Carroll n.p). Carroll reinforces his ethos through developing on the solid basis of an established health research leader.

    Aaron E. Carroll’s article has a few weaknesses. One f the major weakness is that the author is quite biased against waking up early. He is a health expert and so he is blinded by the fact that sleep is important and is related to performance. He, therefore, portrays his bias against early start times for teenagers by just giving a one-sided argument.  However, it is important to note that just because waking up early does not work for a few teenagers; it does not mean that it will not be applicable for any other teenager (Carroll n.p). Therefore, the author could have used a two-sided argument where he would also state why it is important for students to wake up early and in doing so he would have been able to effectively compare the effects of the two hence allowing the reader to choose on the best sleep and wake up time pattern that best suits their needs.

    Overall, Carroll makes a good claim about why teenagers need to be allowed to sleep later at night and still be left to wake a little later than the normal. The author gives some valuable insights and facts that parents and teachers should take into consideration before making up any decision in regards to sleeping and wake time for teenagers. Basing on the above analysis, it is quite evident that Carroll clearly uses rhetorical tools in his work so as to help him in building on his case. In general, we can deduce that Carroll is an effective writer, even if he was inefficient in convincing a large number of teenagers, parents, and schools to push back the start times of the days.

Work cited

Carroll, A, E. The Economic Case for Letting Teenagers Sleep a Little Later, 2017.  Retrieved from: https://www.nytimes.com/2017/09/13/upshot/the-economic-case-for-letting-teenagers-sleep-a-little-later.html

U.S. Economic regulations

The concentration of markets by few large firms in key industries can be attributed to deregulation cult that has stifled competition, increases prices and led to reduced innovation. The high concentration of corporate power in terms of monopoly, duopoly or oligopolies by is as a result of big mergers by big firms that control the largest market share which have enabled the firms to make policies aimed at control the market (Reguly, 2). The government felt that market forces were better in regulation than competition bureaus , and thus led to firms that were too big that they could not be allowed to fail and hence , the 2008 financial crisis bailout.  The money pumped in the economy as bailouts were used by firms for merging purpose, so that these few firms control the largest market. In addition, shares buybacks increased largely in value as these companies try to appease shareholders at the expense of wage increase and innovation (Reguly, 3).  The duopolies and oligopolies may eventually be diluted by new entrants with new innovations and competitive pricing, but given that few will be willing to compete against large firms, the process may take a long time.  The restoration of competition, job creation and innovation can be done through reducing unreasonable corporate concentration through regulation and antitrust laws (Reguly, 3).

Preserving innovation in the market will encourage innovation since quality of products is improved; pricing is done fairly and thus enhancing economic growth. The improved competition and quality of products will be of great benefits to the consumers (Infobase Learning,2). This can be achieved by enacting anti-trust laws which will enable the government to penalize firms that seeks to control their industries unfairly and this lead to the aforementioned benefits in the market and for consumers. Laws such as the 1890 Sherman Act and 1914 Clayton Act that tended to limit unreasonable monopolization or such an attempt and formed a basis on which courts and antitrust officials can build on as industries and business practices undergo changes (Infobase Learning,3).  The antitrust laws help in limiting creation of monopolies and other anticompetitive practices that can discourage innovation and allow setting of high prices and thus, hurting the public. The courts and should consider aggressive prosecution of attempts by firm at monopolization while antitrust officials must question any merger that may curtail competition in an industry and hence harm consumers. Monopolization enables large firms in industry to prevent success of new entrants that would encourage competition and innovation by lowering prices to force them out of business and raising the prices again after the new firms have exited (Infobase Learning, 8).

Competitors can come together as cartels so as they can maximize profits through output limitation and fixing prices in their industries. The use of antitrust laws can play a major role in limiting any form of mergers that would hurt the economy through output limitation, reduced innovation and high prices at the expense of the consumers who are the public. The laws are also important in preventing firm from engaging in practices such as bid rigging, territories division and groups boycott that are devoid of any logic or reason for public policy purposes. Firms can also be prosecuted for taking part in anticompetitive practices (Infobase Learning, 8). Such practices are driven by the self-interest of firms which lead to exploitation and abuses.

The government should enforce rules that are aimed at protect the economy, environment and other practices that can lead to job losses. However, such regulations should be given more attention so that they are not inefficient and hence, counterproductive. The regulatory systems should not place illogic burdens on firms in way that they stifle innovation and hence, leading to negative impact on growth and job creation (Infobase Learning,2). However, effective government regulations can provide important protection of public against various dangers that arises from a free market especially neglect and corporate greed excesses (Infobase Learning, 4). These regulations will not have negative impact growth and job creation but will reduce impact of dangerous consequences like 2008 financial crisis. Past regulatory policies especially during the 20^th century Great Depression were borne out of the need to enhance fair competition, consumer protection and prevention of malpractices (Infobase Learning, 5).The public focus on social problems experienced previously led to more attention being paid to work place safety, environmental pollution, racial discrimination and demand for action by the government to tackle such issues. The lack of regulation in financial sector, where firms were allowed to trade derivatives is majorly blamed for the 2008 financial crisis. The reckless behavior by the banks leads to major losses and use of large amount of taxpayers’ money and hence, the increased call for such firms to be broken up, re-regulated or both. The regulatory framework should be tool for controlling negative results of capitalism for the purpose of public safety and fairness but not undoing the free market mechanics (Infobase Learning,6).

While free markets can stimulate growth in the economy in a more effective way, during an economic downturn, government intervention helps in speeding up economic recovery and reduces human suffering in the meantime. The deregulation of markets can lead an unhealthy financial system like the recession and financial crisis seen in 2008 (Infobase Learning, 8). The previous deregulation meant that large banks could engage in lending activities even to individuals with poor credit rating and who were motivated by low interest loans. The deregulation policy had allowed few banks to grow too large that their failure during the credit crunch would have a devastating effect on the economy and even the collapsing of the entire banking system. The passage of regulatory policies like Consumer protection Act imposed various financial regulations on the investment activities undertaken by the banks and even expanding the roles of regulatory bodies (Infobase Learning, 9). The increasing income inequality that lead to protest across the country served as a proof that government had to step in to ensure the public is not exploited by big firms. The 2008 crisis could be attributed to the freedom given to the financial institutions in making risky investment decisions with little regard of what the future market would look like. If the banks had not been give the freedom to engage in the risky bets the financial crisis and economic recession could not have occurred (Infobase Learning, 4). More specifically , if banks have been required to have separate divisions that engage in trading of derivatives and subsidiaries that are separately funded , there would have been minimal threat to the performance of a bank and hence, saving it from a crisis( Infobase Learning,5). Reforms on financial regulation can, therefore, protect the economy from reckless actions of firms, which cannot be provided by a free market.

Works cited

Reguly, Eric. "It's time to call in the oligopoly busters." Globe & Mail [Toronto, Canada], 15 Apr. 2017, p. B1. Opposing Viewpoints in Context, ezmw.ez.cwmars.org:4200/login?url =http://link.galegroup.com/apps/doc/A489619903/O VIC?u=mlin_c_wachcc&xid=b96c3ff0

Infobase Learning, Antitrust Law: Should the U.S. government strictly enforce antitrust laws?" Issues & Controversies, 21 Jan. 2014 http://icof.infobaselearning.com/recordurl.aspx?ID=14178

Infobase Learning, Government Regulation: Do government regulations help protect the public against corporate excess." Issues & Controversies, 14 Oct. 2013, http://icof.infobaselearning.com/recordurl.aspx?ID=6323. Accessed 29 Nov. 2017.

Infobase Learning,.Financial Regulation: Would recently proposed financial industry regulations help prevent future financial crises?" Issues & Controversies, 12 July 2010, http://icof.infobaselearning.com/recordurl.aspx?ID=2256. Accessed 29 Nov. 2017

Infobase Learning,"Economic Policy and Financial Regulation: Should the government play an active role in the economy?" Issues & Controversies.17 Dec. 2012, http://icof.infobaselearning.com/recordurl.aspx?ID=6298. Accessed 29 Nov. 2017.

 A research whose objective is to investigate the current monetary policy and followed by the Federal banking system

In the year 2008 in the month of December, while a finance crisis was going on and the ‘great recession’, FED was forced to reduce the public kitty at a rate that ranged from 0%-0.25%. The rates were reduced to reach what is popularly known as zero lower bound. The rates remained at that lowered point until FED commenced increasing rates in December 2015.This was one among the many actions the FED took to  gradually try and stiffen monetary policy (Harrison,p1).

The ongoing FED monetary policy is at a rate of 1.5%.Federal reserve hinted to the public that it would increase the rates to 2% in the next year. The rate is predicted to be 2.5% in 2019.The rates are very important in influencing the economic status of the United States (Harrison, p1).

The Fed’s board increased its funds quarterly rates to 1.5% in 2017 December .Previously it has increased it to 1.25% in June this year. FED utilizes competitive market activities to manage and manipulate monetary policies. The objective of FED in trading USA administrative securities is to impact the rates at which different banks are borrowing funds from each other. The FED’s board sets very specific objectives or a scope of targets for this rates. This is not the definite rate that is driven by the competitive market. (Harrison, p1).

Every bank is required to have a reserve fund but they rarely fulfill this requirement to run their day to day activities. In order for them to meet this need, they are likely to rent from one another. This gives the FED a chance to either increase interest rates or reduce them between different periods of time. Hence the FED has an opportunity to influence rates within the United States banks. This is done to stabilize the economy’s values and to control interest rates in the near future (Chaney  ,p 1)

The FED tries to get a hand on interest rates and in turn affect spending that is associated with   businesses and their capital meant for planting and apparatus; paying for durable goods and other household items and investing in the real estate sector. In addition, just as interest rates deviate between countries, as it is currently, it impacts the continuous circulation of capital that in turn sways the exchanging rates that occur among foreign nations and the  us dollar hence affecting expenditure on exportation and importations. Through this routes the monetary policies stipulated by FED have the capacity to control accumulated expenditure related to short term goals. In terms of a longer period monetary policies as stipulated by FED, influences inflation. A very small and stabilized rate of inflation encourages fair and transparent pricing hence good decisions can be made about the economy (Timaros, p1).

The FED predicts that the components of the economy   and the conditions that come with it will gradually change over time in a way that will favor and enable steady and stable increase in the federal fund and its rate; public fund rate is predicted to remain low in a long period of time. Even though rates are being increased by the FED, the Fed will try and strategize on maintaining a particular stimulating   monetary policy as of now. In terms of the role they are supposed to play, FED considers that it has done its best to reduce unemployment to an acceptable rate (Chaney p1).

Works cited

Harrison .D. Economists See Few Monetary Policy Changes with Powell Leading. The Wall Street Journal, (Nov, 9, 2017).

Timaros. N. Fed Raises Rates, Stick To Forecast For 2018 Increases. WSJ (Dec, 13, 2017).

Chaney .S. Economists React to the December Fed decision: ‘we Wish Jay Powell the best of lack’WSJ (Dec, 14, 2017).

Retrieved from https://blogs.wsj.com/economics/2017/12/13/economists-react-to-the-december-fed-decision-we-wish-jay-powell-the-best-of-luck/

Impact of Macroeconomics Variables on the Islamic Stock Market Returns in Saudi Arabia

CHAPTER ONE: RESEARCH OVERVIEW

1.0 Background of the Study

Stock market serves an important role in regard to the distribution and allocation of scarce commodities to the most operative users as therefore serves mainly as the channel through which funds move from the addition to deficient industry (Bellalah, & Masood, 2013). Stock market can best be described as the market that gathers both the purchases and vendors of stock in the business world. Stock market remains to be among the most essential sectors that influence the wellness of the economy. It that it serves as a ground that permits public shares trading. In the last few years, the association amid stock returns and macroeconomic variables has created a rather intense discussion among financial and macroeconomists analysts and investors. Based on literature stock pricing is mainly driven by some of the prevailing macroeconomics variables which are not clearly illustrated by the existing pricing theories (Bellalah, & Masood, 2013). The Islamic Stock Market in Saudi Arabia owns the customized characteristics of an operative industry which has the capability to control stocks pricings patterns within the economy.

Some of the dominant macroeconomics variables that influences effectiveness in the stock industry includes exchange rates, financial supply, interest levels and industrial and consumer Price indexes. These variables are mainly applied in the market as they depict either desirable or negativity within the market. The above mentioned macroeconomic variables have a crucial connection with stock pricing based on the fact that they are fully able to play part in stock costs predictions. In this context this notion is supported by Hassan, (2017) the variables are not only essential but they are highly significant in regard to justifying pricing patterns in the stock market. The operational nature of the market is present when the stock prices specifically reflect positivity. In that, the prices can be utilized to assess and understand the operation of the market. In that, with all this information the public, as well as investors, can fully be able to predict future stocks prices and the associated returns. However, excessive return in the market cannot be earned if the players are not willing to take extra risks within an operational market. Based on the Arbitrage Pricing Theory (APT) different macroeconomics forces such as an anticipated inflation, interest rates, and industrial performance affects the stability of the stock industry (Hassan, 2017). The argument that macroeconomics variables mainly affect the guides of the stock market has been proven to be a well-grounded notion as demonstrated by economics finance literature. It is in the last two decades that the market has experienced rapid changes based on economic adjustment and globalization in general. This has resulted in more and more researchers focusing on understanding the primary influence of macroeconomics but these studies are mainly grounded on the well-established markets such as those in Asia, USA and Europe (Hassan & Bashir, 2003). Few studies have however been based on the emerging markets despite their remarkable performance and potential to develop their respective economies in the future.

On the other hand, based on the behavioral theory it is evident that responses by the public and investors in using their psychology to determine the shares values within the market also affects the general pricing (Hassan & Bashir, 2003). In that when the stock prices go up resulting in increased earnings for the investors the trend attracts even more buyers. In this context, even after the increase in investment the general prices will increase further based on the demand and if this event is continuous this will create even more positive anticipation from the investors thus the expanded bubble will automatically be subjected to overflowing leading to reduced priced created by the increased and consistent expectations. This is fully illustrated by the Global financial crisis of 2008 which was mainly driven by increased investment and high earning expectations in the market. In the last couple of years, the Islamic stock market has acquired substantial attention on the local as well as the global setting (Hassan, 2017). This has, in turn, led to the creation of huge capitals for the Islam and non-Muslims states. The Islamic finance market is particularly directed by the standards and rules of the Islamic Law which is widely recognized as Sharia which forbids interests and extreme risks participation, betting while it promotes revenue sharing, collaborative risks, ethical financing and financial transactions that are well supported by assets (Hassan & Bashir, 2003). One of the primary features of the market that have gathered high levels of consideration is the growth of Islamic fairness guides that are created with the aim of following the performance of firms that adheres mainly to the Sharia laws. The Islamic guides are mainly uncovered from the demanding screening with respect to business operations and financial proportions. There are numerous guides that are in existence are situated in distinct nations and economic sectors and Nifty50 is the leading one that is situated in India (Habib & Islam, 2017). This is categorized to be one of the largest and most liquidities are within the Stock Exchange industry (Habib & Islam, 2017).

While the rather complex and extensive association amid macroeconomic variables and stock earnings have been investigated widely in the recent there are few studies that have been dedicated in regards to understanding the effects of these variables on the Islamic market. In addition to some of the well-performing industries such as Saudi Arabia studies have shied away which is cited on the complexity of the Islamic law (Bellalah, & Masood, 2013). This study established that the Islamic Stock Market returns are highly vulnerable based on the Islamic law influence which mainly prohibits extreme risking and interest rate. It is also argued that based on the fact that the Islamic guidelines are part of the economy drives the market’s interest rates and this trend might be affecting the functioning of the market in an indirect way. The study also follows the notion that there are a number of methodical jeopardies that are derived from macroeconomic variables in the industry (Hassan, 2017).

1.1 Problem Statement

The association amid stock market and some of the leading macroeconomics forces has grown into a prevalent and yet sensitive subject in the financial industry research. It cannot be denied that Stock market is particularly an important part of the contemporary economy because it serves an essential responsibility in regard to the industrial as well as economic development. Stocks industries offer support to any country’s monetary and monetary policies. In that, this incorporates the assessment of the marketable securities on the ground of the existing demand and stock provision (Hassan & Bashir, 2003). It is such estimates that are exceedingly essential and crucial for use across different sectors as governments, public and investors utilizes the assessment in making a prediction in regard to the market. In addition, the operations of the stock market also have direct implications on the growth of the economy. This is the rationale behind the fact that industries, financial institutions, and governments globally are highly concerned in regard to the happenings in the stock market as the failure of the sector can have immeasurable undesirable effects on the economic wellness. In real nature, the stock market is accounted as an unequal one because it is not fully equal given that the distinction amid the negative and desirable earning might not be balanced (Hassan, 2017). It is in this context, very important to approximate and assess the macroeconomics forces relationships with the stock's pricing based on an unequal approach. The leading macroeconomics variables that are connected to the stock market incorporates, interest and exchange rates, funds supply, Consumer price guides and industrial generation index. These factors were established to having a substantial effect on the stock market returns.

1.3 Research Objectives

1.3.1 General Objective

The current research study will mainly seek to establish the significant association and effects of macroeconomic forces and Islamic Stock market returns in Saudi Arabia. This research will, therefore, focus on a number of variables which are exchange rate, funds supply, interest rate, industrial creation and consumer pricing guide in the long run.

1.3.2 Specific Objectives

1. To determine the association amid macroeconomics factors and the Islamic market a case study of Saudi Arabia
2. To determine the different macroeconomic factors and their impact on the Islamic stock markets earning.

1.4 Research Question

1. What is the long run and short run association amid Stock return and macroeconomics factors which includes interest and exchange rates, funds supply, industrial production and Consumer Price Index?

1.5 Study’s Hypothesis

The study found out that there is some significant association amid stock market earnings and macroeconomics variables within the Islamic Stock market in Saudi Arabia. To begin with, according to Espinoza & Prasad (2010) exchange and interest rates are directly connected to stock markets earnings. In that, if the interest rates are high this might result in a depreciation of the general earning in the market thus leading to a lower exchange rate that is associated with minimal returns. In the incidence where the interest rates are more this implies that the borrowing expenses are high as well as individuals tend to deviate from borrowing and focus on depositing. This trend, therefore, leads to minimal investment which implies that the earning within the stock industry is bound to be low which thus creates negative correlations. On the other Industrial production, variable is mainly utilized in assessing the actual economic operations and real generations as well as returns from the stock exchange. This aspect has effects on the anticipated financial flow s in general. In this context, the variable is likely to lead to excessive profits in the industry and as the activities increase the earning and generation also rises to some high and desirable levels (Mustafa, 2008). In other words the rise in industrial production results in increased profits as well thus industrial production creates a positive association with market returns in the industry.

Consumer Price Index is the inflexible living cost that serves as the procedures of an inflation degree. There is rather undesirable association amid the variables given that in the instance when the inflation level is high then the living cost heightens thus changing the spending of the public towards consumption (Espinoza & Prasad, 2010). Consequently, the rise of the inflation level will mainly constrain the monetary provisions thus having some undesirable effects on returns. In this context, this research does not support the hypothesis that CPI and stock returns form an undesirable relationship in Saudi Arabia. Money supply remains to be one of the most influential subjects in regard to stock exchange in general. In that, it refers to a monetary instrument that has a direct effect towards the financial system. In that, according to Mustafa, (2008), there exists a positive association amid money supply and stocks returns in Saudi Arabia. In that, if the fund's provisions are high this leads to increased liquidity thus the interest levels decreases while investment demand from the public remains high. Eventually, the trend results in increased returns in the Saudi Arabian stock market. Thus, this research supports the hypothesis that money supply has a significant connection with Stocks returns in the Islamic market.

1.6 Significance of the Study

The current study is aimed at establishing the association and the effects of macroeconomic variables on the Islamic Market earnings in Saudi Arabia’s Stock market (Almazari, 2014). Focusing on the previously mentioned variables this research will particularly contribute to the evaluation of the effects of macroeconomic factors on the performance of the stock market and the earnings in general. Focusing on the macroeconomics factors will generate some useful information and can, therefore, act as an essential prediction element for the different users ranging from policy developers, government, the public, and stockholders. Based on the latest insights the Islamic Market in Saudi Arabia is one of the most potential based on the existing financial opportunities but it remains vulnerable based on the constraint that is projected by the domination of the Islamic law (Almazari, 2014). This, therefore, raises the need of focusing on a detailed research on the market.

This study is of essence because it will contribute to the existing information in regard to the macroeconomics variables influence on the stock market. This can be utilized as the basis for advancing research in the future based on the acquired findings. The policy developers in the Saudi Arabian can utilize the study’s findings as one of the most essential tools in regard to evaluating the source of the market’s vulnerability thus focus on stabilizing the market earnings for the wellness of the economy. In addition, this would also be useful to the policy developers in conducting monetary analysis thus allowing them to follow the most accurate directions while settling for some accurate decisions in general. From the shareholder's view in Saudi Arabia and, the information can mainly be utilized to gain a more enhanced comprehension in regard to the stock market flow as well as forecasting the stock market patterns in Saudi Arabia. Therefore the information can be utilized as an influential instrument in projecting the shifting patterns in the industry which will work to ensure that their choices are rational in regard to purchasing or selling stocks. Further, the study will create increased awareness as well as familiarity in regard to the subject while relating to the existing policies and their effectiveness. This might result in generating a number of feasible and effective solutions that are mainly aimed at addressing the issue. The government and shareholders as the managers of funds can adequately and appropriately offer the most suitable provisions to the consumers. Therefore, the information can be utilized in positioning the market more strategically. It is without a doubt that the study will open more opportunities for researching the market further and also assist in forecasting demand and earning as well as acting as a guide that ensures that decisions are not made based on the earning but based on the market state. In that high investment leads to decreased earning thus the information can be utilized in guarding economies against recession since the stock industry is one of the primary players.

CHAPTER TWO: LITERATURE REVIEW

            2.0 Introduction

In examining the association amid stock market returns and macroeconomic variables a number of journals and books as the secondary sources were utilized to justify the raised claims. The association amid the two has acquired popularity in the stock market setting across the globe and particularly in some of the large emerging markets such as Saudi Arabia, Islamic region, Asia and so on. Some of the conducted previous studies empowered the researcher to establish the specific macroeconomic factors and their effects on the stock market earning while conducting this investigation.  This chapter is mainly focused on the acquired findings from the consultation of the existing literature.

 Figure 1: Conceptual Framework of the macroeconomics variables that affects stock markets returns on Islamic Stock Market returns in Saudi Arabia.

Dependent                                                                                Independent Variables

2.1 Review of literature

2.1.1 The Relationships and Effects of Macroeconomic Variables of Stock Market Returns

The association amid stock directories and all the leading macroeconomic factors ranging from inflation, GDP, Exchange and interest charges, and money supply among others have mainly been addressed by most researchers. Almazari, (2014) suggests that stock gains are mainly affected by a number of microeconomics factors such as industrial generation, inflation and interest charges. On the other hand Jarrah & Salim (2016) investigated mainly on the connections amid stock gains and macroeconomics factors and established that there is an undesirable connection amid inflation and returns. Some other studies conducted by Johnes, Izzeldin & Pappas, (2014) also established a negative association amid stock returns and inflation.

However while Cihák,n& Hesse (2008) was investigating on NYSE stocks the study settled for a positive association that is in relation to industrial production, interest charges and the return on interest. In addition in a different research that was grounded on the Japan market a more positive association amid different macroeconomic factors and the country’s stock market revealed a positive association basically in the long and short run basis in addition to the stock pricing. In addition, in a study that was conducted by Cihák,n& Hesse (2008) it was established that the existence of increased rates of inflation leads to decreased performance within the finance industry. This was the results that were mainly obtained from the study in more than 60 countries. There are several attempts on investigations that have been made in regard to attempting to establish the general effects of these factors in relation to macroeconomics on the traditional stock guidelines in the cause of Saudi Arabia. In that, it is accounted that the stock industry remains to be among the essential sectors with reference to the general settings of these countries’ economies in general. Therefore if they are not in operation then the economy in the region is affected drastically.

Based on a study that was conducted by Waemustafa, & Sukri, (2016) a negative association of inflation in an operational economy was also revealed in general. On the other hand in a study that was based in Malaysia, it was established that in general exchange and interest charges tends to affect gains in the stock market while in the case of funds supply a more positive association was established. The long-run association of the variables namely funds supply, CPI and exchange charges were investigated within the Middle-Eastern region and it was established that there is no association of these variables within the stock returns in the region as it had been anticipated but the same variables demonstrated significant impacts in Malaysian Islamic Stick market (Sutrisno, 2017).

Given that most of the conducted studies are mainly grounded in the developed states and other developing markets such as Malaysia there lacks adequate information in supporting the situation that is prevalent in Saudi Arabia. In this context, this study is aimed at bridging the existing gap in literature in reference to the effects of macroeconomic variables on the Islamic Stock market gains in Saudi Arabia. This will be accomplished on the foundation of the literature review that follows.

2.1.2 Stock Market Return

The amount of earning that is acquired by shareholders from all the invested capital gains as well as bonuses from the stock market is what is referred to as Return. It is critically important to attain a comprehensive understanding of the association amid stock market as well as financial growth which plays part in assisting the shareholders in forecasting the underlying trends within the market for more informed investment choices in reference to stock market operations (Sutrisno, 2017). With the presence of detailed understanding in regard to the association, the private, as well as the public sectors, can effectively guarantee effectiveness in regard to the development of policies that serves well in creating directions. The Random Walk Theory notes that the pricing in the stock market is bound to change rapidly and completely based on any leaking insights. Therefore the information that influences these changes is mainly grounded on the responsiveness of the stock value. Based on the fact that the Islamic law dictates that excessive interest charges and risks cannot be taken Waemustafa, & Sukri, (2016) asserts that the Islamic stock market is vulnerable and despite the fact that it is characterized with the highest form of growth it has remained weak and ineffective. This is based on the fact that based on the dominance of religion in the region the stock market companies remain closed in several hours daily to enable the populace to engage in players and remains closed fully on Fridays. This, therefore, implies that it becomes particularly difficult for the investors to obtain the needed insights while needed which slows down the general rate of investment in general.

Based on the findings of the prior studies the association and macroeconomic forces and market return equity is important. In that, the variables play part in determining whether the earning is to be desirable or low (Sutrisno, 2017). It was established that in the emerging markets such as India inflation, funds provision, exchange, and interest’s rates have direct implication on the equity market gains. In that when the interest rate is high this implies that the investors and buyers forego the need to invest in stocks thus focusing consumption and with low investment, the earning becomes low based on minimal exchange prices and buying demand. With inflation also the general living cost tend to heighten thus forcing the investors to uphold their needs and invest in other fewer riskier activities in general. In this context, it was established that with reduced money supply in the industry this implies the investment in the market to acquire more stocks is decreased thus creating a negative association. In the research by Arshed, Riaz & Khan, (2017) the researchers determined a stable association amid GDP and Stock Returns. Most of the emerging markets with Saudi Arabia included are fully characterized by more improved gains in general thus with a stable economy the general earning tend to be higher as the consumers are exposed to more investment funds that are to be utilized in acquiring more shares. However, if the GDP decreases the gains lowers as well due to the decreased demand of the stocks in general (Sutrisno, 2017). The effects of the variables differ from a nation to another in general based on the money supply and the state of the economy.

Sutrisno, (2017) evaluated the association stock market index and the dominating macroeconomic variables. The findings clearly demonstrate that there is an essential association amid the general stock pricing and the variables. While for the research on the Islamic nations Habib, & Islam, (2017) investigated on the association amid the stock return in Saudi Arabia and macroeconomic forces through the use of Error Correction approach. The study’s findings demonstrate that the exchange charges and the economic GDP will definitely impact all the classifications of returns. There is a rather undesirable association amid Portfolio gains and the level of inflation, money supply, and exchange charges, particularly for the large and medium corporations.

2.1.3 Exchange and Interest Rates

Exchange charges can best be measured mainly based on a comparison of two distinct nations (Sutrisno, 2017). In that, this can basically be described as the share of a single currency as articulated in a different one. The association amid the variables has in the recent gathering the focus of most researchers as well as shareholders in projecting future operations in the stock market. Most of the studies that have conventionally attempted to determine the effects of exchange rate and equity return have demonstrated that returns are negatively impacted by the exchange charges. One of the recent studies conducted by Waemustafa, & Sukri, (2016) mainly investigated on the association amid macroeconomic factors and stock gains within a period of ten years which began on 2005 and was mainly accomplished through the use of monthly analysis based on the released reports. The study’s findings revealed that it is just the exchange charges that are associated with a substantial undesirable implication in reference to stock gain. In this context, the study demonstrated that all the other macroeconomic variables held no substantial implication in reference to returns.

According to Jarrah & Salim (2016) stocks, returns are bound to be affected rather negatively by the volatility of exchange charges for instance amid Dollars and. This research utilized differentiated models within a lifespan of 7 years from 2002 (Saiti, Bacha, & Masih, 2016). The findings of this study demonstrated that the appreciation of the dollar currency creates an undesirable implication in reference to returns. This is justified by the explanation that the appreciation of the dollar results in the heightening of products prices in general when being equated to those from the foreign markets which leads to increased imports while exports drop which thus implies that the gains are low. On the other hand with the appreciation of foreign currencies, the local one will be subjected to depreciation and this leads to increased markets gains in the long run (Saiti, Bacha, & Masih, 2016). On the other hand in the short term, this trend will lead to decreased gains until the situation is stabilized. In other words, the studies concluded that exchange rates mainly have undesirable effects of the markets equity. In the presence of inflation and high-interest charges the relationships are even worse given that it creates a rather negative correlation. In that, the investment level decreases as the shareholders tend to shift their funds to other sectors which are associated with higher gains and less operating threats in the short run. Interest rate is an essential macroeconomic factor that holds immediate effects on the economy. In that, the best perspective of analyzing its effects on stock returns is based on the viewer of the borrowers (Saiti, Bacha, & Masih, 2016). In that, if the rates are high the borrowers are unwilling to participate in general thus focusing on saving.

2.1.4 Industrial Production Index

GDP can best be described as the total value of products and services as provided in the market within a given economy in a specified period. This is certainly a prevalent strategy that is utilized in assessing the country’s economic performance as well as revenue generation. In this context, the performance and production of industries, in this case, will be utilized as the representative of GDP because the output represents the performance of the economy. Islam, & Habib, (2016) States that there is a positive association amid stock return and industrial production. In that, the association is only present in instances where there is increased production that will ultimately lead to the acquisition of high revenue that will automatically lead to the wellness of the companies. In this context, with her returns then the production is also higher and the cash flow in the economy is at the pick hence the earning in the stock market will eventually rise. In addition, to this, it has been established that there is a positive association amid market returns and GDP. These findings are similar to the findings by Dimic, Kiviaho, Piljak & Äijö, (2016) which asserts that the desirable connection amid the two is mainly fueled by the presence of increased money flow that is generated in the presence of high production.

The general development of GDP mainly influences the rise of stock gains as it stipulates the increase in regard to profits in the market (Dimic, Kiviaho, Piljak & Äijö, 2016). The aggressive earning increase is bound to have major effects on the earnings as well. However, the association is not a guaranteed one because there are a number of forces that mainly play part in developing the economy in general but the effects are ones which might not be at the reach of the stock's investment. In that, the income increase is only bound to result in a positive effect on the stock market only in the instances that the profiting ratios are not equal (Islam, & Habib, 2016). However, the increase in regard to stock leads to a decline in the acquired returns in general and this is accounted as one of the major inconsistencies. On the other hand, according to, the association amid the actual market gains and per capital increase are seen as negative in a number of countries. In that, in most cases, the economy will experience a desirable growth based on a number of aspects such as employment increase, income rise, and increased savings and these aspects fail to offer any benefit to the restock investors. The quick technology advancement creates a number of advantages to the consumers by basically raising their living state but not on stocks demand. In this context, individuals are more focused on investments which in turn increases their earning but has little to do with the market development (Islam, & Habib, 2016). Thus the GDP growth is associated with minimal effects in reference to the performance of the stock gain in the nation.

2.1.5 Consumer Price Index

Based on a 2016 survey on Saudi Arabian economy it is shown that the country’s inflation rate has been less than 3 percent in the last three years. CPI is the main substitute while accounting for inflation. In Saudi Arabia, some of the leading CPI classification is grounded on housing, fuel, gas, food among others. Consumer prices increased by about 1.7 percent as per 2015 (Dimic, Kiviaho, Piljak & Äijö, 2016). An extensive rise in regard to the level of goods as servicing prices in a nation is accounted for inflation. In that, with the rise of goods prices than the general value for money decreases, which then implies that the purchasing authority within the exchange level is low. With the rise of the general prices then it implies that consumers are bound to purchase fewer units since the expenses are high. In such a scenario the will and the ability of the consumers to play part in any investment is affected gradually. This implies that it is them that the stock earning becomes low as the demand goes down. Based on Bhaloul, Mroud, & Naifar (2016) Inflation can best be accounted for while focusing on the expected and unexpected aspects. In that, this implies that inflation should be assessed based on the prevailing economic forces in general. It has thus been illustrated by the investigations that with the presence of inflation then this account to rather negative gains in reference to returns.

In that even while focusing on the long run relationships amid the variables it because evident that inflation will lead to decreased returns. This is mainly derived from the fact that the involved companies might not be able to adjust their prices in general as the pricing is utmost while the buying is minimal. More so in a study that was mainly conducted by Dohaiman, (2017) it was established that the real operational economy and stock earnings are dominated by a rather positive association because with inflation the prices of stock decreases which implies that the acquired gains are irrelevant and might even lead to losses if the situation is severe. In other words it is rather evident that when the general performance of the economy is low due to the increased products prices consumers mainly focuses on minimal spending which in turn implies that the stock gains will be reduced as low demand leads to decreasing the stock prices in an attempt to attract more consumers in general (Ibrahim & Musah, 2014). The undesirable relationship is evident on all nations regardless of the state of the economy and size as the willingness of the consumers to be part of the operation will be minimal not only based on the associated risks but also the inability to invest.

2.1.6 Money Supply

Money mainly refers to the most liquid asset in existence based on the notion that it is a primary channel that determines the effectiveness of trade (Ibrahim & Musah, 2014). Besides money is useful in economizing in reference to the general utilization of inadequate resources within the economy. In this context, this implies that money can mainly be utilized in ensuring that trade occurs as well as customization of activities in the economy. Money supply basically refers to one of the most fundamental determinants of stock pricing in general given that it acts a rather vital responsibility being the indicator of economic anticipations (Bhaloul, Mroud, & Naifar, 2016). There are a number of studies that have focused on the association amid stock return as well as monetary supply. Money supply is bound to impact the general pricing of shares which can either be positive of undesirable based on the rate. In that in instances when the supply is high this implies that the stock prices are high as well which is associated with desirable returns in general. According to Ahmad et al (2015), inflation, as well as the supply of money, are associated in a rather positive manner. In that money provision and inflation are positively associated with one another and an increase in the supplied money can lead to increased discounts level and a decrease in market pricing. On the other hand, the increase in regard money creates increase money flow in the economy which generally implies that the demand for stock is heightened.

 In the existence of increased demand the prices rise leading to high return as the sales rate is higher when equated to the initial buying cost of the shares. In this context money supply has a positive correlation with inflation. In that when money provision in the market is high it means that inflation will rise due to the existence of valueless money and also the expectations for higher returns will heighten (Dimic, Kiviaho, Piljak & Äijö, 2016). In such a situation the general value of all the involved firms decreases thus forcing the decrease in stock prices. With reference to the existing theories, there is a negative as well as desirable correlation amid money provision and stocks return. Based on Mofleh (2011) it is demonstrated that funds supply is most likely to have a number of implications on the stock pricing in different ways. In that to begin with, uncertainty in regard to the future will obviously affect the general performance of the companies. In addition, if the exchange rates are high this implies that the economy will suffer from minimal investment. In addition, if the supply is a stable one then the relationship is a positive one as consumers will not suffer from uncertainties.

 ReferencesTop of FormTop of Form

Ali U. Ahmad, Abdullah A., Sulong, Z., & Tijjani A. Abdullahi. (2015). the Review of Stock Returns and Macroeconomic Variables. International Journal of Academic Research in Business and Social Sciences. DOI: 10.6007/IJARBSS/v5-i5/1600

Almazari, A. A. (2014). Impact of internal factors on bank profitability: Comparative study between Saudi Arabia and Jordan. Journal of Applied finance and banking, 4(1), 125.

Arshed, N., Riaz, S., & Khan, T. M. (2017). Financial disintermediation and Profitability of Global Islamic Banks. European Journal of Islamic Finance, (7).

Bellalah, M., & In Masood, O. (2013). Islamic banking and finance. Newcastle upon Tyne: Cambridge Scholars Publishing.

Bhaloul, S., Mroud, M., & Naifar, N. (2016). The impact of macroeconomic and conventional stock market variables on Islamic index returns under regime switching. Borsa Istanbul Review Volume 17, Issue 1, March 2017, Pages 62-74. https://doi.org/10.1016/j.bir.2016.09.003

Cihák, M. M., & Hesse, H. (2008). Islamic banks and financial stability: An empirical analysis (No. 8-16). International Monetary Fund.

Dimic, N., Kiviaho, J., Piljak, V., & Äijö, J. (2016). Impact of financial market uncertainty and macroeconomic factors on stock–bond correlation in emerging markets. Research in International Business and Finance, 36, 41-51.

Espinoza, R. A., & Prasad, A. (2010). Nonperforming loans in the GCC banking system and their macroeconomic effects.

Habib, M., & Islam, K. U. (2017). Impact of Macroeconomic Variables on Islamic Stock Market Returns: Evidence from Nifty 50 Shariah Index. Journal of Commerce & Accounting Research, 6(1).

Hassan, K. (2017). Handbook of empirical research on Islam and economic life. Northampton.

Hassan, M. K., & Bashir, A. H. M. (2003, December). Determinants of Islamic banking profitability. In 10th ERF annual conference, Morocco (pp. 16-18).

Ibrahim, M. & Musah, A. (2014). An Econometric Analysis of the Impact of Macroeconomic Fundamentals on Stock Market Returns in Ghana. Research in Applied Economics ISSN 1948-5433 2014, Vol. 6, No.2. Doi:10.5296/rae.v6i2.5146

Islam, K. U., & Habib, M. (2016). Do Macroeconomic Variables Impact the Indian Stock Market?. Journal of Commerce & Accounting Research, 5(3).

Jarrah M., & Salim. N. (2016).The Impact of Macroeconomic Factors on Saudi Stock Market (Tadawul) Prices. Int'l Conf. on Advances in Big-Data Analytics. ISBN: 1-60132-427-8, CSREA Press

Johnes, J., Izzeldin, M., & Pappas, V. (2014). A comparison of performance of Islamic and conventional banks 2004–2009. Journal of Economic Behavior & Organization, 103, S93-S107.

Mofleh A. M. (2011). Alshogeathri. Macroeconomic Determinants Of The Stock Market Movements: Empirical Evidence From The Saudi Stock Market. KANSAS STATE UNIVERSITY. Retrieved from https://krex.k-state.edu/dspace/bitstream/handle/2097/11989/MoflehAlshogeathri2011.pdf?sequence=1

Mohammed S. Al Dohaiman. (2017). The impact of stock market and macroeconomic

Mustafa, K. (2008). The Islamic calendar effect on Karachi stock market. In 8th International Business Research Conference. Dubai.

Saiti, B., Bacha, O. I., & Masih, M. (2016). Testing the conventional and Islamic financial market contagion: evidence from wavelet analysis. Emerging Markets Finance and Trade, 52(8), 1832-1849.

Sutrisno, B. (2017). The Impact of Macroeconomic Variables on Sectoral Indices in Indonesia. Etikonomi, 16(1).

            Variables on real estate prices dynamics: evidence from Saudi Arabia. Int. J. Sustainable Real Estate and Construction Economics, Vol. 1, No. 1, 2017.

Waemustafa, W., & Sukri, S. (2016). Systematic and unsystematic risk determinants of liquidity risk between Islamic and conventional banks.

Controlling inflation

The understanding of Milton Friedman on how to control inflation put to test the ideas of other economics about the importance of fiscal policy. The fiscal policy failed to find a solution for the recurrent inflation in the economies and as it focused on influencing taxation and government spending and hence, the market demand (Heilbroner, and William,53). The fiscal policy failed to provide clear theoretical vision on how to solve inflation in the market amidst efforts by central banks to control inflation rate.

The monetary policy idea proposed Milton Friedman was more applicable and was pegged on reducing the growth rate of total spending. The monetary policy was, therefore, deemed to be more effective in influencing aggregate spending that the fiscal spending (Heilbroner, and William,53). The idea that a fiscal policy was not needed in backing up monetary policy since its accommodation by authorities in an attempt to finance budget deficit would lead to inflationary effects. The principal of monetary policy being used as a tool for effecting price stability was adopted by major economies as the framework for monetary policy. Policy makers had failed to understand the impact of monetary policy in control inflation in 1970’s (Nelson, 1).  The fiscal policy had the capacity to bring about budget deficits due to the tendency to overspend especially during recessions. On the other hand, the use of fiscal policy is seen to have strong re-emerged in 2008 recessions where governments used fiscal stimulus to spur aggregate demand. Despite the natural consequences of increased deficit due to borrowing, the central banks resulted to using fiscal policy to increase government, households and firms spending (Global Economic Prospects, 121).

References

Nelson, Edward. "Milton Friedman on inflation." Monetary Trends Jan (2007).

Heilbroner, Robert L, and William Milberg. The Crisis of Vision in Modern Economic Thought. Cambridge [u.a.: Cambridge Univ. Press, 1995. 52-53

Global Economic Prospects, January 2015: Having Fiscal Space and Using It. , 2015. Internet resource.121

The demand and supply side of Public debt

Abstract

This paper analyses the supply and demand side of public debt in both domestic and global markets. It discusses the government debt in terms of private and severing borrowing to fill the budget deficit and this affect demand in financial markets. It also includes a review of various factors influencing the domestic demand for public debt and various related to such debts. An analysis of Greek crisis is done to explore where it related to supply and demand in domestic and global market. The paper concludes the trade deficit prompts an increase in public debt.

Introduction

In a mixed economy, the government spending, borrowing and raising of revenue – which informs the operations of public sector, plays an important role.  The government spends its funds in various ways, including the supply of goods and services not provided by the private sectors, spending to improve the macro-economy through supply-side enhancements, for income redistribution and to increase the aggregate demand in the economy.  The government expenditure involving deficit finance refers to a policy where the spending is increased without a corresponding increase in taxes or reduction of taxes without reduction in the spending[1]. The government is forced to raise the level of borrowing so as to sustain the policy, and this involves borrowing from the private sector through issuance of government bonds. In the financial market where the government borrowing takes place, the demand and supply laws also applies. The demand law holds that an increase in rate of return will lead to low quantity demanded. An increase in the rate of return or a favorable rate of return offered by the government will increase the demand for the government bonds in the market[2]. This means that more firms or individuals will be willing to buy the bonds and this provides the amount required by the governments. The deficits in the budget have some effects on the economy of a country. The classical deficit theory holds that the budget can lead to increased current expenditure by the government, which is offset by a reduction in investment.  IF there is an increase in expenditure, there is reduction in savings which in turn makes the interest rates to increase and this then leads to a reduction in the investment.

Sovereign Debt

The effects of increased government debt due to deficits can present problems to the emerging markets, mostly because they are vulnerable to market volatility. The investors in government bonds pull sudden stops whereby they stop purchasing government bonds or begin selling the ones they hold. In the recent years, it has become apparent that even the market for government bonds in the advanced economies can also face investors’ outflows and related runs.  In addition, some countries traditionally considered safe haven have seen historic drop in borrowing costs as they continue to face increasing inflows from foreign investors[3]. These countries exposure to public borrowing costs and refinancing risks is determined by those holding the government bonds, which represent the government debt demand side. Other aspects in the global economy like financial crisis affect the public debt especially the sovereign debt[4]. Amidst such risks, the foreign investors’ share in the public debt for majority of the developed economy has continued to increase especially outside the euro area.  The cumulative share of the sovereign debt in an advanced economy was more than double in 2004 – 2011 periods from US $ 5 T to about US$ 12 T[5].  The major driving force was foreign nonbanks and central banks purchase of government bond. In the same period, ownership of the debt by foreign banks was basically constant at about US $ 2 T. Due to this, among many nations, foreign banks ownership of public debt reduced[6]. During the whole 2004-2011 period, the foreign investors share average of public sovereign debt rose to 62 percent from 50 percent for those low-spread area economies and for investors from developed economies, it increased to 31 percent from 20 percent[7]. For the traditional haven nations, the share of the sovereign public debt increased to 21 from 14 percent. At the end of 2009, the total foreign share of countries in euro areas mostly stopped increasing but later reduced to 35 percent from 60 percent at the time the area was experiencing debt turmoil[8].

Factors influencing domestic demand for public debt

During the 2007-2008 financial crisis, the share of domestic holding of public debt begun to increase in majority of the developed economies as a part of assets from banking sector and in nominal terms.  Such an increase is mostly seen in euro area where the debt held by local banks rose to around 20 percent from about 15 percent of overall GDP[9]. The rising demand for the government debt from domestic investors especially banks is worldwide phenomena and this seems to suggest that common aspects are the likely cause. While quantifying the relative significance of every aspect is difficult, the role they play after the financial crises seems to be quite important. These include the global recession, deleveraging of banks, more financial regulations and increasing home bias for the loan.  The low economic activity due to financial crisis in 2008 and resulting weak growth in private sector especially in developed economies  led to reduction of demand for loans offered by banks and hence, the banks started to accumulate government debt[10]. The deleveraging of banks in the developed economies after the crisis possibly made banks to focus their investment towards government debt so as to minimize risks related to their assets.  Such a motivation is brought about by the fact that debts issued by local debts are subjected to Zero Regulatory Risk-weights[11].  The local banks possibly raised their demand for public debt due to efforts to enforce various regulatory changes in whereby stricter liquidity and capital standards and increased need for collateral are required[12]. As aforementioned, there seems to be a more bias for local banks, specifically those in euro area. The increasing demand for the public debt among the local investors can be related to market uncertainty given that investment in government bonds attracts lower risks than in other areas.

Issues with Public Debt

Many economists hold on to their idea that a bit of government debt can be important and at the same time not affect the economy negatively, but such ideas change once there is a rise in debt levels. An increased rise in the government debt can cause problems to the economy since the repayment has to be done. This involves paying the interests on the bonds from the government budget. The interest rates levels have been reducing since 1980s and have reached low since 2008[13].  With low interest rates, the government can operate a budget deficit since its inexpensive especially if the expenditure is on investments that will have more multiplier effect.  For instance, in case of infrastructure spending where the multiplier is 2, 200 billion spent would lead to creation of 400 billon as overall economic activity[14].  The gain from such will probably be large than cost of repaying the debt due to low rate of interest and this leads to positive net gain.  Concerns arise when there are concerns by bond holders about the government’s ability to repay the debt. The likely effect is an increase in interest rates in the market as they seen a huge risk and can either result in reselling the bonds or seek for higher rates of interests which can justify the risk of holding such bond[15].  Such an issue is common among countries that are considerably less wealthy in comparison to countries with advanced economies. In case of financial crises, countries whose global GDP share is small have little ability to solve their debt problems. They are not even able to convince bond holders that they are able to continue repaying the interest on debts while debt level rises during this recession[16].

 Countries can repay their debt in two ways, which consists of debt monetization or tax revenues. An increase in taxes with an aim of meeting the requirements to service the debt may hurt a country’s GDP since taxes can lead to investment and consumption reduction. The only safe way is to pay the debt when the budget has a surplus or is balanced and even in such a situation, the repayment of the whole debt can take long[17]. In addition, cutting back government expenditure which is also required to have a balanced budget may lead to further depressing of the economy. Such a problem has affected the Greece and led to great political conflict. Monetization of the debt basically means printing more money. In monetizing the debt, treasury bonds would be sold, which would then be bought by Federal Reserve and interest on such debt would be repaid by the Treasury department[18]. In this case, the Federal Reserve would give back the interest paid on debt to Treasury after deducting expenses and in this money, more money is printed for repaying off the debt. This process may increase the threat inflation since it lead to higher supply of money in the economy. However, some economists argue that increasing inflation with a small percentage can have positive impact on the economy since in an economy experiencing depression or recession, the deflation threat (reducing prices which may cause further business activity depression) can be countered by use of inflationary forces[19]. The debt monetization option can only apply to the counties than can control the debt denomination currency.  In countries like Argentina and Greece whose debt was in dollars and Euros respectively such an option was not available[20].

The Case of Greek Crises – Supply and Demand

 The unfolding of 2008 financial crises brought about a striking rise in public debt in various advanced economies. The market crisis involving US mortgage loan in 2007 transformed into a sovereign debt problem especially in the euro zone[21].  The large increment in public debt could be related to governments’ efforts to minimize private debt level whose accumulation over the years preceding the crisis was quite great.   Various issues can be observed from the crises: substantial increment in debt crisis in euro zone during some periods and high reduction of private debt in other periods; private debt increased during economic booms at high rates; during the entire period, private debt increased considerably than public debt; the private debt increased at an yearly average of about 35 percent among euro zone countries[22]. In Greek , a rise in public expenditure in years preceding the 2008 crisis brought about increased need for borrowing and hence, high accumulation of public debt. The level of the debt amounted to € 298.5 billion, while the ratio of debt to GDP continued rising, which was also increased by EU rescue package of € 110 billion and was then projected to go beyond 150 percent by 2020[23].  The problems in increased public debt can be related to reduction in consumption and productive activities in the market which meant that even taxation could not take care of the expanding government expenditure. In addition, Greek has an economy whose structure is distorted such that economic activities are concentrated in few individuals and this lead to price inflexibilities[24].  The wage cuts and fiscal strictness adopted by the country lead to a dangerous reduction in demand, leading to recession and increased unemployment. The restructuring of sovereign debt in 2012 failed to solve the huge public debt in the country. This shows that large amount of debt was an effect rather than a cause of the crises. The problem can be related to both demand and supply; supply issues have persisted since the country joined EU in early 1980s; the demand issues were a result of financial strictness and reduction in wages which reduced the rate of consumption[25].   The fiscal austerity adopted brought about more negative multipliers and a great reduction in the economy’s output. While internal depreciation helped the exports to some level, the wage cut that initially caused this together with unstable prices caused large fall in domestic demand. Even the adopted structural reforms failed to solve the situation because its scale was limited[26].  The falling exports lead to high trade deficit in the country which eventually translated into increased public debt.  In addition, the reduction in productivity and wage costs resulted from great reduction in aggregate demand and even investment. In the Euro area, the formation of fixed capital in 2014 was almost 19 % of overall GDP, and this was a bit lower than levels observed before the crisis[27]. However, in Greek, the formation of fixed capital fell from over 20 % in periods before the crisis to almost 16.3 % during 2009 period and in 2014, it fell to 8 %.   The construction of residential houses made up the largest portion of the decline[28].  In addition, the nature of Greek economy is such that it is not as open as others in the euro zone and is vulnerable to many frictions in comparison to countries like Portugal and Ireland. In an economy like Greek, fall in prices does not occur and aggregate demand fall due to wage decrease bring about aggregate activity contraction and hence, unemployment.  There reductions in wages were indicated by the larger increase in profit margin instead of being reflected by prices’ reductions[29].

In terms of public debt, the risks posed by economic hard ships due to fall in aggregate demand and country’s investment indicated a maturity profile that is not convincing. The government could not convince the bond holders than with prevailing status of the economy it would repay the loans. This made the investors to seek for higher rates of interests so as to lend additional funds to Greek.  With the onset of the credit crunch, the public debt continued increasing especially driven by the ability and willingness of the government to implement fiscal structures that would help the situation[30]. The discussion helps in highlighting various important points. The high borrowing by the Greece government from abroad with an aim of funding deficits in current account and government budgets left it with high level of external public debt. The economic structure of the country was vulnerable to various frictions, which is seen in reduced aggregate demand, productive activity and level of exports. The holders of the bonds demanded high interest on the debt given the kind of risks they were exposed to and this further worsened the situation. In addition, the level of Greece external debt and budget deficit way above the normal rules established by Economic and Monetary Union of EU, so that there was that the expected 3 percent and 60 percent of GDP respectively was not observed[31]. In addition, the high government expenditures and with not corresponding strength in government revenues lead to the crisis. In a period of years, there was an increase in central government spending of 87 percent; revenue growth was only 31 percent which lead to the aforesaid deficit[32].  The various structural policies in the country are also so rigid that they lower its international competitiveness – in terms of wags and reduced productivity – ad the major factor[33].  The reduced growth in exports in comparison to other countries increased trade deficit. The borrowed funds were mostly directed to current expenditures and little was used in improvement of productive investments for generation of future growth, competitiveness and creation of new resources that would be used in the repayment of debt.

Conclusion

The above discussion shows how the accumulation of trade deficit can lead to crisis in public finances.  In an ideal case a country is having no trade deficit and government expenditure is covered by taxes, while exports values equal exports value. However, the world economy is vulnerable to internal and external factors that affect aggregate demand, productivity and international competitiveness of a country. In case there is recession among other countries, the demand for exports from the country will fall significantly. In case the imports demand remains constant, a trade deficit would develop since exports are lower than imports.  The increasing trade balance will affect the demand in the country which will lead to reduced output and unemployment. To prevent such a scenario, the government borrows more money with an aim of making up for the lost exports and this leads to debt accumulation. The trade deficit can therefore, lead to budget deficit which is then financed through borrowing.

References

Arslanalp, Serkan, and Takahiro Tsuda. "Tracking global demand for advanced economy sovereign debt." IMF Economic Review 62, no. 3 (2014): 430-464.

Gennaioli, N., Martin, A., & Rossi, S. (2014). Sovereign default, domestic banks, and financial institutions. The Journal of Finance, 69(2), 819-866.

Herndon, Thomas, Michael Ash, and Robert Pollin. "Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff." Cambridge journal of economics 38, no. 2 (2014): 257-279.

Karagöz, K. (2013). Determinants of tax revenue: does sectorial composition matter?. Journal of Finance, Accounting and Management, 4(2), 50.

Perry, Nathan .Debt and Deficits: Economic and Political Issues. Tufts University. 2014

Vlamis, Prodromos, and P. Kouretas Georgios. "The Greek crisis: Causes and implications."

Vlamis, Prodromos, and P. Kouretas Georgios. "The Greek crisis: Causes and implications." Panoeconomicus, Vol 57, Iss 4, Pp 391-404 (2010) no. 4 (2010): 391

YANNIS M., IOANNIDES, and PISSARIDES CHRISTOPHER A. "Is the Greek Crisis One of Supply or Demand?." Brookings Papers On Economic Activity (2015): 349. JSTOR Journals, EBSCOhost

[1] Perry, Nathan .Debt and Deficits: Economic and Political Issues. Tufts University. 2014

[2] Perry, Nathan .Debt and Deficits: Economic and Political Issues. Tufts University. 2014

[3]  Perry, Nathan .Debt and Deficits: Economic and Political Issues. Tufts University. 2014

[4] Gennaioli, N., Martin, A., & Rossi, S. (2014). Sovereign default, domestic banks, and financial institutions. The Journal of Finance, 69(2), 819-866.

[5] Arslanalp, Serkan, and Takahiro Tsuda. "Tracking global demand for advanced economy sovereign debt." IMF Economic Review 62, no. 3 (2014): 430-464.

[6] Arslanalp, Serkan, and Takahiro Tsuda. "Tracking global demand for advanced economy sovereign debt." IMF Economic Review 62, no. 3 (2014): 430-464

[7] Arslanalp, Serkan, and Takahiro Tsuda. "Tracking global demand for advanced economy sovereign debt." IMF Economic Review 62, no. 3 (2014): 430-464

[8] Arslanalp, Serkan, and Takahiro Tsuda. "Tracking global demand for advanced economy sovereign debt." IMF Economic Review 62, no. 3 (2014): 430-464

[9] Perry, Nathan .Debt and Deficits: Economic and Political Issues. Tufts University. 2014

[10] Perry, Nathan .Debt and Deficits: Economic and Political Issues. Tufts University. 2014

[11] Arslanalp, Serkan, and Takahiro Tsuda. "Tracking global demand for advanced economy sovereign debt." IMF Economic Review 62, no. 3 (2014): 430-464

[12] Arslanalp, Serkan, and Takahiro Tsuda. "Tracking global demand for advanced economy sovereign debt." IMF Economic Review 62, no. 3 (2014): 430-464

[13] Perry, Nathan .Debt and Deficits: Economic and Political Issues. Tufts University. 2014

[14] Arslanalp, Serkan, and Takahiro Tsuda. "Tracking global demand for advanced economy sovereign debt." IMF Economic Review 62, no. 3 (2014): 430-464.

[15] Herndon, Thomas, Michael Ash, and Robert Pollin. "Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff." Cambridge journal of economics 38, no. 2 (2014): 257-279.

[16] Perry, Nathan .Debt and Deficits: Economic and Political Issues. Tufts University. 2014

[17] Herndon, Thomas, Michael Ash, and Robert Pollin. "Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff." Cambridge journal of economics 38, no. 2 (2014): 257-279.

[18] Karagöz, K. (2013). Determinants of tax revenue: does sectorial composition matter?. Journal of Finance, Accounting and Management, 4(2), 50.

[19] Karagöz, K. (2013). Determinants of tax revenue: does sectorial composition matter?. Journal of Finance, Accounting and Management, 4(2), 50.

[20] Perry, Nathan .Debt and Deficits: Economic and Political Issues. Tufts University. 2014

[21] YANNIS M., IOANNIDES, and PISSARIDES CHRISTOPHER A. "Is the Greek Crisis One of Supply or Demand?." Brookings Papers On Economic Activity (2015): 349. JSTOR Journals, EBSCOhost

[22] YANNIS M., IOANNIDES, and PISSARIDES CHRISTOPHER A. "Is the Greek Crisis One of Supply or Demand?." Brookings Papers On Economic Activity (2015): 349. JSTOR Journals, EBSCOhost

[23] Vlamis, Prodromos, and P. Kouretas Georgios. "The Greek crisis: Causes and implications." Panoeconomicus, Vol 57, Iss 4, Pp 391-404 (2010) no. 4 (2010): 391

[24] YANNIS M., IOANNIDES, and PISSARIDES CHRISTOPHER A. "Is the Greek Crisis One of Supply or Demand?." Brookings Papers On Economic Activity (2015): 349. JSTOR Journals, EBSCOhost

[25] YANNIS M., IOANNIDES, and PISSARIDES CHRISTOPHER A. "Is the Greek Crisis One of Supply or Demand?." Brookings Papers On Economic Activity (2015): 349. JSTOR Journals, EBSCOhost

[26] YANNIS M., IOANNIDES, and PISSARIDES CHRISTOPHER A. "Is the Greek Crisis One of Supply or Demand?." Brookings Papers On Economic Activity (2015): 349. JSTOR Journals, EBSCOhost

[27] YANNIS M., IOANNIDES, and PISSARIDES CHRISTOPHER A. "Is the Greek Crisis One of Supply or Demand?." Brookings Papers On Economic Activity (2015): 349. JSTOR Journals, EBSCOhost

[28] YANNIS M., IOANNIDES, and PISSARIDES CHRISTOPHER A. "Is the Greek Crisis One of Supply or Demand?." Brookings Papers On Economic Activity (2015): 349. JSTOR Journals, EBSCOhost

[29] Vlamis, Prodromos, and P. Kouretas Georgios. "The Greek crisis: Causes and implications." Panoeconomicus, Vol 57, Iss 4, Pp 391-404 (2010) no. 4 (2010): 391

[30] Vlamis, Prodromos, and P. Kouretas Georgios. "The Greek crisis: Causes and implications." Panoeconomicus, Vol 57, Iss 4, Pp 391-404 (2010) no. 4 (2010): 391

[31] Vlamis, Prodromos, and P. Kouretas Georgios. "The Greek crisis: Causes and implications." Panoeconomicus, Vol 57, Iss 4, Pp 391-404 (2010) no. 4 (2010): 391

[32]Vlamis, Prodromos, and P. Kouretas Georgios. "The Greek crisis: Causes and implications." Panoeconomicus, Vol 57, Iss 4, Pp 391-404 (2010) no. 4 (2010): 391

[33] Vlamis, Prodromos, and P. Kouretas Georgios. "The Greek crisis: Causes and implications." Panoeconomicus, Vol 57, Iss 4, Pp 391-404 (2010) no. 4 (2010): 391

Government policies affect the economy

The government regulates the economy by controlling the financial system through its Federal Reserve agency. The financial systems acts like an engine and the Fed controls the amount of fuel available through price manipulation and dictating how the fuel is going to be used. The aim of these actions is to prevent very high rates of economic growth and prevent the shrinkage of the economy.

In this case the fuel represents money, where the Federal Reserve influence on price of money is through increasing and decreasing the rate of interests. The Fed has maintained the interest rate at Zero since 2008 but only the bank can get such money for free: but the public cannot obtain such money since lenders fear a rise in interest that would make such  a transaction a lost opportunity; lenders fear that borrowers may not repay (Appelbaum, 2013).  The Fed also use the bonds to control the market , whereby the purchase of treasury bonds at higher rates drives the prices high  as investors rush to buy  available diminishing securities.  By paying higher prices for Treasury bond, it shows that investors are allowing a lower rate of interest from borrowers. This way, the Fed helps in reducing the interest rates the government pays or buyers pay for mortgage.

 The best thing that is the Fed can do, and which is generally agreed by economist is for Fed to maintain the inflation to be steady and slow. When the economy is too weak, the rate of reduction in inflation can be very low.   The efforts by the government to spur economic growth through purchases of huge assets can eventually lead to higher inflation.  When the purchase of such assets involves creation of money out of nothing, the money supply increases faster than economic growth which leads to inflation (Appelbaum, 2013).  However, in case the economy starts growing, the Federal Reserve can cap the inflation rate though paying higher rates of interests, and this leaves the supply of money intact.  On the other hand, unsustainable rise in the prices of assets can lead to property bubbles. The economic growth can be boosted through consumer spending that can be determined by the government through inflation rates (Schwartz, 2017).

Conclusion

 The government can influence the economic growth rate by using interest rates to control the inflation rate. A reduction in interest rates can lead to increased consumption as borrowing becomes easier for consumers while a high interest rate leads to low consumption. High rate of economic growth means that the GDP of a country will improve buoyed by increased consumption.

References

Rationale of: Bank of Canada Holds Interest Rate Steady with respect to monetary policy

When the interest rates are held steady by the Bank of Canada, it means that there is no change in this rate.  Hence, the market will not affect be affected in terms of demand, production and prices. The borrowing and lending interest rates by the commercial banks will remain unchanged. The financial markets will continue to lend more as long as the borrowers are able to repay at the prevailing interest rates. In contrast an increase in interest rates will lead to increase in borrowing and lending rates among the financial institutions.  The Bank of Canada held a steady interest rate as a cautious measure against the uncertainty in the market.  The uncertainty makes the bank to be cautious in adjusting policy rates so as to do away with monetary policy stimuli.  The uncertainty in the market is brought about by trade policies that are more protectionist and the risks related to renegotiations on NAFTA (Evans, 2017).  Such uncertainty means that some things have to be understood clearly before the central bank decides to raise the interest rates. Such knowledge includes an understanding of how rate increment affects the level of debt of Canada.  

The steady interest rate is, therefore, a cautionary measure approach to the kind of debt being taken by the Canadian Bank.  Even though the performance of the economy of the country is fine, an increase in the interest rates could greatly affect the ability of many people to spend their income while stealing bearing big debts. Such debts have arisen from buyers borrowing a lot, in terms of hefty mortgages, due to attractive housing market (CBC News, 2017). Maintain the interest rates at a steady level of 1 percent means that the expenditure by households in the market will be sustained.  In fact, the prevailing interest rate currently remains the same, which underlines the intention of the bank (Bank of Canada, n.d).

The constant interest rate could be aimed at keeping the interest rates low, presently below 2 percent. This would encourage an environment of low inflation so as to encourage more consumers spending and thus, keep the demand in the market high. The other problem involves the challenge of predicting the economic developments in the future amidst increasing tendency to have protectionist policies. There are many possible surprises relating to the changes in the policies and the market that can impact on the path the economy is to take in the future. Theses includes productivity growth rate, economic outlook in foreign markets and the sentiments held by businesses regarding the direction of the economy. This uncertainty means that making a future prediction is very difficult especially in relation to inflation and hence consumer behavior. Hence, the Canadian Bank has to be very careful with whatever monetary decision to be made in relation to adjusting the interest rate. The bank is mandated to manage the monetary policy in a way that will promote the long-run wellbeing of the economy in terms of inflation, stable prices, consumer expenditure and productivity growth, all of which are affected by the prevailing interest rate (Bank of Canada, n.d).   In a market that is open, the bank has to ensure that prices are stable, while lending and borrowing rates of interest are in tandem with expected market outcomes.

References

Evans, P., (2017).Bank of Canada keeps benchmark interest rate steady at 1%

CBC News, (2017) .Lot of things that have to come together' before next rate hike, Stephen Poloz says. Retrieved from: http://www.cbc.ca/news/politics/bank-of-canada-poloz-interest-rates-cautious-1.4372066

Current federal Deficit

The article highlights the increases of federal deficit for 2017 which has reached at $80 billion, which is higher than the fiscal year 2016 which was 3.2 percent.  The deficit is indicated to be comprising of 3.5 percent of the current US economy size or rather GDP.  This deficit is a reflection of the difference between the amount of revenue corrected by the government and what it actually spends.  The largest contributor to the debt is accrued deficits for the past years which increased to $14.667 trillion in 2017 (Sahadi, J., 2017). However, the accrued deficits are reported to have actually fallen as compared to the same period in 2016, without accounting for funds owed to trust funds such as social security.  Tax revenue also rose by 1.5 percent even though the receipts reduced from 17.7 percent in 2016 to 17.3 percent of GDP.  The incomes taxes from individuals and payroll taxes made up the largest part of revenue, which is a reflection of improvement in salaries and wages (Sahadi, J., (2017).  

The article reports the Government expenditure as also having increased at a higher rate than tax revenue which contributed to the aforesaid deficit.  In addition, due to the aging population, expenditure on Medicare and Social Security is reported to have increased by 1.5 percent and 2.5 percent in that order.  The other increase in expenditures includes interest payment for debt and spending on Environmental Protection Agency reduced by over 7 percent.  The government gave a historical subpar economic growth as the reason for expenditures surpassing growth of revenue.  The results of the budgets are reported to provide proof for need of advocating for tax code reform and less regulations (Sahadi, J., 2017).  

Reference

Economics of urban land use

Introduction

Land is a major factor of production alongside labor and capital, and economic theory has been focusing on rent as the return obtained from land. Like other factors of production, land is scare and this can be attributed to growth in urban areas at high rates which has led to its extensive use and high prices as demand for this resource outruns its supply. In addition, the growth of urban areas is creating problems to the society across the world as concentration of people in urban areas increases. This has given rise to debate and research on the impact of changing use of land in urban areas and the need for optimal land use with an aim of solving such problems. Economic theories on land have largely concentrated on land use as a factor of production from an agricultural perspective while ignoring the issue of urban land use in terms of residential use and construction of central districts.  In recent times, the issue land use planning especially in urban areas has been receiving significant amount of attention as the need for optimal land use gains more importance.

Literature review

Land is an object that is endowed with two major characteristics which are land as a commodity and immobility of land. Every piece of land is related to a unique geographical location or space. Every household that relocates to a city is forced to select a residence, and this involves decisions set that is quite complex. This can be perceived as a trade- off challenge where space, accessibility and even environmental amenities are the main fundamental factors (Fujita, 1990).  In making this choice, households have to weigh the aforesaid factors in order to meet time and budget complaints.  Like any other consumer, the behavior of the household will aim at maximizing utility but within a given budget limit.   Land use in urban areas is categorized as either residential, office use or industrial areas for manufacturing firms. Residential use consists of single-family residences, mobile homes and multiple-unit dwellings and even mobile homes and is easily identified due to their nearness to roadways and urban centers.  The industrial areas consist of various types land uses and structures including heavy and light industry where processing, manufacturing and assembly of different products occurs. The office use of land encompasses spaces that contain structures that are majorly used for commercial and services, where selling of products and services takes place (Fujita, 1990). Given that land is normally fixed, it attracts stiff competition as manufacturers, offices and households strive for a share and are willing to for this asset up to the activities to be conducted on it. The price of a piece of land is determined by accessibility to work places, which in turn determines commuting costs, accessibility to suppliers and consumers and information accessibility (Fujita, 1990). Research on growing cities in various parts of the world indicates an increase in build up land use for the past almost three decades while at the same time other categories have been reducing.  A research focusing on major Asian cities of Ranchi, India and Gurgain and Jaipur shows the various changes relating to land use across the world driven by population pressure and economic growth (Gupta, 2014).

 With increased need for land in urban areas, land cost and competition for the same, attention has been focused on various effect of expansion of urban land and very heavy industrialization. The increased extension of land use can be attributed to heavy industrialization and resulting influx of population in urban . The end results has been an increase in residential land areas and the effect on human and environment has also been significant (Fujita, 1990).  The need for large-scale construction in urban areas has led to emergence of issue of land use efficiency and even optimization. Land use expansion has aimed at supporting the economic growth in different place especially in emerging economies like China where heavy construction on land for the industrial, commercial and residential purpose has defined the economic growth of these countries (Gupta, 2014). The governments in these countries have come up with policies aimed at regulating the use of this scarce resource and its optimization to ensure full economic impact.  

The development of urban land markets involve models that reflect an open-city or closed-city model with the later model taking income and population to somehow determining the outcomes of the markers.  The form tries to define the endogenous migration process of business and individuals in urban areas. This kind of migration reflects products and labor markets that are connected. The population resulting from this migration is the major determinant of the land area that has been developed or rather the size of the city or urban centre. In United States, there is always an increase in land rents at Central Business District as demand for such increase (Jaeger, 2013). The conditions for equilibrium for urban land market require price equilibrium to be present at the border line between use of agricultural land and urban land. The condition also requires the marginal utility to be equal for all the properties within a given city. Urban areas such as cities are most likely to be between the assumptions that they are not closed completely and not open entirely (Jaeger, 2013). These are two basic models of urban city models that have been used to define the land in these areas. However, the population factor is the most important determinant of the urban areas’ spatial scale and it normally varies in line with it. The regulatory limitations and geographic boundaries places limit on the extent of development concentration around a Central Business District and hence, places limit on the use of land in an urban center (Jaeger, 2013). In addition, land prices and value are largely determined by the population and income per capita even though any obstacle that may put limitations on development concentration is likely to result to increased prices from a specific distance from the urban center (Jaeger, 2013). The demand of land in an urban center and the size of that land determine its prices where other factors such as accessibility and distance from the urban center are not taken into account.  The government may place regulations on the use of land with an aim of controlling the development of an urban center.

 Optimization of land use focuses on maximization of total production of total consumption in urban areas. The distribution of residential and business land relates to residential densities and employment densities in urban areas, while optimal use of land is determined by commuting costs and other production externalities.  The trade-off experienced between these two aspects brings about optimal allocations which is different in terms of commuting costs amount and the level of external effects (Rossi-Hansberg, 2004). An optimal allocation attracts business in the land and accompanying employment wile high commuting cost is likely to results to many residential sectors and many businesses.  In many cities, optimum use of land is never achieved if residential and business sectors are mixed in one area. The need for government regulation in urban land use can be traced to the need to optimize the use of the resource while at the same time ensuring that minimal effects to human and environment occur (Rossi-Hansberg, 2004).

The regulations and interventions of government authorities have impact on the cities around the world.   Such regulations are mostly well-meaning and they are normally designed to attain some ends that are thought to be economically and socially desirable. In many cases, markets for real-estate markets are complex and therefore, the interventions normally results to subsidiary impacts that policy makers anticipates (Brueckner, 2009).  Urban growth limits is an example of such interventions, where a government draws a specific ring around the urban area while prohibiting any development beyond the ring. Another intervention involves development densities’ regulation with the aim of a lower density being achieved through a restriction on minimum lot –size where densities are limited in detached house areas so that every structure is surrounded by enough space. The various measures taken by governments are normally aimed at ensuring social-economic development of the community in the urban areas is attained (Brueckner, 2009).

References

Jaeger, W. K. (2013). Determinants of urban land market outcomes: Evidence from California. Land use policy, 30(1), 966-973.

Brueckner, J. K. (2009). Government land use interventions: An economic analysis. In Urban land markets (pp. 3-23). Springer Netherlands.

Rossi-Hansberg, E. (2004). Optimal urban land use and zoning. Review of Economic Dynamics, 7(1), 69-106.

Fujita, M. (1990). Urban economic theory: Land use and city size. Cambridge [Cambridgeshire: Cambridge University Press.

Gupta, R. (2014). The pattern of urban land-use changes: a case study of the Indian cities. Environment and Urbanization Asia, 5(1), 83-104.