ECON545 Paper Project 1

 

ECON545 Paper Project 1

 

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Professor’s Name

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    Introduction

Cindy has an innovative idea, however, before the implementation of such an idea, many factors have to be considered. Cindy has to look at the macroeconomic conditions in the United States, the country that he intends to start his business from a wider perspective. He has to do a lot of research to determine growth forecast of the solar equipment that uses solar energy to generate power and convert it into other forms of energy that can be used to enhance the efficiency of work. Having knowledge regarding macroeconomics, I would wish to present to Cindy macroeconomics factors that ought to be examined before he invests a huge amount of capital at once. The following is the discussion concerning the factors as well as other macroeconomic issues.

Financial support is necessary since it facilitates the success of business ideas such as the one for Cindy. It is necessary for Cindy to ensure that there is maximum utilization of the available resources especially financial resources. In a competitive business setting as well as an economy that faces many challenges, Cindy can steadily come up with different sources of finance that can be adopted in the solar energy industry. There are companies which are known for solar services that they offer. For instance, San Mateo which is a California-based firm that provides innovative rooftop rental program unveiled in 2008. These programs stimulated the solar housing market through the elimination of upfront installation expenses. The Cindy’s new business can provide influential investors a chance to buy different bonds secured by its clienteles as well as commercial power agreements.  It will be necessary to raise adequate capital so as to finance the formation of the firm in California.

 

There is a growing optimism among solar companies in the United States, beginning with manufactures to project designers and developers. Some of the companies believe that they will achieve better performance in the coming year than before. These companies have been able to generate a substantial amount of revenue in the previous year’s thus increasing the chances of conducting operations in the foreseeable future. Additionally, the local, the state and federal government provide solar tax credits as well as rebates, and these encourage property holders or home owners to prefer renewable sources of energy so as to reduce the cost of energy. Thus, they switch to solar power usage. Different programs differentiate the sum of the rebate subsidy, although there are those that cover 30% of the cost of the solar power system. Hence, Cindy will benefit from setting up a solar installation organization.

The federal administration permits business men to deduct 30 percent of the cost of the solar power system from the taxes through the investment tax credit (ITC). Those who are not expecting to owe taxes the current year have the opportunity of rolling over their credits to the subsequent year. These huge incentive as well as benefits from the government, can satisfy Cindy since he desires to serve the society. The tax credit greatly lowers the cost of implementing the solar power system project. Thus, they make the solar power cheaper and affordable that the power that comes from utility companies.

 

An overview of Unites States economy in relation to price of oil and gasoline.

The GDP of United States is higher than most countries in the world. Since the 2008 economic depression the U.S has been recovering over the years and the GDP is increasing. This is shown by the graph above. Employment and inflation affect the GDP and business operations and the general growth of the economy. The increase in the price of cool oil per barrel increases the cost of gas. The increase in the price of oil does not only affect gas but all sources of energy that are associated with oil. Trucks that transport and deliver foodstuffs depends on oil products which facilitate their movement. Hence, increase in the price of oil, increases the price of fuel hence making it expensive to move goods from one point to another. As a result, the price elasticity of goods is more than the price elasticity of demand for gas. Cindy needs to set up lower prices for his products (Bank, World Development Indicators, 2014).

Company dealing with oil are experiencing challenges due to the rapid growth of China and India, and when these trends persist, there is a high possibility that the prices of oils would increase to more than $200 per gallon.

In general, the prices of oil tend to affect the whole economy. Individuals spend a lot of money on groceries as well as gas and spend little on other goods and services. As a result, inflation is becoming a threat. There is the need for the government to ensure that there is an optimal distribution of resources through the effective and efficient allocation of budget. Due to these situations, it would be beneficial to develop other sources of power or energy to reduce or stop the increase in the price of gas and oil. At first, Cindy can experience losses due to low demand for solar panels at offices and homes, although when the business develops and becomes popular in the long-run, the costs would decrease, and he will be able to earn higher profits.

The United States government has developed an economic incentive packet that is helpful when it comes to compensation for high prices of gas and stimulation of the economy. It believed that increase in the supply of money would lead to increase in expenditure on all goods, though research indicates that many people use free money supplied to invest and pay their bills. An increase in money supply increases aggregate demand in the economy, and thus people spend more on gasoline and its products (Fed, 2010).

In an economy, the demands for one commodity can directly or indirectly affect the demand for another good. For instance, In the case of Cindy’s innovation, the demand for solar products would be subject to the demand for gasoline by customers. When consumers demand more gasoline, there is a high possibility that people will start using solar panels in the future since due to comparatively lower cost. The existing demand for gasoline in the U.S is inelastic which means that a change in the price of Gasoline would not lead to a significant change in the quantity demanded. The reason behind this scenario is the lack of a close substitute for gasoline, and it is an essential good. Therefore, if Cindy creates an alternative solution, he will earn a substantial amount of revenue.

 

On the other hand, the supply of Gasoline would greatly influence Cindy’s business status because its supply depends on many factors based on where it comes from, the tax structure, the international tariff. As a result, the equilibrium quantity, as well as price of Gasoline, would be influenced by foreign demand by other countries, India, and China.

Statistics indicate that there has been a continuous increase in the price of gasoline due to increased consumption of fuel. This creates a spiral in the U.S economy which affects other businesses. The spiral is brought about by the low-interest rate by the Federal Reserve. Businesses spend a lot of cash on fuel to enhance the running of the day to day operations.

The recent statistics indicates that the GDP of United States is more than $17 trillion while the population is approximately 320 million. The GNI per capita is 55,836.79 USD ‎and it is steadily rising. This indicates that the country has regained stability which is a positive outcome and increases the chances of growth of businesses. (Bank, World Bank Data Base, 2014). Research also shows that literacy level is high in the United States. Many almost all children are going to school. For faster growth and development of the business, Cindy can target areas where literacy levels are very high. This is because individuals in such areas can quickly understand how the solar system works and share the knowledge with other people.

From an economic as well as financial point of view, it is evident that the 2008 crises weakened the dollar and these made people lose their trust in banks as well as the security and investment market. Many people withdrew their money from banks which led to a reduction in interest rates and foreign direct investments. During the economic downturn, the price of gasoline fell although people still bought it few times. This shows that Cindy’s business may not be greatly affected in case there is an economic recession since the new products to be offered are not the same as the existing sources of energy.

Banks in the U.S provided loans at subprime mortgages in the recent years, and people with low incomes were able to afford housing loans. However, the inability to repay these loans made banks to experience a shortage of funds. As a result, banks have now come up with conditions that must be fulfilled for one to get a loan. Loans are given based on the nature of collateral that individuals are willing to provide. Therefore, Cindy should identify something that he can give as security for a loan. When he provides a considerable security, he can be able to acquire a huge loan at a low-interest rate.

The number of business loans provided by banks is rising. The annual rate of provision of commercial and industrial loans is over 9.6%. Wang, 2014). This is a significant increase. (The conditions that businesses ought to meet to secure loans have been reduced. There are high chances that the more loans are going to be given to businesses in the future to promote the development of the economy. The government is trying as much as possible to avoid economic recession by ensuring that issues related to money and currency are managed effectively (Reserve, 2013)

The provision of loans to small business is important because it facilitates the creation of employment. When more credit flows to people, they would be encouraged to start businesses. The federal states in liaison with banks ensures that Americans have access to credit so as to set up businesses, create employment opportunities and increase the national income. Being one of those who has innovative business ideas, Cindy Can take advantage by borrowing and implementing his project to create employment, generate his own income as well revenue for banks and the federal state (State, Federal and the local incentives, 2013)

Cindy has to consider the business cycle in the United States to understand how his business can grow. He should do research to determine the rate of inflation in the country. High inflation indicates that there is a fall in aggregate demand and increase in the level of unemployment. In 2007, the rate of employment in U.S was decline though the output was rising.  The rate of unemployment in the United States was 9 percent in April 2009 but based on the 2016 statistics, and this rate has greatly declined to 6 percent. There is also a rise in productivity of labor. This shows that employees are productive. At earlier stages of the new business, Cindy should employ few productive employees and examine what his business makes before expanding and hiring more people for his store (Cooper, 2011)

A graph showing unemployment rates in the United States over the last few years.

 

The Postal services of United States is financially strapped many people have lost their jobs. According to statistics the Postal service lost more than $8 billion and it intended to pull its employees out of the retirement as well as the health benefits that they enjoyed and create a benefit system that it owns. This requires the approval of congress. However there could be severe resistance from the unions that have agreements which ban dismissals. Recently the postal corporation laid off more than 100000 employees. The decline in advertising brought about by recession as well as loss of mail in the interned have shaken the agency.

The has been increase in price of goods and services all over the world and hence there is a growing need to use an alternative source of energy to that would replace the consumption of fuel. This would help to reduce the high rates of inflation that is experienced throughout the world. United States currency has great effects on the other currencies and hence stability of the Dollar would help reduce worldwide inflation to a certain extend. Thus, when there are major change in the economy of U.S, the international trade would be effected hence affecting the balance of payment and the balance of trade of other countries. Depreciation of the dollar relative to all other currencies would lead to an increase in United States’ exports. This means that imports of other countries will increase. On the other hands, if the U.S dollar appreciates, there would be a decline in exports and increase in imports and this lead to a deficit in the current account.

Cindy should consider monetary as well as the fiscal policies adopted by the United States. Monetary and fiscal policies have a great impact on businesses. Currently the federal government focuses on maintaining inflation at a rate that is between  0.0% to 0.25%. This has been a target since economic recession took place in 2008. The federal government does not intend to disturb policies of businesses and works towards maintaining a stable economy and normalize any changes in the market. Besides, the federal state focuses on reducing inflation through fiscal and monetary policies. A reduction inflation would lead to increase in unemployment and hence inflation can only be reduced up to a certain level that would not lead to high levels of unemployment. Moreover, reducing prices of goods and services will lower the profit margins of producers. As a result, Cindy should keep lower margins since higher margins will negatively affect sales. (cleane energy authority, n.d.).

Economists argue that when the value of the United States dollar in relation to other currencies leads to deterioration of economy of the U.S., This can be interpreted in a positive way. Thus, reduction in imports will lead to a reduction in trade deficit of the country. Countries always devalue their currencies to stimulate economic development through promotion of exports.  For instance, china has kept approximately 400% undervaluation so that no country in the world manages to set of prices below the true value of products. Hence, if Cindy wants his business to establish his business in other countries, thus, expanding his business internationally, he must consider the value of highly valued currencies such as the dollar, starling pound, Euros and the Japanese yen. It will be beneficial for Cindy to start his business in another country when there is appreciation of the dollar but he may end up making losses when there is a depreciation in United States dollar.

One of the major ways that the United States government affects the economy of most countries in the world is through purchasing power. The US is one of the major importer of goods and services from other countries. A decrease in the value of dollars as well as the rise in price of gasoline, the purchasing power of America is reduced. This clearly shows that Cindy should not set high prices for his products because the demand may be low at early stages of the business. Local purchases of goods and services have declined greatly leading to decrease in aggregate demand of goods. Countries which do not have stable economies can suffer from decline in general expenditure which reduces their capabilities of purchasing the goods or the exports of United States and this pushes downward spiral. (HRSA)

 

Source: Data releases of American Data Bank

The United States makes many reforms including changes in fiscal as well as monetary policies to promote business and trade. There are different export-import policies that are being made by the federal state to boost free trade and stimulate economic growth. Some of these policies includes increasing money supply through credit so that Americans so that they can increase their expenditures on goods and services to increase aggregate demand in the country.  The approaches taken by the federal government will promote the growth of business in the United States. Having more money at their disposal, many people would be willing to purchase the products which are offered by Cindy, hence, he will earn more revenue. He should consider introducing discount on specific amount of goods that a customer purchases to boost sale of solar panels.

The implementation of various policy changes to enhance the development of the economy makes investors to gain confidence thus increasing the level of investment. For example, the level of investment rose from 20 to 25 percent since 2009.hence individuals do not have to sacrifice the insurance policies that they have that are necessary during economics shocks. A positive increase in the level of investment will promote Cindy’s business. Apart from installing solar panels, Cindy should provide other goods and services that would be helpful in daily chores.

One has to note that although these data is in terms of dollar amounts, it reflects the quantity or the volume of clientele’s purchases rather than the actual expenses on the items. There is a major concern associated with certain items such as the gasoline. The following graph shows the purchases of non-durable goods and other things .the graph shows how the purchases of gasoline as well as fuel oil have been decreasing in the recent years due to high prices. However, between 2008 and 2009 the prices of fuel decreased and demand increased.

 

Statistics indicate that the United States has a population of more than 320 million people. A large population consumes more energy and hence effective measures ought to be put in place to ensure that there is adequate supply of energy. More than 85% of the total energy in the United States comes from natural gas, petroleum and coal. Oil and petroleum are mainly used as a source power or energy. However, due to high population, the aggregate cost of energy is very high. This creates the need for renewable sources of energy. Moreover, there is a ready market for the business due to high population and the desire for cheaper sources of energy. An increase in population increases the demand for energy and the rate of consumption of energy. The population of US has been increasing over the years and it is expected to increase in the future. Therefore, Cindy has the opportunity to exploit a larger market in the future.

The following graph indicates the population growth of US since 2006.

 

Conclusion

To sum up, it is evident that economic conditions are suitable for setting up businesses. Therefore, as an economist, I would advise to set up or establish Solar Panel Installation Company. This would encourage better utilization of the available solar power. It will greatly reduce the cost of living since people will be required to pay smaller amount for power. Besides, use of solar energy will cut down the cost of production for many businesses including hotels, inns and others. Although, Cindy ought to be keen on matters regarding pricing policies and strategies to avoid making losses and the negative effects of economic cycles. Cindy should relate the demand as well as the supply of his products with existing laws and regulations and demographics so as to achieve an optimal outcome.

 

References

(n.d.). Retrieved from cleane energy authority: http://www.cleanenergyauthority.com/solar-rebates-and-incentives/

Bank, W. (2014). World Bank Data base. Retrieved from www.worldbank.org.

Bank, W. (2014). World Development Indicators. Retrieved from World Bank: http://data.worldbank.org/country/united-states

Cooper, J. C. (2011, August). Bank Lending signals a strengthening economy. Retrieved from Fiscal Times.

Fed, S. L. (2010, December). St. Louis Fed’s Bullard: The U.S. Economic Situation and Recent Monetary Policy Developments. Retrieved from http://www.stlouisfed.org/: http://www.stlouisfed.org/newsroom/displayNews.cfm?article=835

Federal, state and local incentives. (2013). Retrieved from solarcity: http://www.solarcity.com/residential/solar-energy-tax-credits-rebates

HRSA. (n.d.). U.S department of health and Services. Retrieved from npdb: http://www.npdb.hrsa.gov/resources/aboutStatData.jsp

Reserve, F. (2013). Data releases. Retrieved from Federal Reserve: http://www.federalreserve.gov/econresdata/statisticsdata.htm

Wang, U. (2014, February). Will The Solar Market Outlook Turn Rosier For 2014? Retrieved from forbes.com: http://www.forbes.com/sites/uciliawang/2014/02/19/solar-market-outlook-turns-rosier-for-2014/