Patient care financial problem is one of the reasons why today’s populations are unable to receive high quality care that they need to achieve improved health outcomes. The problem of huge health care cost is a big burden to low income earners who always lack adequate finances to purchase drugs and to pay for hospital bills (Kelley, McGarry, Georges, and Skinner, 2015). It becomes even worse for patients who are suffering from chronic health conditions such as diabetes and cancer.
According to Kelley et al., (2015), dementia is one of the chronic diseases that are attracting large social costs for patients in the United State. For this reason, being a fatal health condition, many dementia patients in the United States are dying due to patient care financial problem. Patient care financial problem has an impact on federal and national budgets. Nurses play a very big role in ensuring that patient care financial problems are integrated into the national and federal budgets by analyzing information that may be required for budget development (Luga & McGuire, 2014)
Health care cost: Heath insurance
Lack of health care insurance and high costs of prescription drugs are the most common patient care financial problems in today’s society. According to Saksena, Hsu and Evans (2014), health care coverage helps to protect patients from financial risks, and lack of it becomes a big burden for many populations. In addition, paying for health care through out-of-pocket payments prevents many people around the world from accessing care.
Although lack of health care insurance is a financial problem for patients, it is always associated with both non-financial and financial health-related impacts to public health. For instance, limited access to quality health care as a result of lack of health care coverage, results into negative health outcomes for the population. This is a good example of a non-financial impact associated with lack of health insurance (Luga & McGuire, 2014).
With regard to financial-related impact, an increase in disease burden among populations is of great financial impact to the public health sector, which must allocate additional funds to clear disease from the society (Saksena, Hsu and Evans, 2014).
The other financial problem that is related to patient care is high costs of prescription drugs. Many patients and their families really have to struggle in order to meet health care costs, especially medication costs. According to Walkom, Loxton, and Robertson, (2013) in a study conducted with the aim of assessing the impact of high medication costs on patients’ ability to adhere to prescription drugs, it has been discovered that 27 percent of participants from Australia and 36 percent of subjects from the United States tend to skip their drug doses because they are unable to purchase drugs which are charged at extremely high prices.
In addition, the need to purchase prescription drugs through out-of-pocket payments is one of the contributing factors to poor health among populations in today’s society (Luga & McGuire, 2014).
Lack of insurance as well as high costs of prescription drugs have an impact on federal and national budgets. This is because the government has to integrate health care costs into its budget to help low income earners to access care and to achieve improved health outcomes (Saksena, Hsu and Evans, 2014). According to Saksena, Hsu and Evans (2014), the number of uninsured citizens is on the rise in the United States because many people are reluctant to join available Medicare and Medicaid programs following increased uncertainties that continue to surround their use.
If the current trend persists, the federal government will be compelled to integrate patients’ health care costs into its budget in order to increase the percentage of United States citizens who receive quality care. As Kelley et al., (2015) explain, there is great need for the federal government to increase budget that it allocates for helping the society to manage chronic illnesses, considering the fact that chronic health conditions become more severe among the uninsured patients than among patients with health care coverage.
Similarly, high costs of prescription drugs have an impact on federal and national budget because the government has to increase its spending on these drugs to promote positive health among its population, especially the low income earners (Luga & McGuire, 2014).
Nurses play a very crucial role in solving patient care financial problems because they are charged with the responsibility of analyzing public health information that is needed for budget development. The federal government depends on information collected by nurses regarding health care costs to make a decision on the most appropriate funds that should be allocated for patient care (Salmond and Echevarria, 2017).
In order to ensure that the right information is used for budget development, nurses must be sure to collect accurate and specific information as this will help the government to distinguish between funds that are allocated for health care coverage from those that are designated for prescription drugs. The staff nurse plays the role of collecting data directly from the community and presents it to the nurse manager.
The nurse manager analyzes the presented information and evaluates its relevance before passing it to the chief nurse. The chief nurse analyzes the information and forwards it to the agencies responsible for budget development, stating the reasons why it should be included in the budget (Salmond and Echevarria, 2017).
References
Kelley, A. S., McGarry, K., Georges, R. & Skinner, J. S. (2015). The burden of health care costs for patients with dementia in the last 5 years of life. Annals of International Medicine, 163(10): 729-736. doi: 10.7326/M15-0381.
Luga, A. O. & McGuire, M. J. (2014). Adherence and health care costs. Risk Management and Healthcare Policy, 7: 35-44. doi: 10.2147/RMHP.S19801
Salmond, S. W. & Echevarria, M. (2017). Healthcare transformation and changing roles for nursing. Orthopedic Nursing, 36(1): 12-25. doi: 10.1097/NOR.0000000000000308
Saksena, P., Hsu, J. & Evans, D. B. (2014). Financial risk protection and universal health coverage: Evidence and measurement challenges. PLoS Med, 11(9): e1001701. https://doi.org/10.1371/journal.pmed.1001701
Walkom, E., J., Loxton, D. & Robertson, J. (2013). Costs of medicine and health care: A concern for Australian women across the ages. BMC Health Services Research, 13: 484. doi: 10.1186/1472-6963-13-484
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Financial Management: Health Care Workers Compensation
Financial Management
Overview of the Financial Issue
While a reduction in compensation of health care workers may be influenced by organizational constraints, health care organizations may at times be compelled to trim workers’ wages and salaries due to poor financial management (Bai, Gu, Chen, Xiao, Liu, and Tang, 2017). The most recently reported financial management issue is a reduction in nurses’ compensation from 300 to 250 United States per month due to improper allocation of funds, which resulted in purchase of equipment that is not urgently needed by the organization.
RacKol Health Care organization specializes in delivering cancer care to the community. The company has been experiencing a rapid rise in nurse turnover rates over the past two months. This has resulted in an increase in patient mortality rate from an average of 3 people week to 10 people every week. It is anticipated that the number of nurses who are leaving the organization is on the rise due to the recent reduction in their salaries that is majorly attributed to poor financial management (Dong, 2015).
To determine the actual cause of the financial issue, the Chief Finance Officer and the Senior Accountant have been interviewed, and they have been asked to share their opinions concerning a possibility of mismanagement of funds in the organization. The Chief Finance Officer is charged with the responsibility of preparing financial plans for the organization and for keeping records of those plans.
The Senior Accountant is responsible for compiling accounts information of the organization by checking whether there is a balance between assets and liabilities (Johns, 2013). According to the Chief Finance Officer and the Senior Accountant, the recent reduction in nurses’ compensation is solely attributed to improper allocation of funds during budgeting that made the organization to purchase cancer care equipment for pediatrics. The two interviewees have explained that the organization has tried to address the current issue for the past one month.
Finanacial Management: Measures that have Been Taken to Address the Issue
Officials in the finance department have taken two measures to address the financial management issue that is currently faced by RacKol Health Care. One of the measures is a move to align organizational plans with available funds without compromising the performance of health care workers. Initially, the health care organization did not take any actions to evaluate whether it has available funds to help it accomplish future financial plans.
Since they faced the challenge of compensating nurses, the Chief Finance Officer in collaboration with the Senior Accountant has begun to align future financial plans of the organization with available funds at any given time, as this helps the organization to only allocate funds to useful projects (Dong, 2015). The other measure that is currently implemented by the organization to prevent improper allocation of funds is involvement of departmental heads in financial decision-making.
Before the current financial issue, officials in the finance department did not involve heads of other departments in making financial decisions. As supported by Walsh (2016), involving departmental heads in financial decision-making facilitates proper allocation of funds because it prevents the purchase of equipment that is not urgently needed by the organization.
Future Steps that Have Been Planned to Address the Issue
RacKol Health Care is highly committed to ensuring that the current financial issue does not repeat itself in future. For this reason, officials in the finance department have documented a plan of how they will improve financial management in the organization over the coming months. For instance, they have a plan to hire an Information Technology professional with competent knowledge of data analytics.
The organization anticipates that with an expert in data analytics, it will be able to understand the specific financial needs of various departments and allocate funds based on the urgency of these requirements. In this manner, it will be able to avoid using funds to make purchases that are not urgently needed by the organization (Walsh, 2016).
Moreover, RacKol Health Care is planning to create a feedback loop that will allow free reporting between executives and the management. With a properly implemented feedback loop, executives on the finance department will be able to understand and strive to address concerns of various departments as far as quick financial allocation is concerned (Dong, 2015).
Potential Blocks in Resolving the Issue
The Chief Finance Officer and senior accountant, however, foresee some problems that may prevent the organization from successfully addressing the financial issue that it is currently facing. One of the problems is the lack of motivation by departmental heads, which may make them to be reluctant to take part in financial decision-making and the creation of the feedback loop.
Moreover, these officials feel that heads of various departments in the organization may lack sufficient training on important issues related to financial management (Bai et al., 2017). Again, managers may lack knowledge and skills to apply in financial management due to unavailability of sufficient financial, managerial tools for use as a reference.
To mitigate these challenges, RacKol Health Care should train all heads of department on basic issues related to financial management. This will enable them to utilize the acquired knowledge and skills to prevent the occurrence of similar financial issues in future (Bai et al., 2017). Personal perception on the current financial issue is similar to the perception of those who are working on finances in the organization.
References
Bai, Y., Gu, C., Chen, Q., Xiao, J., Liu, D. & Tang, S. (2017). The challenges that head nurses confront on financial management today: A qualitative study. International Journal of Nursing Sciences, 4(2): 122-127. https://doi.org/10.1016/j.ijnss.2017.03.007
Dong, G. N. (2015). Performing well in financial management and quality of care: Evidence from hospital process measures for treatment of cardiovascular disease. BMC Health Services Research, 15: 45. doi: 10.1186/s12913-015-0690-x
Johns, M. (2013). Breaking the glass ceiling: Structural, cultural, and organizational barriers preventing women from achieving senior and executive positions. Perspectives in Health Information Management, 10(Winter): 1e.
Walsh, K. (2016). Managing a budget in healthcare professional education. Annals of Medical & Health Sciences Research, 6(2): 71-73. doi: 10.4103/2141-9248.181841
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Inclusions, Exclusions, and Adjusted Gross Income Assessment
Introduction
Determining a taxpayer’s taxable income is a complex process. A tax paper is required to deduct specific deductions from their gross income to determine the adjusted gross income (AGI). The adjusted gross income thus determined is then deducted allowances for personal exemptions and deductions that have been itemized to arrive at the taxable income for the period (Salisbury, 2016).
A person’s gross income includes one, some or all income earned from business, rental properties, interest, dividends, wages and alimony payments received from a former spouse, capital gains from assets owned and income earned from self-employment among others . Tax payers are permitted by the United States of America Congress to make certain deductions from their gross income to determine their adjusted gross income (AGI). The specific deductions have been identified in Form 1040 issued by the Internal Revenue Service (IRA) (Klemens, 2006).
Adjusted gross Income (AGI) Legislation
The US Congress has permitted various deductions from a taxpayer’s gross income to determine the adjusted gross income (AGI) in a bid to make taxation fair and equitable throughout the country. These deductions are referred to as “adjustments to income” or “above-the –line deductions” and are subject to change every year by the US Congress.
If trade or business carried out by a company does not constitute performance by a taxpayer as an employee, the Internal Revenue Service allows above-the-line-deductions for related expenses that are ordinary and necessary(Salisbury, 2016). These include allowance for salaries for personal services rendered to the company, travelling expenses while looking for new business and rental payments made by a taxpayer for a property for which he has not taken a title or has no equity and is done for purposes of ensuring that the business continued operating (Klemens, 2006).
One of the deductions that have been allowed is educator expenses. Educator expenses is one of the adjustments to income also known as “above-the-line deduction” allowable by the Internal Revenue Service for purposes of computing a taxpayer’s adjustable gross income (AGI) for tax purposes (Salisbury, 2016).
Educational expenses are expenses incurred by eligible educators for participation in professional development courses and materials used in a class room such as computer equipment both hardware and software, books, supplies and other supplemental materials for use in a class room setting. Grade 12 teachers, instructors, counsellors, principals and their aides are some of the professionals classified as educators for tax purposes.
The next above –the –line deductions for determining a taxpayer’s AGI is contributions made to a traditional individual retirement account (IRA). Tax payers do not have to pay tax on IRA accounts because they are tax-deferred. Interest or any other gain made from such accounts is exempt from tax purposes (Salisbury, 2016).
The next item allowable for above-the –line deduction is interest paid on loans taken by students. The next above-the – line deduction are costs incurred by a tax payer to move to take a new job in a different location. This is allowable only if the move from the previous job is more than 50 miles away.
The next above-the-line deduction is alimony payments to a former spouse. Alimony payments are only allowable when they are made under a divorce or separation instructed pursuant to a court judgement (Chodorow, 2011). The recipient of the alimony payment is required to include the amount in their income for tax purposes. Other above-the-line deductions include business expenses incurred by teachers, fee-basis government officials, performing artists and reservists, deductions made on health savings accounts, one half of tax on self-employment, domestic production activities deductions and jury duty pay that is paid to the employer of the juror among others (Ruff, 2007). Adjusted Gross Income.
Justification for the exemptions to taxpayers by the US Congress
There are various reasons which could have informed the decision by the US Congress to grant these exemptions to taxpayers. The first reason is that the US Congress ensured that there is equity and fairness in tax payments to the Internal Revenue Service. Exemption on alimony payment protects the recipient from having to pay taxes twice on the same income (Salisbury, 2016).
This is because the recipient is taxed on the amount received as alimony income and so if the payer is also taxed then that would be tantamount to double taxation on the same income. The US Congress by granting the exemptions ensured taxes are broad based as to include as many people as possible. This was aimed at ensuring the government generates adequate revenues to meet its financial obligations. The exemptions were also aimed at minimising tax burden on the individual tax payer (Reichert, 2016).
By exempting one half of tax on self-employment, the US Congress ensured that self-employed people are not overtaxed sine their employed counterparts get part of their tax revenues met by their employers. By granting the exemptions, the Congress ensured taxes are enforced in a manner that facilitates voluntary compliance by a wide range of taxpayers.
The exemptions are meant to communicate the message that the government is fair in its tax collection and that no one is unfairly treated in tax payment (Koch, 2011). This encourages tax payers to pay taxes willingly without compulsion or coercion from the tax authorities. The exemptions were also made to ensure tax collection was efficient and hence achieved its overall objectives.
The exemptions was aimed at minimizing the cost of tax collection as the exemptions are easy to understand and apply in determining the adjustable gross income. The exemptions were also aimed at ensuring equity in tax application such that no particular citizen or group of citizens could perceive themselves as bearing an unequal burden of paying taxes as compared to other groups of citizens in the USA (Chodorow, 2011).
The US Congress was also motivated by the desire to ensure taxes were administered in a neutral manner. The exemptions were meant to ensure that no race, group or sector was favoured by taxes over another and that no group, sector or race could use taxes as the basis for collective or individual decision making in either investment, social life or any other matter.
The exemptions were also aimed at ensuring taxes were predictable and inevitable to ensure tax payers have information before hand to enable they pay taxes on time and without coercion from the Internal Revenue Service (Klemens, 2006). The Exemptions could also have been undertaken with the aim of achieving certain objectives. For instances, exempting interest on student loans could have been motivated by the aim of encouraging young people to pursue higher education without the fear of incurring huge debts by the time they finish their studies.
Educational expenses exemption on eligible educators for participation in professional development courses and purchase of materials used in class rooms such as computer equipment both hardware and software, books, supplies and other supplemental materials could have been motivated by the desire to grow investment in education. By giving exemptions for educator expenses, the congress encouraged investment in schools and colleges to improve accessibility and quality of education in the sector (Klemens, 2006).
The exemptions could have been motivated by a desire to ensure tax administration was simple foe every tax payer to understand. Adjusted gross income to be considered. This encouraged compliance and improved willingness of taxpayers to pay taxes on time and reduce tax evasion. The exemptions were also aimed at fostering fair and equitable distribution of wealth in the country. By ensuring no tax payer was billed for more than their fair share of taxes, the congress ensured that people retained their fair share of gross income. This ensured income will be distributed equitably with the country (Klemens, 2006).
Additional exemptions that can be challenged easily
Even though the US Congress has granted various exemptions, there are various exemptions that can easily be challenged. One of the exemptions that can be challenged is exemptions on educator expenses. Educator expenses that can be challenged include participation in professional development courses, books, supplies and supplemental materials. Schools, colleges and universities charge students fees at market rates and even where they are given grants and donations, they are given on budgets which have been prepared beforehand.
By granting exemptions, the congress is favoring one sector over others. This is because these expenses are factored in the financial statements of the schools they work for. Most educational institutions that employ educators are also for profit making and hence giving exemptions will only increase their revenues (Chodorow, 2011).
On the other hand, costs that educators incur on attending personal development courses are ideally aimed at enhancing their knowledge, skills and competencies. The educators henceforth are able to assume bigger responsibilities and earn higher incomes. By exempting educator fees, the revenue service is ideally granting educators in one profession better terms that their counterparts in other sectors.
Exemptions in alimony payment to a former spouse is another exemptions that can be challenged (KATZEFF, 2011). This is mainly because alimony payments occur as a consequence of breakup of the family unit. This exemption encourages couples to break up to earn alimony income from a former spouse. It common in the country to find one spouse earning alimony income from multiple former spouses. This is likely to lead to laziness as many people will opt for his revenue source instead of working hard to generate their own income. This exemption encourages families to break up and take their marriages to court to have the divorces registered for alimony payment (KATZEFF, 2011).
Exemptions on interest on student loans is also another ill-advised exemption. Exempting interest on student loans ignores the effect of passage of time on the value of money. Money lend to students loses value due to passage of time due to inflation and other factors. The interest is supposed to compensate for the effects of inflation on the time value of money. Giving exemptions to performing artists is unfair as what they earn inform of income is similar to what other professional also earn from their professions (Koch, 2011).
Additional exemptions that are agreeable
There are various additional exemptions that US Congress has granted that are agreeable. One of the more agreeable exemptions is deductions on medical and dental expenses more than 7.5% of a taxpayer’s adjusted gross income. This expenditure is agreeable because it promotes the health of tax payers and it is classified as below-the –line deduction.
Health saving account deductions are agreeable because the funds saved will improve accessibility of healthcare services to all Americans and especially the most vulnerable members. Moving expenses are agreeable because they reduce the living standard of the tax payer at the time of moving without increasing their disposable income. This exemption is therefore agreeable (KATZEFF, 2011).
Deductible part of self-employment income is agreeable because this exemption goes a long way in promoting entrepreneurship in the country. With the rising numbers of unemployed people who are employable, any efforts to promote self-employment would assist in reversing unemployment in the country. The exemption on penalty for early withdrawal of savings is also an agreeable deduction. This is mainly because the penalty levied is punitive to the taxpayer and taxing him again would be being unfair on the part of the internal revenue service (Chodorow, 2011).
References
Chodorow, A. (2011). Charitable FSAs: A proposal to combine healthcare and charitable giving tax
provisions. Brigham Young University Law Review, 2011(4), 1041-1089. Retrieved from https://search.proquest.com/docview/906182592?accountid=45049
KATZEFF, P. (2011, Mar 07). Refresher on tax-prep strategy some tips for savings getting the most from your
Klemens, A. D. (2006). Applying the above-the-line deduction for certain legal fees.The Tax Adviser, 37(11), 644-645. Retrieved from https://search.proquest.com/docview/194951649?accountid=45049
Koch, R. (2011, Jul 06). New tax brackets necessitate payroll system upgrade.McClatchy – Tribune Business
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Worth of money
Why is money worth more today than at a point in the future? If someone wants the use of your money, should you lend it or invest it in the company? What kinds of risk apply if you lend it? If you invest it? What moral issues are involved?
Introduction
In determining whether money is worth more today or in future the ‘time value of money’ concept must be considered which states that money received today is worth a lot more that the same amount of money in the near future due to the ability of saving this amount and earning interest . Alignment of financial goals and the investment or lending policy is required in order to ensure the chosen option is beneficial in the long term (Advani, 2006). In determining whether to lend or invest money the risks and benefits of both options must be evaluated and the best option implemented.
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When lending money the lender expects to receive their principle amount and any interest that has arisen from the loan .The major risks possessed in lending may be a default of both the interest payments and refusal to pay even the principal amount .The terms of the lending arrangement ma not also be beneficial due to the interest charges agreed (Advani, 2006).
Worth of money
Before making an investment it is important to evaluate the type of investment that best suits the funds available and the risks involved. The investment idea must match with the individual’s financial objectives. The risk associated with investing is a rapid drop in share prices if one has invested in the stock market a decrease in interest rates if one has invested in bonds and other forms of investment.
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Conclusion
Worth of money
Financial goals of the individual should be the key consideration before they decide whether to lend or invest .A risk analysis is also important as it helps in making a sensible decision on the option that is more suitable. The best option should help the individual increase their asset value.
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Investment Decisions in Economics and Finance
Background
Investment decisions in economics and finance are the decisions made by the investors through investment analysis which is supported by decision tools. Investors use technical and fundamental analysis of the market to achieve satisfactory return against the risk taken. There have been several theories, models and ideas by the scholars and researchers to analyze the market condition and maximize the portfolio expected return while minimizing the risk level.
One of the most common and used theory is the Modern Portfolio Theory or MPT which help to determine lower risks for an investment. In this theory, there are several mathematical models to analysis different factors in an investment like risk and expected return, diversification, efficient frontier with no risk free asset, two mutual fund theorem, capital allocation line and risk free asset. MPT can also help for asset pricing through systematic risk (market risk or portfolio risk), specific risk measurement and capital asset pricing model etc.
In this paper, we are going to calculate expected return, risk premium, standard deviation, covariance, portfolio return and sharp ration for different fractions through case analysis.
Investment Decisions in Economics and Finance
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Case: Pioneer Gypsum
To understand the theories and approaches for investment decisions, we are going to consider the facts of Pioneer Gypsum.
Expected return
Standard deviation
Beta
Stock price
Pioneer Gypsum
10.0%
30%
0.3
$87.50
Table 1: Pioneer Gypsum market status
From these facts, we are going to calculate expected outcome in the market for the company.
Modern Portfolio Theory (MPT)
In investment analysis, MPT is a concept of diversification by using mathematical formula with an aim of finding a set of investment assets that has lower risk all together than any individual asset. The concept behind MPT is that the assets in an investment portfolio should not be selected individually. Instead, it is more significant to consider how each asset changes in price regarding to how every other asset in the portfolio changes in price. Normally, assets with greater expected returns are riskier. For a given amount of risk, MPT shows how to select a portfolio with the maximum promising expected return. Contrary, for a given expected return, MPT describes how to select a portfolio with the lowest possible risk (Elton and Gruber, 1997).
In spite of its theoretical significance, there have been some criticisms on MPT about whether it is a perfect investing strategy, the reason for that is this concept of financial market does not reflect the real world in several ways. Efforts to interpret the theoretical basis into a feasible portfolio structure algorithm have been diseased by technical difficulties from the volatility of the key problems with respect to the data in hand. Recent findings have proven that instabilities disappear when a restriction or penalty is included in the optimization process (Brodie, De Mol, Daubechies, Giannone and Loris, 2009).
Many researchers criticize the Modern Portfolio Theory as: it does not reflect the market in practical sense and it does not take its own effect in account for asset prices.
The Modern Portfolio Theory gives several mathematical models regarding market analysis and calculates risk and return.
Investment Decisions in Economics and Finance
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Expected Return
According to the Modern Portfolio Theory, the mathematical equation of expected return is:
Where Return on the profit
= Return on assed i
wi = Weightingof component asset i
Portfolio return variance:
Here, ρij = the correlation coefficient between the returns on assets i and j
For two asset portfolio,
The portfolio return:
The portfolio variance:
For Pioneer Gypsum, the expected return would be:
CAPM
CAPM or the Capital Asset Pricing Model was introduced by Jack Treynor in 1961 (French, 2003). The model is used to establish a theoretically approach to determine the required rate of return for an asset, if the asset is to be joined in an well diversified portfolio with the fact that the asset is at non diversifiable risk. The theory takes into account the sensitivity of the asset to non diversifiable risk (i.e. market risk or systematic risk) as well as the expected return of theoretical risk free asset and the expected return of the market. It is often symbolized by the quantity beta (β) in the investment analysis.
Searchers have fount quite a few problems in the theory of CAPM. The most notables among them are:
According to this model, asset returns are normally distributed as random variables and potential shareholders uses a quadratic outline of the utility. However, it is often found that returns in equity and other markets are not circulated in general way. Because of that, large swings (3 to 6 standard deviations from the mean) takes place in the market more than the normal distribution theory would anticipate (Mandelbrot and Hudson, 2004)
This model also employs that the guesses of potential and active shareholders on possibilities go with the true distribution of returns. Another possibility tells that the expectations of potential and active shareholders are prejudiced, which causes market prices to be unproductive. This factors is studied in behavioral finance, which takes account of psychological assumptions to bring new alternatives for CAPM like the overconfidence based asset pricing theory (Daniel, Hirshleifer, and Subrahmanyam, 2001)
In theory, a market portfolio should have all types of assets that are held as an investment (i.e. real estate, art works and human capital etc.). In real, such market portfolio is not possible and individuals usually replace the true market portfolio in the place of a stock index. It has been proven that this replacement is not inoffensive and most likely can guide to miss-inferences as to the legality of CAPM. Also, this theory might not be empirically experiment able because of the lack of its potential outcomes in the real market portfolio (Roll, 1977)
Investment Decisions in Economics and Finance
The mathematical formula of CAPM depends on two facts, the security market line and its relation with systematic risk and expected return. From this relationship, we obtain the Capital Asset Pricing Model with the following equation:
Here:
= the expected return on the capital asset
= the risk free rate of interest
= the sensitivity of the expected excess asset returns
= the expected return of the market
= the difference between the expected market rate of return and the risk free rate of return
Beta
The term Beta (β) refers to a number is that describes the relation of its returns for a portfolio with those of the financial market all together (Levinson, 2006). If the return of an asset changes autonomously according to the changes in the return of the market, it has a Beta of zero. A positive beta means that the return of the asset follows the return of the market. On contrary, a negative beta means that the return of the asset follows the opposite movement of the returns of the market. The beta coefficient is a key parameter in the CAPM.
Seth Klarman criticized Beta by saying that it fails to consider specific economic developments and business fundaments (Klarman & Williams, 1991).
Investment Decisions in Economics and Finance
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The mathematical expression of Beta is
Where = beta coefficient
= the rate of return of the asset
= rate of return of the portfolio
= covariance between the rate of the return
Investment Decisions in Economics and Finance
Risk Premium
The term Risk Premium refers to the minimum amount of money which must exceed the confirmed return from a risk free asset comparing to the expected return on a risky asset. This is accounted when an individual is holding a risky asset instead of a risk free asset. The premium is the minimum compensation for the risk that the individual is willing to accept.
Investment Decisions in Economics and Finance
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The mathematical expression for calculating the risk premium is
Where u = concave von Neumann-Morgenstern utility function
= return on the risk free asset
r = random return on the risky asset
x = zero-mean risky component
= hypothetical expected return
Standard Deviation
The standard deviation is used to determine the variation from the average or expected value. A low standard deviation means that the date points are close to the average and a high standard deviation means spread out data points over large array.
Investment Decisions in Economics and Finance
Sharpe Ratio
Sharp ratio is used to measure the risk premium per unit of deviation in an investment asset. Mathematically, it is expressed by the equation:
Here, R = asset return
= return on a benchmark asset
= expected value of the excess of the asset return over the benchmark return
= standard deviation
Covariance Matrix
The covariance matrix is the type of matrix where the elements in the i, j position are the covariance between the ith and jth elements of a random vector. Each element of the covariance vector is a random scalar variable, each with a finite number of experiential empirical values or with an infinite or finite number of possible values précised by a theoretical combined probability distribution of all the random variables.
Investment Decisions in Economics and Finance
Conclusion
Investment decisions as decisions made by the investors assist investors to achieve satisfactory return against the risk taken. One of the most common and used theory is the Modern Portfolio Theory or MPT which help to determine lower risks for an investment MPT can also help for asset pricing through systematic risk (market risk or portfolio risk), specific risk measurement and capital asset pricing model. Through calculating the expected return, risk premium, standard deviation, covariance, portfolio return and sharp ration for different fractions it becomes possible for an investor manage the investment in a professional manner.
References
Edwin J. Elton and Martin J. Gruber (1997) Modern portfolio theory, 1950 to date. Journal of Banking & Finance 21
Brodie, De Mol, Daubechies, Giannone and Loris (2009). Sparse and stable Markowitz portfolios Proceedings of the National Academy of Science 106 (30)
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PERFORMANCE ANALYSIS OF INDITEX GROUP
EXECUTIVE SUMMARY
The analytical and critical review of a company’s performance is a very important managerial responsibility. Most of the decisions are based on the figures generated by the finance and accounting departments and this calls for strict observance of the financial reporting standards in the preparation of the financial statements. They must capture all the relevant information so that the inferences drawn from them can be realistic and effective. These figures must reflect the true and fair view of the company.
INTRODUCTION
Inditex Group is a Spanish company and one of the major players in the textile industry. It is composed of more than 100 companies all engaged in the manufacturing, designing and distribution of textiles all over the world.
Question 1.ANALYSIS OF FINANCIAL PERFORMANCE
Comparison of latest year with previous year reports.
The financial year for the Group ends at 31st January of the proceeding year.
The following are extracts from the Group’s financial statements;
Year ending 31stJan.2011
Year ending 31st Jan. 2012
Sales
12,527
13,793
Operating Income
2,966
3,258
Operating Profit
2,290
2,522
Pre-tax Profit
2,322
2,559
Net Income
1,732
1,932
Earnings per share (Euros)
2.78
3.10
.
There was growth in each of the above variables, an indication of the company’s good performance.
Question 2
Ratio analysis of both latest and previous years:
(A)LIQUIDITY
Current ratioThis ratio indicates the company’s ability to meet its current liabilities obligations using current assets;
Therefore for the year ended 31st January 2012 the current ratio for the company
The current ratio for the year ended 31st January 2011 was
Quick ratio
The second liquidity ratio is the Quick ratio. This ratio shows the ability of a company to satisfy its current liabilities using its most liquid assets ( Deverrel, 1999).
Current liabilities
Therefore the quick ratio for the year ended 31st January 2012= 5437- 1277 = 1.54
2702
For the year ended 31st January 2011 the quick ratio was =5203- 121
2675
Networking capital to sales ratio
This ratio indicates the liquid assets of a company based on its need for that liquidity (as indicated by sales) after the company meets its short term obligations.
Therefore for Inditex Group, the networking capital to sales ratio for the year ended 31st Jan 2012 was = 5437- 2702 =0.19
13793
The ratio for the previous year was = 5203- 2675 = 0.2
12527
The larger these liquidity ratios are, the greater is the company’s ability to meet and finance its short term obligations. If for instance one considers the current ratio, huge amounts of current assets and less amount of current liabilities will imply that the company can successfully meet its short term obligations.
The Inditex group is performing very well because the liquidity ratios analyzed increase in the present year as compared to the previous. This shows that chances of the company lacking liquid capital for its immediate requirements are minimal (Keegan, 2005).
(B)SOLVENCY RATIOS
These ratios show the ability of a company to service its long term debts and also any interest earnings that will accrue on those debts. The larger these ratios are the more solvent a company is and hence its ability to service any of its long term debt commitments (Caroline, 1997). These ratios include:
Solvency ratio.
This is expressed as a ratio of the total assets to liabilities. Therefore;
For Inditex company the solvency ratio for the year ending 31st January 2012 is =10959 =3.09
3544
For the year ending 31st January 2011=9826 =2.85
3440
For the year ending 31st January 2010= 8335 =3.62
2304
Debt ratio
This ratio shows the degree of reliance on debt by a company to finance its assets. The lower the debt ratio the stronger is the company.
Debt ratio= Total debt
Total assets
The debt ratio for the company for the year ending 31st January 2012= 1.54 = 0.00014
10959
The debt ratio for the year ended 31ST January 2011= 4.17 = 0.00042
9826
These figures are very low and this indicates that the company is very strong and can fully service its debts which are very low.
Indebtedness ratio
This ratio is used as an indicator of what makes up the debt liability of a company. This is because a company’s total debt can be in other areas like payables, salaries and not only in form of bank loans.
Indebtedness ratio= Total debts
Total liabilities
For Inditex Company, the indebtedness ratio for the year ending 31st Jan 2012=1.54 =0.0004
3544
For the year ending 31st January 2011 = 4.17 =0.001
3440
(C)WORKING CAPITAL MANAGEMENT RATIOS
The working capital enables a company take advantage of opportunities as they arise. The working capital is normally the difference between current assets and current liabilities.
Working capital ratio = current assets
Current liabilities
This ratio indicates the ability of the company to finance its long term obligations. It is the same as the current ratio.
Collection ratio
This ratio gives the average number of days it takes a company to transform receivables into cash.
Collection ratio= accounts receivable
Average daily sales
The collection ratio for this company for the year ending 31st Jan 2012=548.28 =14.5
13793/365
For the year ending 31st Jan 2011 = 498 =14.5
12527/365
Inventory turn over ratio
This ratio indicates how efficient a business is in the selling and management of its inventory.
Inventory turn over ratio= Net sales
Inventory
The inventory turn over ratio for Inditex group for the year ended 31st Jan.2012=13793 =10.8
1277
For the year ended 31st Jan.2011= 12527/1214=10.3
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(D) PROFITABILITY RATIOS
These ratios are an indicator of how well a firm is performing. The net profit margin ratio shows how much profit a company is making for every unit currency of sales (Fred, 2000).
Net profit margin ratio = Net profit after tax
Sales
The net profit margin ratio for the company as at 31st January 2012 was 14.2% and for the previous year was 12.1%
Return on assets ratio (ROA)
This shows the level of profitability as a comparison to investment in new capital.
Return on assets = Net income
Total assets
The return on investments for the company as at 31St January 2012 was 18.4% and for the previous year it was 14.9%.
This ratio tells how efficient the management is in using the company’s assets to generate earnings.
Return on equity
This rate indicates how mush the shareholders earned for their investment in a company.
Return on equity= Net income
Total shareholders equity
The rate for the Inditex group was 24.8% for the year ended 31st January 2012 and 21.7% for the previous year.
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(E) ASSET EFFICIENCY RATIOS
Inventory turn over ratio
This ratio indicates the number of times inventory is sold and stocked every year. If it is high the company could be in danger of having stock outs and if it is very low the company could be having some obsolete inventory that does not sell in the market.
Inventory turn over ratio= Net sales
Inventory
Inditex Group had an inventory turn over ratio of 13793/1277=10.8 for the year ended 31st January 2012 and the ratio for the previous year was 12527/1214=10.3
Days’ sales in inventory
This ratio measures the performance of the company for the management and the owners of the company.
Days’ sales in inventory = 365 days / inventory turn over
For this company the ratio will be 365/10.8=33.8 for the year ended 31st January 2012 and 365/10.3=35.4 for the previous year.
Fixed assets turn over ratio
This ratio gives a picture of how the fixed assets like plant and equipment are being used to generate sales.
Fixed assets turn over ratio= sales/ net fixed assets.
For the company, the ratio is 13793/4082= 3.4 times for the year ended 31st January 2012 and 12527/3414=3.7 times for the previous year. This means the fixed assets were used more to generate sales in the year ended 31st January 2011 than the proceeding year.
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Question 3
Most of the industry operators experienced moderate sales. On average majority had net profit margin ratios of between 4 to 9 %. This was mainly due to the effects of the global financial crisis of 2008 and the majority have not fully recovered.
Question 4 Key performance indicators (KPIs)
Current ratio
2.01
Solvency ratio
3.09
Collection ratio
14.5
Net profit margin ratio
14.2%
Inventory turn over ratio
10.8
Question 5
Key performance indicators denote the level of success of an activity and the achievement of a company’s goals and objectives. KPI’s are used in various departments of the organization and therefore those choosing the indicators to be used in a particular section must have a good understanding of the organization. There should also be good management frameworks in companies to enable better understanding of the procedures and hence the selection of the correct KPI for use.
Question 6
The level of liquidity and solvency for Inditex is healthy. The liquidity levels have also been rising meaning that the ability of the company to meet its current liabilities obligations using current assets has been improving. The company has also been able to continuously give dividends to its shareholders due to the impressive performances in the management of its assets and equity.
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Question 7
Advantages of using KPI’s
Provides vital information necessary for making business decisions
Alerts managers on the direction the business is taking and need for precautionary and intervention measures.
Provide information that enables the optimal allocation of resources and achievement of set goals and objectives.
Disadvantages
Requires a lot of resources in form of qualified personnel for monitoring and managing the processes involved.
Any biases in the data collection, computation and analysis can have negative implications to the business.
The compilation of this data helps in making key decisions concerning the business. Decisions to acquire other businesses, increasing the product range, marketing strategies to be adopted usually rely on this data (John, 2010).
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References
Caroline, H (1997). Financial Analysis Techniques. London. Prentice Hall, P.28
Deverrel, W (1999). Performance Indicators. Sydney. Lakers Publishers, P.4
Fred, D (2000) “The need for Financial Analysis” (Online) Available from http://www.fin.edu.au/ (Accessed on 19th May 2012)
John, V (2010). Basic Business Decisions. Dublin. Ace Books, P.19
Keegan, B (2005). Analysing Business Environments. Freiburgh. Hewmann Books, P.81
Appendix 1
Annual Interim
2012
2011
2010
2009
2008
Period End Date
01/31/2012
01/31/2011
01/31/2010
01/31/2009
01/31/2008
Stmt Source
ARS
ARS
ARS
ARS
ARS
Stmt Source Date
04/02/2012
03/30/2011
03/30/2010
04/01/2009
06/11/2008
Stmt Update Type
Updated
Updated
Updated
Updated
Updated
Assets
Cash and Short Term Investments
3,517.44
3,433.53
2,420.11
1,466.29
1,465.84
Total Receivables, Net
548.28
498.8
437.44
600.65
465.44
Total Inventory
1,277.01
1,214.62
992.57
1,054.84
1,007.21
Prepaid Expenses
0.0
0.0
0.0
0.0
0.0
Other Current Assets, Total
94.56
55.55
93.67
142.26
43.11
Total Current Assets
5,437.29
5,202.51
3,943.8
3,264.04
2,981.6
Property/Plant/Equipment, Total – Net
4,082.87
3,414.44
3,306.81
3,450.78
3,191.59
Goodwill, Net
218.09
131.69
131.69
131.69
125.58
Intangibles, Net
614.11
555.75
533.28
547.94
517.95
Long Term Investments
9.5
8.92
15.39
14.42
36.17
Note Receivable – Long Term
0.0
0.0
0.0
0.0
0.0
Other Long Term Assets, Total
597.31
512.78
404.48
367.78
252.72
Other Assets, Total
0.0
0.0
0.0
0.0
0.0
Total Assets
10,959.18
9,826.08
8,335.44
7,776.65
7,105.6
Liabilities and Shareholders’ Equity
Accounts Payable
1,838.09
1,886.67
1,557.75
1,540.77
1,577.94
Payable/Accrued
0.0
0.0
0.0
0.0
0.0
Accrued Expenses
178.46
145.57
133.92
0.0
0.0
Notes Payable/Short Term Debt
0.0
0.0
0.0
220.47
333.49
Current Port. of LT Debt/Capital Leases
0.69
2.68
35.06
13.57
37.78
Other Current Liabilities, Total
685.54
639.98
578.23
616.05
508.86
Total Current Liabilities
2,702.77
2,674.91
2,304.96
2,390.85
2,458.07
Total Long Term Debt
1.54
4.17
5.0
13.24
42.36
Deferred Income Tax
182.53
172.65
172.89
213.85
110.96
Minority Interest
40.77
36.98
41.38
26.89
23.92
Other Liabilities, Total
616.75
551.19
482.04
410.11
277.17
Total Liabilities
3,544.37
3,439.9
3,006.27
3,054.93
2,912.47
Redeemable Preferred Stock
0.0
0.0
0.0
0.0
0.0
Preferred Stock – Non Redeemable, Net
0.0
0.0
0.0
0.0
0.0
Common Stock
93.5
93.5
93.5
93.5
93.5
Additional Paid-In Capital
20.38
20.38
20.38
20.38
20.38
Retained Earnings (Accumulated Deficit)
7,312.64
6,359.81
5,343.42
4,722.56
4,181.55
Treasury Stock – Common
0.0
-0.62
-0.62
-0.62
-6.93
ESOP Debt Guarantee
0.0
0.0
0.0
0.0
0.0
Unrealized Gain (Loss)
0.0
0.0
0.0
0.0
0.0
Other Equity, Total
-11.72
-86.89
-127.51
-114.11
-95.37
Total Equity
7,414.81
6,386.18
5,329.17
4,721.71
4,193.13
Total Liabilities & Shareholders’ Equity
10,959.18
9,826.08
8,335.44
7,776.65
7,105.61
Total Common Shares Outstanding
623.33
623.11
623.11
623.11
620.96
Total Preferred Shares Outstanding
0.0
0.0
0.0
0.0
0.0
Financial data in EUR
Appendix 2
Annual Income Statement Data
Actuals in M €Estimates in M €Fiscal Period January2010,2011, 2012201320142015 Sales11 08412 52713 79315 63617 14618 858 Operating income (EBITDA)2 3742 9663 2583 7334 1414 556 Operating profit (EBIT)1 7292 2902 5222 8913 2263 553Pre-Tax Profit (EBT)1 7322 3222 5592 9183 2433 618 Net income1 3141 7321 9322 2192 4572 689EPS ( €)2,112,783,103,553,954,32 Dividend per Share ( €)1,201,601,802,112,402,67 Yield1,79%2,38%2,68%3,14%3,58%3,98% Annoucement Date 03/17/2010 06:18am03/23/2011 06:02am03/21/2012 06:40am—
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Financial liberalization
“Financial liberalization and increased access to international capital markets brings benefits and disruption to developing countries.”With the above statement in mind, and based on a review of the literature, consider the evidence on the net benefit to developing countries from unfettered access to international markets.
FINANCIAL LIBERALIZATION
Globalization is the process of worldwide integration that occurs as a result of the exchange of global views, goods, ideas, and other cultural elements (Fernando, 2021). Globalization has been fueled by advancements in transportation and telecommunications infrastructure, such as the Internet and mobile phones, which have increased the interconnectedness of economic and cultural activity in countries all over the world (Fernando, 2021).
Though some researchers identify the beginnings of globalization in modern times, others trace its history back to the third millennium BCE, well before Europeans began crossing the Atlantic in the 15th century (Fernando, 2021). Large-scale globalization began in the 19th century, and by the late 19th and early 20th centuries, the world’s economies and cultures had become extremely intertwined (Fernando, 2021).
Following World war ii, leaders worked together to organize the Bretton Woods Conference, which took place from July 1 to July 22, 1944 (Chen, 2021). The conference brought together 730 representatives from all 44 Allied states to oversee the post-World War II international monetary and financial system (Chen, 2021). The conference resulted in key states agreeing to establish the framework for international monetary policy, commerce, and finance, as well as the establishment of various international institutions aimed at facilitating economic growth by eliminating trade barriers (Chen, 2021).
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Financial liberalization
The rapid rise of globalization has sparked a heated discussion among economists, with both supporters and critics. This paper outlines the benefits and risks that financial liberalization entails for developing countries. Financial liberalization is the elimination of government involvement from financial markets.
It involves removing limitations such as bank interest rate limits, mandatory reserve requirements, entrance hurdles, especially for foreign financial intermediaries, and credit allocation choices (Masci, n.d.). These policies limit government intervention in financial markets, resulting in the privatization of state-owned banks, the introduction of currency convertibility on the capital account, capital account liberalization, improved prudential regulation, and the promotion of local stock markets (Masci, n.d.).
Simply phrased, it refers to a country’s local financial system’s integration with international financial markets and institutions. Financial liberalization lets governments and private investors to do business with less constraints, while also allowing financial hosts to access the global market (Banton, 2021). However, because emerging countries or economies are compelled to compete in the same market as larger economies or nations, this might be detrimental to them (Banton, 2021).
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Financial liberalization
The capital account in a country’s balance of payments covers a wide range of financial flows, including foreign direct investment, portfolio flows (including equity financing), and bank borrowing, all of which involve the acquisition of assets in one nation by citizens of another (Kose and Prasad, 2020). It is theoretically feasible to manage these flows by imposing limitations on those that pass via official channels. However, through increased capital inflows and outflows, capital account liberalization is likely to result in a greater degree of financial integration of that nation with the global economy (Kose and Prasad, 2020).
Any action taken by a government or other regulatory agency to restrict the movement of foreign capital into and out of the domestic economy is referred to as capital control (Barone, 2020). Taxes, tariffs, laws, and market forces are all examples of these types of regulations. Many asset types, including stocks, bonds, and foreign currency trading, can be affected by capital regulations.
It is a country’s attempt to protect itself against the dangers connected with international capital flow variations. Unrestricted capital flows might make maintaining a fixed exchange rate system more challenging. This is one of the reasons why, under the Bretton Woods system of fixed currency rates, even industrial countries maintained relatively restricted capital accounts during the second world war (Kose and Prasad, 2020).
One of the major roles of capital control is that it reduces the volatility of currency rates in the economy as well as provide support and stability by shielding it from sharp fluctuations (corporate finance institute, 2015). This is because unrestricted capital can produce inflows and outflows that easily affects the appreciation and depreciation of the nation’s currency (corporate finance institute, 2015). For instance, in the year 1933, President Franklin D.
Roosevelt compelled Americans to convert their gold for US currencies by Executive Order 6102 (Giambruno, n.d.). The official government exchange rate was negative, which comes as no surprise. Until 1974, the United States government prohibited individual possession of gold bullion (Giambruno, n.d.). According to Ballotpedia (n.d.) this major decision made by the late president lead to the revision of the Trading with the Enemy Act of 1917, allowing banks to reopen after a four-day banking holiday and requiring the Department of the Treasury to examine institutions.
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Financial liberalization
The legislation increased the president’s regulatory powers over the banking system, provided the comptroller of the currency the right to restrict the activities of banks with impaired assets, and empowered the Federal Reserve Board to create emergency money backed by commercial bank assets.
Capital controls are also used to prohibit foreigners from acquiring local assets or to restrict domestic individuals’ access to foreign assets. Foreigners’ and residents’ capacity to exchange domestic money for foreign money, and vice versa, has historically been the most extensively employed capital control and it is known as exchange control (Coppola, n.d.).It can disrupt international trade by interfering with floating foreign exchange rates;
when a country’s official exchange rates diverge significantly from market prices and citizens are not permitted to get foreign money, foreign enterprises may find it difficult to conduct business there (Coppola, n.d.).
Financial liberalization
Some systems allow beneficiaries of certain types of exchange to sell a part of their receipts on the free market. A managed exchange rate is frequently higher than a free-market rate, reducing exports while increasing imports. The control authority can limit imports by restricting the amount of foreign exchange a resident may buy (Britannica, n.d.). As a result, the country’s overall gold reserves and foreign balances will not drop.
Regardless of the many advantages of capital control, there are still a number of negative factors to be considered. For instance, the distribution of resources would be inefficient if credit was determined administratively rather than by market price. Because the most promising initiatives would not be supported and hence would not contribute to economic growth, this poor allocation would exacerbate the negative impact on growth (Masci, n.d.).
Financial liberalization
Also, Access to credit would be granted for developmental purposes to big state owned and private companies, while the rest of the economy will only have some access to consumer credit (Masci, n.d.). Moreover, Individuals would find methods to export capital internationally, runaway inflation, putting pressure on the exchange rate. Administrative interest rates would undervalue actual interest rates, give an incentive to reduce savings and investment and also have a negative influence on the pace of economic growth (Masci, n.d.).
Financial liberalization
According to Kose and Prasad (2020), Capital account liberalization should theoretically allow for more efficient global capital allocation from capital-rich industrial countries to capital-poor developing economies, with widespread benefits such as higher rates of return on people’s savings in industrial countries and increased growth, employment opportunities, and living standards in developing countries. It also allows for risk sharing opportunities by demonstrating that international financial integration should lead to a decrease in consumption volatility relative to output volatility (Masci, n.d.).
Financial liberalization
Finally, financial liberalization provides protection against national income fluctuations while also demonstrating a country’s commitment to sound economic policy (Kose and Prasad, 2020). A perceived deterioration in the policy environment for a nation with an open capital account might be penalized by local and international investors, who might rapidly withdraw money. This offers a powerful incentive for governments to adopt and sustain solid policies, with evident long-term growth advantages (Kose and Prasad, 2020).
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Financial liberalization
Federico and Tena-junguito (2016) estimated that since the 1950s, the growth in the proportion of international commerce in GDP had added around 5% to global wealth. With a global GDP of $85 trillion in 2018, the incremental trade advantages since the 1950s amount to around $4.3 trillion in global revenue.
Financial liberalization has also boosted finance, technology, and talent flows, boosting earnings and increasing living standards (Petri and Banga, 2020 p.3). According to other research, the United States has profited from globalization even more than the rest of the globe. According to Petri and Banga (2016), advancements in globalization added $0.8 trillion–$1.5 trillion, or 11 percent–14 percent, to the US GDP of $11 trillion in 2003, between 1947 and 2003.
Financial liberalization
Extrapolating these figures to 2018 GDP, economic interconnectedness has contributed $2.2 trillion since 1947. Unfettered access to international market has brought about both net benefit as well as certain disruptions to developing countries for the past two and a half years. To developing countries, financial liberalization and integration has brought about abundant benefits that are verifiably both theoretically and through empirical evidence as well as a number of disruptions to their economy.
Firstly, liberalization has brought about the elimination of barriers to international investing whereby both the government and private organizations are allowed to business with minimal restrictions. Tax rules, foreign investment limitations, legal challenges, and accounting requirements are all examples of barriers that make it difficult or impossible to access the international market (Barone, 2020).
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Financial liberalization
During the 1980s through to early 1990s, a great banking crisis occurred that is considered to be one of the worst global credit disasters in history. The crisis drove the United States’ state and federal regulatory and deposit banking insurance systems to their breaking points, resulting in broad regulatory revisions (Summa, 2014). The Depository Institutions Deregulation Committee and Monetary Control Act of 1980, which removed many restrictions on thrifts and credit unions, and The Tax Reform Act of 1986, which fundamentally altered the banking landscape and engendered conditions that contributed to the banking crisis, were both passed prior to the onset of the crisis (Summa, 2014).
This was considered to be the primary cause of the banking crisis of that time. In order to rescue the banking sector. The United States’ economic comeback has been aided by liberalization and economic contact with the rest of the globe. Their relatively open borders, which let most foreign goods to enter with no or modest tariffs, have helped keep inflation in control, allowing the Federal Reserve to ride out the good times without raising interest rates as swiftly as it could have otherwise (Summa, 2014).
Financial liberalization manifests its positive impact through the rather increase in demand for domestic goods internationally for both developed and developing countries. By increasing the involvement of developing countries into the international market, it becomes evident through an increasing export and import volumes, as well as expanding outflows of domestic savings into international investment projects and increasing inflows of foreign capital into local enterprises (Masci, n.d.).
According to a report made by the office of the unites states trade representative (n.d.), The United States was the world’s top goods and services trading nation in 2017, with $2.35 trillion in exports. The total value of goods and services traded in the United States in 2017 was $5.3 trillion, up 6.5 percent ($321 billion) from 2016 and up 31% from 2007. The value of US goods trade was $3.9 trillion, while the value of US services trade was $1.3 trillion.
Despite the large number of benefits that are associated with financial globalization, there are also disruptions that come with liberalization. One is the transitional risks that accompany it. Despite a significant rise in global gross capital flows, net capital flows to developing countries have typically been minimal, if not negative (Broner and Ventura, 2016).
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Financial liberalization
Traditional models acknowledge that foreign sources of funding can be problematic, since the incentive for opportunistic default coupled with low-quality institutions can lead to recurring foreign debt crises. They also expect that domestic savings stay in the country and that new foreign sources of financing add to overall development funding (Broner and Ventura, 2016).
The chief concern in the US is that the economy is delivering a disproportionate share of gains to the wealthiest few. According to Census data, from 1970 to 2018 the median US household income rose from $50,545 to $63,179, or by 0.46% per year, while that of the top 5% of households rose from $192,603 to $416,520, or by 1.62% per year (Semega et al., 2019). In 1970, a high-income household earned 3.8 times as much as the median household, but this ratio had grown to 6.6 by 2018.
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Financial liberalization
Still more extreme contrasts emerged between richer and poorer households, and amongst subgroups by levels of education. In turn, inequality may have contributed to other trends such as withdrawal from the labour force, increased mortality and morbidity, and political polarization (Broner and Ventura, 2016). These trends are not direct results of liberalization, but they are often attributed to trade in popular discussions.
Is it worth the risk of liberalization? It depends, as it would with most things. Capital account liberalization is definitely not a perfect solution, and it comes with significant dangers if it is implemented in poor conditions, especially without accompanying measures (Kose and Prasad, 2020). While data indicate that capital account liberalization is linked with transitory risks, fighting it for a lengthy length of time may be useless and harmful. Closed capital accounts are becoming more difficult to maintain as the forces of globalization progress (Kose and Prasad, 2020).
Federico, G. and A. Tena-Junguito 2016. ‘A Tale of Two Globalizations: Gains from Trade and Openness 1800–2010’, CEPR Discussion Papers, No. 11128. London: Centre for Economic Policy Research.
Office of the united states trade representative, n.d. Benefits of trade. [online] Available at: https://ustr.gov/about-us/benefits-trade [Accessed June 5, 2021]
Semega, J., Kollar, M., Creamer, J., and Mohanty, A., 2019. Income and Poverty in the United States: 2018 – Current Population Reports. Washington, DC: United States Census Bureau.
