Inflation and Interest Rates

Inflation and Interest Rates
Inflation and Interest Rates

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Inflation and Interest Rates

Overview

Solve three problems addressing inflation and interest rates affecting the financial environment, including the real risk-free rate, expected interest rate, detailed risk premium, and ratio analysis.

By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:

  • Competency 1: Maximize shareholder wealth.
    • Compute real risk-free rate of return based on data presented.
    • Determine yield on 2-year and 3-year Treasury securities.
  • Competency 2: Evaluate the financial health of the firm
    • Assess the default risk of a corporate bond.

Context

There are different determinants of market interest rates. Try to answer such questions as, “What determines the shape of the yield curve?” and “How is the yield curve used to estimate future interest rates?,” which are important considerations for financial managers.

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Resources

The following optional resources are provided to support you in completing the assessment or to provide a helpful context.

  • Brigham, E. F., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.). Boston, MA: Cengage.

Assessment Instructions

For this assessment, complete Problems 1–3 on inflation and interest rates affecting financial environment. You may solve the problems algebraically, or you may use a financial calculator or an Excel spreadsheet. In addition to your solution to each computational problem, you must show the supporting work leading to your solution to receive credit for your answer. Note the following:

  • You may need an HP 10B II business calculator.
  • You may use Word or Excel, but you will find Excel to be most helpful for creating spreadsheets.
  • If you choose to solve the problems algebraically, be sure to show your computations.
  • If you use a financial calculator, show your input values.
  • If you use an Excel spreadsheet, show your input values and formulas.

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Cost Reduction & Application to Global Markets

Cost Reduction & Application to Global Markets
Cost Reduction & Application to Global Markets

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Cost Reduction & Application to Global Markets

            Most firms have become disillusioned with sales in the global marketplace as old markets become infiltrated and new ones should be established. How can companies personalize products for needs of new markets? With crafty global competitors giving them a run for their money, many companies think the game just is not worth the shot. Properly managed organizations have moved from focusing on customizing products to providing internationally standardized items that are improved, functional, reliable, and low prices.

Only multinational corporations will accomplish long-term success by expending their focus on what everybody needs, as opposed to worrying about the information of what everyone thinks they might like. A great force powers the world towards converging harmony, and that force is technology. The outcome is a new viable reality-the rise of international markets for homogeneous consumer goods on an initially unexpected degree of magnitude. Companies devoted towards this new reality benefit from great economies of scale in production, distribution, marketing, and management.

The era when prices, margins and proceeds abroad were collectively higher than at home are finally over. The internationalization of markets is ongoing. The international company with resolute constancy-at low relative cost, as if the whole world was a distinct body. Which policy is effective is not a matter of belief but of importance. If a firm’s forces costs and prices down and increases quality and reliability, while sustaining rational concern for suitability, consumers will favor its global-standardized products. The international competitor will pursue constantly to homogenize its offering all over the globe.

Cost Reduction & Application to Global Markets

References

Stiglitz, J. (2012). Globalization and its Discontents. New York, NY: Oxford University Press.

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Free Higher Education Essay

Free Higher Education
Free Higher Education

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Free Higher Education

Introduction

Higher education has transformed to become one of the most important systems in this modern era. The education system has shaped the market into highly competitive global economy by producing practitioners and professionals in various disciplines. Just like any other commodity, higher education has a price tag. However, the price of education has increased significantly thereby closing out potential economists, doctors, engineers, lawyers and many others.  The benefits that accrue to the economy because of the contribution of higher education provide enough evidence that the commodity should be made free.Free higher education would have more positive impacts.

Higher Education is usually the next level after secondary education and includes both under-graduate and post-graduate levels. It is difficult to describe whether vocational and technical training fall in this category since the policies and laws that regulate education system vary in different countries. Word Bank (2011) provides a category of institutions that fall under the higher education system.

Free Higher Education

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This includes; universities, colleges, nursing schools, research laboratories, centres of excellence, community colleges, technical training institutions and distance learning centres. Free education refers to a situation where learners do not incur the price of education. Mostly, free education can be funded through taxes or grants from charitable organisations.  Primary and secondary education is free in most countries; however, higher education is free only in some specific regions, mostly European Countries.

For example, Norway offers free education in state institutions to both foreign and native students. Sweden currently has no tuition-free universities since the process was halted in 2010 where a bill was passed requiring non-European Union student to pay for tuition and application fee. However, most universities in Sweden offer scholarships and grants to fund higher education especially for foreign students.

Other examples include Denmark, Greece, Argentina, Germany, Northern Europe Estonia and Finland. Article 13 of the International Covenant on Economic, Social and Cultural Rights states that free primary education is a right and progressively, free secondary and higher education will be introduced as a right too.  The main participants and beneficiary in the free higher education will be the government, taxpayers, institutions, learners and the parents or guardians.  It is quite evident that everybody within the system or society will be affected or influenced by its introduction, either in the positive or negative.

Free Higher Education

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A lot of debates and arguments have been going about whether to make higher education free or to charge the commodity. The benefits of free primary Education will obviously outweigh its negative implications. Free primary education will contribute significantly to the growth of the economy by ensuring that all access higher education training thus increasing the human capital which is very vital in an economy. Most countries continue to invest huge amounts of funds on grants and financial aid that usually don’t benefit the targeted individuals.

This therefore translates to huge loses both in terms of human and financial resources. It has been established that that it would cost less to offer free higher education rather than offer financial aid to specific individuals. A recent analysis, undertaken by the U.S. Department of Education estimated that the cost of making higher education free is $62.6 billion which is $ 7 billion less than the expenditure on grants and financial aid to needy students.   

Furthermore, college and university fees have become very expensive and most of the graduates either take too long in the system or finish with huge loans and debts. A review by Forbes indicated that U.S.A State student loan balances exceeded $1.2 trillion (Denhart 2013). It is very expensive for the economy to loose bright minds just because they are not able to afford to join a higher education facility. If free higher education is provided then a lot of challenges faced by many countries will be solved immediately. 

Free Higher Education

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Making higher education free has numerous benefits and advantages. First, free higher education will create an opportunity for all citizens or individuals interested in furthering their education to access institutions offering these services. This will beneficial to the economy as the right amount and quality of labourers will be produced and released into the market.  There has been countless debate whether higher education benefits an individual or the society at large.

The answer is both since it increases returns to the individual to an estimated amount of $1,000,000 and increases chances of being employed to about 80%-90%. On the other hand, the country or society will benefit from skilled and educated human capital. Germany introduced free higher education because they established that the high college prices were preventing many from joining universities and other higher education institutions.

Secondly, making higher education free will reduce the student loan debt balances which has been plummeting in many countries. Since most are unable to fund the program they opt to take loans which have very high interest rates. For example in U.S, students who applied for loans in 2012 to fund their under-graduate program have approximately a loan debt balance of $29,400 and 70% graduate with debts.

Free Higher Education

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Making higher education will pose to be a smart and wise investment for most governments apart from reducing the loan debt levels. It will also be cheaper than the current financial aid and grant system that is used by most governments and federal states.  A report undertaken by the U.S Education Department revealed that it $7 billion less to offer free higher education than providing grants to low-income students.  It is worth mentioning that the U.S grants to needy students amounting to $69 billion did not include federal loan subsidies.

Thirdly, free higher education program can be used as a tool to reduce low unemployment within an economy. Education is usually referred to as an empowerment tool that equips individuals with skills to create jobs, perform certain duties that will in turn increase their financial status. Education should not however be directly interpreted to mean employment. It is an instrument that when combined with other factors increase the chances of employment. This argument is however only true in certain economies where the level of unemployment is high. When unemployment rate reduces, the economy is expected to grow holding other factors constant up to a certain level.

On the contrary, critics against free higher education argue that the systems will reduce the quality of education, send the wrong message to students and that it will be a burden to taxpayers.  They argue that it is very expensive and difficult to offer free education and therefore the public must be charged for it through taxes. When taxes are increased individuals and professional will look for better options where they can enjoy their earnings without so many reductions.

Free Higher Education

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This will therefore result to contra-effect in the system since as more enter the market others are opting to leave (Vedders 2014). Sanders (2014) recommends, based on the Morill Act of 1862, that countries can fund higher education by taxing financial transactions which will provide two-thirds of the budget and the rest can be contributed by the government. Additionally the government can decide to use the federal loan subsidies and financial aids to support the program.

Some argue that education will open up doors and opportunities for many students to join higher education programs thus diluting the value and status that comes with it. The objective of any education systems is not to block out others but to impart knowledge. Therefore, this argument does not apply at all.

Finally, others argue that free higher education will force other private institutions to cut on their tuition fees in order to remain relevant in the market. In the recent past, most institutions have transformed into profit making ventures. The private institutions will therefore have to venture and invest in other areas in order to remain relevant in the market. However, a cost- benefit analysis must be undertaken to determine this position. Obviously, the economic benefits that result from free higher education would exceed the loses in the collapse and closure of the private institutions.

In conclusion, the benefit of free higher education exceeds the benefits and opportunity cost of failing to adopt the program. Free higher education will play a big role in economic growth and result to other social benefits. Adopting free higher education is an investment in to the future and every state should consider it.

Free Higher Education

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References

Huffington, P, (2013), Why going to college is a valuable investment (In 1 Chart). Available on http://www.123helpme.com/search.asp?text=college+tuition.

Vedder, R, (2004), Going broke by degree: Why college costs too much, AEI Press, 2004. Washington D.C.

Denhart, C, 2014, There is no such thing as a free college education, Forbes. Available on http://www.forbes.com/sites/ccap/2014/10/03/there-is-not-such-thing-as-a-free-college-education/

http://www.theatlantic.com/business/archive/2014/01/heres-exactly-how-much-the-government-would-have-to-spend-to-make-public-college-tuition-free/282803/

Sanders, B, 2014. It is time to make college tuition fee free. Wall Street Journal.

Free Higher Education

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China superpower of manufacturing economy

China superpower of manufacturing economy
China superpower of manufacturing economy

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China superpower of manufacturing economy

Over a period of many years, China has held its position as the world superpower of the manufacturing in the general merchandise sector. This is due to the rapid and dynamic growth in its economy, building focus in the world demand for manufacturing products and services.  The country’s population, political stability and consumer interest and pattern can be explain its position as the world superpower of manufacturing in general merchandize. The country is however experiencing stiff competition from India, one of the world’s rapidly growing country economies.

India has in the past twenty years rapidly increased its share in the manufacturing industry. The country has recorded positive improvement in its gross domestic product (GDP). India just like China records one of the highest populations in the world (Ghemawat & Hout, 2016, p. 86). This offers a vast market for consumers and traders in the region. The country has taken advantage of its growing population to invest in merchandise market development. This has posed a significant threat to China’s position as the world superpower in the manufacturing industry.

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Subsequently, it can be argued that India is rapidly rising into the next superpower after China through their shift in development of technology (Gupta & Wang, 2009, p.25). The country is facing a drastic change in the industrial revolution through adopting a modern forms of technology applied in the manufacturing industry. This has increased their overall business performance.

India has tightened its grip in both the private and public sector, embraced trade liberalization and increased their involvement in foreign direct investment (Xingxing 2015, p. 685). This has primarily improved the manufacturing industry of India, making it a viable candidate as the next superpower after China.

Furthermore, the rapid expansion of information technology in India has accounted for the growth of commerce, business services, and banking. Moreover, India has gained an international reputation as an IT enabled center of the world. This has increased its global position in the e-commerce sector, improving its strength in the manufacturing industry globally.

In addition, India is experiencing growing investment rate, with an average of thirty-two percent compared to that of China at thirty-five percent (Mahtaney, 2007, p. 2455). This rate is set to project in the next year and India could surpass China’s the rate, making it the world superpower in the manufacturing industry.

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China is facing a significant challenge in their population, as a large percentage of the population is set to experience old age in the future years. This is bound to affect its general labor output, unlike that of India which is strengthening. India has a demographic surplus of younger generation increasing their task force in the manufacturing sector (Takeuchi, Chen & Lam, 2009, 86). The growing generation is also experiencing the best form of education, expanding their expertise in the sector. Based on these projections, it is predicted that India may overtake China as the current superpower in the manufacturing industry.

Reference List

Ghemawat, P, & Hout, T 2016, ‘Can China’s Companies Conquer the World?‘, Foreign Affairs, 95, 2, pp. 86-98, Academic Search Premier, EBSCOhost, viewed 30 March 2016./

Gupta, A, & Wang, H 2009, Getting China And India Right: Strategies For Leveraging The World’s Fastest-Growing Economies For Global Advantage, San Francisco: Jossey-Bass, eBook Collection (EBSCOhost), EBSCOhost

Mahtaney, P 2007, India, China, And Globalization: The Emerging Superpowers And The Future Of Economic Development, Basingstoke [England]: Palgrave Macmillan, eBook Collection (EBSCOhost), EBSCOhost

Takeuchi, N, Chen, Z, & Lam, W 2009, ‘Coping with an emerging market competition through strategy-human resource alignment: a case study evidence from five leading Japanese manufacturers in the People’s Republic of China’, International Journal of Human Resource Management, vol. 20, no. 12, pp. 2454-2470. Available from: 10.1080/09585190903363763.

Xingxing, L 2015, ‘An Economic Analysis Of Regulatory Overlap And Regulatory Competition: The Experience Of Interagency Regulatory Competition In China’s Regulation Of Inbound Foreign Investment‘, Administrative Law Review, 67, 4, pp. 685-750, Business Source Complete, EBSCOhost,

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The Economic Order Quantity (EOQ)

The Economic Order Quantity (EOQ)
The Economic Order Quantity (EOQ)

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The Economic Order Quantity (EOQ)

Introduction

The Economic Order Quantity is that quantity that results in minimal costs in terms of holding costs for a particular period. The EOQ provides a good measure for calculating the optimal stock quantity required.

1a).EOQ = √2 (Annual Usage in Units) (Order Costs)/ (Annual Carrying Cost per Unit)

EOQ = √2 (CoD/Ch

Where Co = Cost of Placing Order = £2

D = Annual demand = 20,000

Ch = Cost of holding one item for a year = £1.5

            EOQ = √2 (2×20, 000/1.5

EOQ =230.94

1b). The implications of holding stock occur when stock outs are registered before the delivery of new orders. The shortage experienced causes delay for customer’s orders who eventually search for reliable suppliers. Alternatively excessive stocks lead to dead stock and holding of capital in stock instead of being utilized in other operations that can be more productive for the company. The above implications above compel the company to identify the right Economical Order Quantity to maintain (Doupnik and Perera 2012)

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2. a)

Cash flow Forecast for UniFood 2016
DateJanFebMarAprMayJunJulAugSepOctNovDec
Receipts            
Sales180001800022000220002600020000100001000027000280002800025000
Credit Sales200030003000400040003000200010001000500060004000
Capital Amounting10000           
Total Receipts (A)300002100025000260003000023000120001100028000330003400029000
             
Payments            
Cash Pymts to supplier200025003000300030001500150020003000300030002500
Cr pymts to supplier600065007000400060002000100020006000700070006000
Delivery Cost100012001500100120090080010001000150015001200
Rent and rates40000           
Insurance         960  
General expenses303030303030303030303030
Stationary202020202010101020202010
Bank Loan100010001000100010001000100010001000100010001000
Wages800080008000800080008000800080008000800080008000
Advertising40505040400305050505040
Vehicle Running200200200200200150100150200200200100
Vehicle Tax250           
Total Payments (B)585401950020800163901949013590124701424019300217602080018880
             
Net In/Out Flow (A-B)-28540150042009610105109410-470-32408700112401320010120
Opening Balance5000-23540-22040-17840-8230228011690112207980166802792041120
Closing Balance-23540-22040-17840-823022801169011220798016680279204112051240

2b) The months that will experience cash shortage are January, February, March and April.

2c) The cause of the cash shortage is that the business capital is insufficient to pay all the initial costs of operating the business. The credit sales are also contributing to the shortage of cash. The rental charges are also very high (Doupnik, Hoyle and Schaefer 2012).

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2d) To improve the Cash Flow Unifoods should apply for some low cost financing from a convenient bank that can advance a soft loan of £23540 or source for funding from an alternative source to facilitate the business operations during the first four months of the year. Unifoods may also opt to shop for cheaper premises that are within the same locality but which have the same goodwill or advantages as their present premises (Vance 2003).

4a) i.

Unifood
Project AProject B
YearsIncomebalanceIncomebalance
0100,000-100,000100,000-100,000
160,000-40,00060,000-40,000
280,00040,00070,00030,000
390,000130,00080,000110,000
4100,000230,00090,000200,000
5100,000330,00095,000295,000
     
     
Payback period1 year and 6 months.1 year and 7 months
     

The Payback Period for project A is one year six months while the payback period for Project B one year seven months (Hermanson, Edwards & Invacevich, 2011)

4b) ii.

Unifood Accounting Rate of Return
Project AProject B
YearsIncomeARRIncomeARR
0100,000 100,000 
160,000 60,000 
280,000 70,000 
390,000 80,000 
4100,000 90,000 
5100,000 95,000 
Total530,000 495,000 
 Less 100,000430%Less 100,000 395%
ARRAverage annual returns/Initial inv
     

The ARR for project A is 430% while the ARR for Project 395% (Bodie, Kane & Marcus 2008).

4c)  iii.

Unifood
NPV
Project  A      Project B
YearCash flowCash flow
0-100,000-100,000
160,00060,000
280,00070,000
390,00080,000
4100,00090,000
5100,00095,000
 Discount Rate 10.00% 10.00%
PV for future cash flows$318,672.97$292,960.61
NPV$218,672.97$192,960.61
   

The NPV for project A is $218672.97 while the NPV for Project B 192960.61 (Brealey, Myers & Allen 2005).

4b)

The best project to invest in is project A. The payback period for the first project is shorter. The Accounting rate of return is 430% which is also higher than that of project B. The NPV for Project A is also higher than that of project B. The NPV for project A is £218,672.97 while that of project b is £192,960.61 (McLaney 2003). The other factors which should also be considered are the other extra expenses like the preliminary expenses. It may be costly to commence trading on some projects hence all the total costs should be considered (Harrington 2003).

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5).

The Gross Profit Margin for Unifood is 65.76% while the Net Profit Margin is 15.31%. The total costs for the project would amount to 84.69%. The profitability ratios for Unifood are good and above average. The total costs are a little high but they can be brought down by strategically moving to cheaper premises. The efficiency ratios for Unifood are: Average collection Period Days in a Year/Inventory Turnover. To obtain the turnover the average stocks have to be obtained and which are not available (Helfert 2007).

DateTotals  Analysis   
Receipts       
Sales254000      
Credit Sales38000  12.58%    
Capital Amounting10000      
Total Receipts (A)302000 302,000    
        
Payments       
Cash Pymts to supplier30000      
Cr pymts to supplier60500      
Delivery Cost12900 103400    
Gross Profit  198,60065.7616(Gross Profit Margin)  
Rent and rates40000      
Insurance960      
General expenses360      
Stationary200      
Bank Loan12000      
Wages96000      
Advertising490      
Vehicle Running2100      
Vehicle Tax250      
Total Costs255760 25576084.6887   
        
Net In/Out Flow (A-B)46240  15.3113(Net Profit Margin)  
Opening Balance52240      
Closing Balance98480      

The credit sales are only 12.6% of the total sales which represent a low rate of credit sales. Unifood needs to provide flexible credit terms to encourage more sales to improve its profitability.

To increase the working capital, Unifood should cut down on its revenue costs. For example, Unifood should look for a way to reduce its rental income which is very high (Fridson 2002).The wages are also very high the company should find a way of reducing the high wages (Samuels et al 1998). Unifood has also to negotiate with the suppliers to provide more favorable credit terms to facilitate increased purchases and trade.\

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To conclude the Economical Order Quantity has provided an accurate way of determining the optimal stock level that a company should maintain having in mind the annual demand of the company and the holding costs that the company incurs in cases of overstocking and the costs of placing an order. The analysis of the company indicates that the financial performance of unifood is good as it is making profits and the suppliers are paid on time while the debtors are also maintained are reasonably low levels.

Bibliography

Bodie, Z., Kane, A., & Marcus, A. J., 2008, Investments (7th International ed) Boston: McGraw-Hill. 303.

Brealey, R.A, Myers, S. C., Allen, F., 2005, .Principles of Corporate Finance Boston: McGraw-Hill/Irwin.

Fridson, M., 2002, Financial Statement Analysis: A Practitioner’s Guide. New York: John Wiley.

Harrington, D, R., 2003, Corporate Financial Analysis: Decisions in a Global Environment. 4th ed. Chicago: Richard D. Irwin, Inc.

Helfert, E, A., 2007, Techniques of Financial Analysis: A Modern Approach. 9th ed. Chicago: Richard D. Irwin, Inc.

Hermanson, R.H., Edwards, J.D., & Invacevich, S.D., 2011, Accounting Principles: A Business Perspective. First Global Text Edition, Volume 2 Managerial Accounting, 37-73.

Vance, D. (2003). Financial analysis and decision making: tools and techniques to solve financial problems and make effective business decisions. New York: McGraw-Hill.

Doupnik, T.S., Hoyle, J.B. and Schaefer, T.F., 2012, Advanced Accounting. Boston: Irwin/McGraw-Hill, Print.

Doupnik, T.S, and Perera, H.B., 2012, International Accounting. New York: McGraw-Hill Irwin, 2012. Print.

McLaney, E. J., 2003, Business Finance: Theory and Practice (5th Ed). London: Pearson Education Ltd.

Samuels, J. M., Wilkes, F. M. and Brayshaw, R. E., 1998, Management of Company Finance (7th Ed). International Thomson Business Press.

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Globalization Effects on the International System

International System
International System

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Globalization Effects on the International System

PART II

Introduction

Globalization refers to an approach that engages people, business entities, companies and governments from different regions in freely interacting with each other in an effective manner. It is essential to consider the fact that the element of interaction between people from different regions is enhanced by particular parameters that are an international system. These parameters include information technology, international trade, infrastructures, engagement in business activities, the ideal of exploiting different resources from various regions and social media (Mehrabanfar, 2015).

These factors therefore remain the main elements that drive people from different contexts to cross borders with the sole aim of engaging in activities geared towards the promotion of a common approach to life. The second part of this paper therefore seeks to determine the manner in which globalization affects the key actors of an international system.

In particularly, this essay examines the way in which globalization affects the main actors in the international system. The essay does so through analysis and critique of the subject matter and not just by describing the topic, as well as through the use of pertinent real-life examples in illustrating the arguments made in the essay. Some of the key actors in the international system as far as globalization is concerned include people, national governments and multinational corporations that have their business operations in multiple countries globally.   

This essay also explores the topic further by analyzing the impacts and implications of globalization on different countries globally. Globalization as evident in the present day has largely been driven by policies implemented by countries in the international system which have served to open economies internationally as well as domestically (Zhang, 2015).

A lot of countries have espoused free-market economic systems that have significantly enhanced their productive potential and brought a wide range of opportunities for global trade and investment. In addition, countries have negotiated considerable decreases in barriers to trade and have created transnational agreements that are aimed at promoting trade in services, goods as well as investment. This essay will also clearly describe how this is affecting the main actors in the international system in globalization today. 

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How Globalisation Affects the Key Actors in the International System

According to Mehrabanfar (2015), the process of globalization has been determined to influence different human development, cultures, and environments, including political and economic systems. It is essential to understand the process of globalization and its effects on the key actors within an international system.  This gives a clear depiction of the manner in which the world is constructed by several changes in the social and economic lives of people (PP.24).

In this, it is therefore essential to determine that globalization is a powerful tool that enhances the course of the new worlds systems that represent the forces that are responsible describing the future of the planet. Globalization is in this case concerned with the economic, political, environmental, security, culture and health of different nations with emphasis placed in the status of different states (Qureshi & Jalbani, 2014).

It is however significant to consider that there are scholars who have different reactions in the interpretation of globalization, a factor that has seen some policy makers considering globalization as an essential element in the advancement of the world’s economy while other believe that this element places negative energy and serious danger upon the world’s economic systems (Baylis, John & Steve, 2001). In as much as globalization can be viewed as a contributor of conflicts, it has several benefits both at the state and individual levels.

Many observers allege that globalization is accelerating with these factors prevalent in the manner in which similar cultural practices have been created and the uniformity of markets.  It is therefore important to consider that globalization effects are very strong that they undermine the powers of international and national governance (Popa, 2014).

This element therefore assumes that societies are strongly connected in this dispensation as compared to the past and that change emanates from a single center that is then radiated outward through a uni-directional fashion (Nederveen, & Dasgupta, 2009).

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Impacts of Globalisation

There are several effects that emerge from globalization which impacts different economies of the world. The production of goods and services is affected by different elements of globalization. This has also seen the development of different approaches of production such as capital and other inputs and labor that are primarily dependent on the levels of globalization.

Additionally, competitiveness as seen in producing a good or service has resulted in the diffusion of technology that has resulted in the initiation of nations to other developed cities (Gaur, 2015). Having considered this, globalization is therefore ascribed as the force behind the efficiencies that have been experienced in affecting investment opportunities of different organizations within different nations and markets.

Investments are known to play a central role in technological transfer, formation of global investment and in industrial restructuring which have an effect in the national level (Luković, 2015). New technological advancements in different economies additionally remain an essential factor in globalization that stimulate competition and enhances the diffusion of nations through foreign direct investments.

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International Commercial Transactions

One of the implications of globalization is increased rise of international commercial transactions that have opened opportunities for cross border trade on both small and large scale.  Over the past, it is essential to consider that it was challenging to find developed economies engaging in trade with the developing countries. This was centrally because different economies were considered as superior to others, a factor that saw this economies gain big percentages in trade.

According to Francioni, Musso and Vardiabasis (2013), the manner in which organizations engage in international commercial transactions as that has seen the inclusion of electronic buying and selling depicts the manner in which globalization has affected trade in the entire world, a factor that depicts the impact of globalization (PP.240).

It is therefore essential to note that the perception of international commercial transactions also known as international trade can be viewed as an approach that offers a variety of business services to different market on both a small and large scale (Bourguignon, 2016). This concept has therefore been changed with the advent of technological developments, availability of social media, infrastructural development including the development of information communication technologies.

This has therefore transformed the manner in which people conduct their business functions and other affairs that relate to trade (Vadlamannati, 2015). Improvements in the way individuals move from one area to the other have also been enhanced by globalization, a factor that has seen the elimination of various barriers in the market.

Globalization as detailed by Faulconbridge (2008)  has provided a clear guideline in the manner in which people from different regions integrate across different markets with each other through the development of an established law system also known as commercial law (PP.185).   This according to the author depicts the fact that there are procedural laws that have been created as a result of globalization that regulate the levels people can interact for the sole purpose of ensuring that safety and the protection of the wellbeing of these parties that engage in international and commercial transactions are adhered to the latter.

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It is however essential to consider that Williams and Martinez (2012) believe that this approach does not create the element of free trade since it provides some restrictions through the developed laws that hinder international commercial trade to occur.

In as much as the element of commercial law remains paramount in regulating trade, it is essential to consider the fact that free trade opens different boarders that allows trade interactions and different activities that promote these practices (PP.79). In my view, I however believe that commercial laws are essential since they specify certain activities that promote trade and the manner in which individuals interact in this process.

States have additionally turned out to be interdependent through the implementation of free-trade that has seen the opening of national boarders for the purposes of trade.  As a result of globalization, companies now have an easier way of setting up branches and different production sites in other nations where the market conditions remain favorable for a company (Westermann, Rehbein, & Fort, 2015).

However, it is significant to consider the fact that these have seen an increase in competition between different nations considering the fact that each of them would want such establishments made in their own economies. The element of free-trade has therefore seen countries turn out to be dependent on one another in order to present attractive markets for multinational corporations that seek to expand their operations in different markets.

Free-trade was to develop market conditions that would define the manner in which different states would conduct trade freely and with the presentation of equal opportunities with other states (Andreeska, 2015). However, the achievement of this objective was met by different reactions that alluded to the fact that such terms may not favor all nations in an equitable manner. This is because some nations had the capacity to export cheaper raw materials and labor as compared to others and are likely to be trade-partners.

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In this case, some countries needed to implement quotas and tariffs to protect their national economies in dealing with this element. This has therefore seen several states affected by other states tariffs and quotas in effectively trading in the markets (Seitan, 2014). This therefore implies that  some states may not be in a position to trade particular goods with other countries considering the fact that meeting these requirement’s may turn out to be detrimental to their functions.

Globalization has in this contemporary time made international trade easier by incorporating online business transactions, a factor that has made it simpler for people to transact (Schelhase, 2008). Commercial laws have therefore been enhanced to cover several aspects within the business spectrum that involves the transfer of funds, accounting, marketing, operational management, book keeping and sales.

It is however essential to consider that the undeveloped nations that may not have access to internet as a result of various factors such as the lack of resources and underdevelopment also have the opportunity to interact with the traders from different regions through enhanced approaches of movement that involve different transport modes (Castro Pereira, 2015). These modes have therefore made movement. Globalization has impacted the transport modes with this making it easier to move from one region to the other without difficulties a factor that impacts international trade.

It is also essential to determine that an essential role was also played when various Inter-Government entities (IGOs) gained significance in the element of globalization. Before the advent of globalization, several states were in pursuit of approaches aimed at promoting their national interests. This therefore saw states primarily concerned with their own interests and safety that developing a global approach to security (Antonelli, & Fassio, 2016). This clearly indicates that states were primarily concerned with their own ways of dealing with their problems at a state level rather than inn an international level.

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Currently, it is essential to establish that issues and challenges have escalated with these affecting states on a global level, a factor that has seen several states unable to protect its citizens (Schelhase, 2008). States have therefore been incapacitated in dealing with these issues by their own means, with this therefore requiring the development of collective action plans with other states through the IGOs.

Through a joint effort, states are in a position to relinquish their sovereignty to a single body that collectively manages the decisions of other member-states (Taylor, et.al.2014). It is essential to consider that these joined sovereignty never existed, a factor that gives the impression that states are obligated to comply with the laid down decisions by the majorities and are in most times affected by such actions considering that this may be against their governance approaches.

States therefore depend upon the aid of other nations who are partisans of the decision making process with the aim of achieving their goals as depicted in the case of UN Security Council. This entity therefore ensures that member states needing to pass resolutions depend on their parameters (Kilic, 2015). Considering the fact that this entity holds veto-powers, they have the capacity to stop a state’s resolution even in the event that these resolutions are passed in their favor.

Another implication that has been noted in these IGOs and the manner in which they relate with members-states remains in the laid down obligations to act under defined circumstances (Verma, & Singh, 2010). In accordance to this, member states of NATO as agreed under Article 5 of the North Atlantic Treaty who lodge armed attacks against other states that reside within North America or Europe are bound to have an attack against them.

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It is also passed that in the event of such armed attacks each of the member-states in exercise of the rights accorded to them recognized by Article 51 of the Charter as described by the United Nations will take full responsibility in assisting the parties affected by taking part in actions as deemed fit that include the use of their forces in order to restore and ensure the security of such a nation (Bassens, & van Meeteren, 2015).

With this example it is therefore essential to note the manner in which member states belonging to NATO remain dependent on one another and are in most cases affected by the happenings in other member states (Bassens, & van Meeteren, 2015). This therefore ensures that the United States of America is required as described under Article 5 of this treaty to send its military forces to assist the European member states when attacks are lodged against them in as much as the US has nothing to do with the issues that arise and are not closer to the attacked states in any way.

This factor therefore implies the fact that in this contemporary society, events have turned out to be borderless, placeless and distancless, a factor that ascertains the fact that states remain unaffected by issues that arise in other nations but may be affected in a way (James, & Steger, 2014).

Another element that can be noted in the manner in which smaller numbers of nations my impact the whole world is in relation to the Organization of Petroleum Exporting Countries (OPEC). In the year 1970, OPEC raised the prices of oil considerably which affected many countries in the world. During this period, OPEC only had 12 member states with their decisions held intact with more states.

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It is also essential to consider the fact that it is not only IGOs and other member states that increase the dependence of other states on others. A Trans-border trade connection that occurs between different locations in different nations has also seen a similar impact as a result of globalization.  It is therefore critical to determine that the developed bodies that are given the mandate of run these connections are the makers of decisions with their constituent regions taking the required actions which then impact the manner in which these systems are run globally (James, & Steger, 2014).

This has seen the development of regulatory bodies such as the Assembly of European Regions and the European Union’s Committee of the Regions that influence the manner in which trade is conducted in member-regions. This has therefore seen states turn out to be independent not by their own actions but due to the regions that form part of a regional organization.

On the other hand, it is also significant to note that another development that has been spurred by the element of globalization is in relation with the interconnections of different states within the modern international systems (Schaeffer, 2009).

This has therefore seen the unity of private sector institutions and other entities such as the International Federation of Stock and Exchange that were incorporated in 1961 with the sole purpose of making decision and taking the required actions in addressing issues such as food pricing and credit rates that have significantly impacted different economies over the world.

It is also important to consider the element of fusion of national capital markets and the development of integrated global economies as another factor that is augmented by globalization in the development of interdependent states (Schaeffer, 2009).

Considering the fact that states do not have control over their own economies, it is essential to point out that they primarily rely on a collective approach to governance by different bodies for instance International Monetary Fund (IMF) and the World Bank so as to develop effective approaches of regulating the international financial markets.

These dependencies have seen different member-states provided with protection in an even where their economies are troubled with financial difficulties. It is therefore essential to consider the fact that the element of interconnectedness may also have its negative effects as this can be determined in the recent economic crisis (James, & Steger, 2014).

This therefore gives an impression of the fact that the advent of a global economy may increase the risks of states being affected by different issues which may begin in a single country and stretch to different nations with this affecting the manner in which functions are conducted.  Additionally, a countries economy may also be affected as a result of this crisis.

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It is therefore essential to determine that the element of globalization has overally impacted the international systems in a significant way by making states turn out to be interconnected through trade and independent.  This therefore determines the fact that this contemporary society is not concerned with the independence of a single state but takes a collective responsibility in uniting the whole states for different purposes (Nederveen, & Dasgupta, 2009).

The issues that affect different nations are therefore solved through a collective approach rather than the engagement of individual states in finding solutions to those issues. It is significant to point out to the fact that intergovernmental organizations, global financial institutions, and the private sector organizations are the products of globalization and take the roles of solving the challenges that different economies and nations face in the development of a global market.

Conclusion

Globalization refers to an approach that engages people, business entities, companies and governments from different regions in freely interacting with each other in an effective manner. It is essential to consider the fact that the element of interaction between people from different regions is enhanced by particular parameters that include information technology, international trade, infrastructures, engagement in business activities.

The ideal of exploiting different resources from various regions and social media.it is therefore imperative to consider the fact that one of the implications of globalization is in its increased rise of international commercial transactions that have opened opportunities for cross border trade on both small and large scale.

Over the past, it is essential to consider that it was challenging to find developed economies engaging in trade with the developing countries. Globalization has therefore seen States turning out to be interdependent through the implementation of free-trade that has enhanced the opening of national boarders for the purposes of trade (Nederveen, & Dasgupta, 2009).

As a result of globalization, companies now have an easier way of setting up branches and different production sites in other nations where the market conditions remain favorable for a company. Additionally, globalization has also in this contemporary time made international trade easier by incorporating online business transactions, a factor that has made it simpler for people to transact.

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References

Andreeska, I. (2015). The Effect of Globalization to the World Poverty and Economic Inequality. Journal of Sustainable Development (1857-8519), 5(13), 5-15. 

Antonelli, C., & Fassio, C. (2016). Globalization and the Knowledge-Driven Economy. Economic Development Quarterly, 30(1), 3-14. doi:10.1177/0891242415617239

Bassens, D., & van Meeteren, M. (2015). World cities under conditions of financialized globalization. Progress In Human Geography, 39(6), 752-775. doi:10.1177/0309132514558441

Bourguignon, F. (2016). Inequality and Globalization. Foreign Affairs, 95(1), 11-15.        

Castro Pereira, J. (2015). Environmental issues and international relations, a new global (dis)order — the role of International Relations in promoting a concerted international system. Revista Brasileira De Political Internacional, 58(1), 191-209. doi:10.1590/0034-7329201500110

Francioni, B., Musso, F., & Vardiabasis, D. (2013). Key decisions and changes in internationalization strategies: The case of smaller firms. Journal of Strategic Marketing, 21(3), 240-259. doi:10.1080/0965254X.2013.790466

Gaur, A. (2015). Impact of Globalization on Trade and Employment. International Journal Of Multidisciplinary Approach & Studies, 2(5), 110-113.                     

Kilic, C. (2015). Effects of Globalization on Economic Growth: Panel Data Analysis for Developing Countries. Economic Insights – Trends & Challenges, 67(1), 1-11.

Luković, S. (2015). The Impact of Globalization on the Characteristics of European Countries’ Tax Systems. Ekonomski Anali / Economic Annals, 60(206), 117-139. doi:10.2298/EKA1506117L 

Mcnally, C. A. (2013). How Emerging Forms of Capitalism Are Changing the Global Economic Order. Asia pacific Issues, (107), 1-8.

Mehrabanfar, E. (2015). Globalization Streams in Futures Studies. Informatica Economica, 19(3), 96-106. doi:10.12948/issn14531305/19.3.2015.09

Nederveen Pieterse, J., & Dasgupta, S. (2009). Politics of Globalization. Los Angeles: SAGE Publications India Pvt., Ltd.

Popa, F. (2014). The Inference of Globalization from the Regionalization Process. Economics, Management & Financial Markets, 9(4), 486-493.

Qureshi, J. A., & Jalbani, A. A. (2014). The Puzzle of Mainstream and Deviant Globalization. IBA Business Review, 9(2), 106-118.

Schaeffer, R. K. (2009). Understanding Globalization : The Social Consequences of Political, Economic, and Environmental Change. Lanham, Md: Rowman & Littlefield Publishers

Schelhase, M. (2008). Globalization, Regionalization and Business: Conflict, Convergence and Influence. Basingstoke [England]: Palgrave Macmillan.

Seitan, S. (2014). Problems of the Impact which Globalization Has on the Macroeconomic Balance. Economic Insights – Trends & Challenges, 66(3), 49-57.           

Taylor, P. J., Hoyler, M., Pain, K., & Vinciguerra, S. (2014). Extensive and Intensive Globalizations: Explicating the Low Connectivity Puzzle Of U.S. Cities Using A City-Dyad Analysis. Journal of Urban Affairs, 36(5), 876-890. doi:10.1111/juaf.12077

Vadlamannati, K. C. (2015). Rewards of (Dis) Integration: Economic, Social, and Political Globalization and Freedom of Association and Collective Bargaining Rights of Workers in Developing Countries. Industrial & Labor Relations Review, 68(1), 3-27. doi:10.1177/0019793914555851

Verma, S., & Singh, P. (2010). Organizing and Managing in the Era of Globalization. New Delhi, India: SAGE Publications India Pvt., Ltd.

Zhang, C. (2015). The Effect of Globalization on Inflation in New Emerging Markets. Emerging Markets Finance & Trade, 51(5), 1021-1033. doi:10.1080/1540496X.2015.1039894

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Retirement Plans Research Study

Retirement Plans
Retirement Plans

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Retirement Plans

Introduction

During the past three decades the retirement plans have shifted from Direct Benefit (DB) to Defined Contribution (DC).The trend is seen in both public and private sectors. The DC plans transfer much of the decisions like the investment and savings from the employer to the employee. The DC plans have attracted the employees in terms of their flexibility and portability.

The mentioned benefits come with the responsibility to choose in a wise manner. The plans have also provided the economists to study the saving behaviors of the individuals. In developed countries like US the plans have expanded themselves to several other factors like health care and time-off arrangements. Due to their wide adoption they have been implemented in different countries including Latin American Nations, Germany, Sweden and Russia.

As the power of decision is given to the individual it is assumed that the employee will behave as an active economic agent acting to maximize its self-interest.  According to this implicit assumption it is assumed that the individual can interpret and judge the information presented as options from employees and governments. The individual is able to evaluate and balance the choices offered to him and can reach an informed decision.

In the recent years it is seemed that the people when trying to maximize the profitability make decisions which have less outcomes as expected. According to the studies the individuals have the right intention but they lack in the abilities to make necessary changes in the behavior. The philosophy of the people making such decisions has developed the rapidly increasing fields of behavioral economics and finance (Utkus et.al, 2003).

b) Purpose

This research will focus on the question of behavior adopted by the individuals while making economic decisions and the reaction of the market towards these decisions. In the research it will be analyzed that how the workers make decisions to save, manage the retirement investments and how they address their assets in retirement. The choices of making decisions have some consequences which are planned to be evaluated in this research. The research questions are as follows:

  1. Are the employees well placed and informed about the plans offered by the employers or the governments?
  2. How the DC plans are implemented in the various countries?
  3. How the employees made decisions regarding their retirement plans?

Literature Review

Defined Contribution (DC) Plans in Various Countries

Stakeholders in the employment sector have an obligation of ensuring that retired employees attain the capacity of enjoying lifelong financial security. However, the approach of how and when this can be achieved remains a wide subject of discussion. Different nations across the globe adopt different mechanisms of implementing their policies regarding saving for the future. Defined contribution (DC) is one of the most adopted approaches of enhancing the employee saving concept for future financial security.

Edwards and Webb (2015)defines Defined Contribution as a retirement plan sponsored by the employer, which puts into account several factors like employee salary history and period of services. Under this scheme, the company exercises entire control of the investment risk and management of portfolio. According to Edwards and Webb (2015), the success retirement scheme is dependent on the input of the plan, levels of saving, and performance level of investments provisions relative to particular benchmarks.

However, these metrics do not sufficiently address the plans potential in providing employees with adequate retirement income. Similarly, there are several challenges, which the responsible institutions of implementing retirement schemes face in the line of deciding the most suitable retirement plan to employ (Beshears 2012). As a result, different countries employee employ different schemes suitable for the needs of its employees.

The objective of this paper is a literature review addressing how different countries implement defined contribution policy. This study also presents a discussion on the relevance of the said retirement plans and contribution schemes and some of the areas, which needs to be addressed to meet the needs of the participants.

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 Implementation of Defined Contribution plan

Defined contribution plan is a retirement benefit policy adopted by most countries across the globe. For instance, the most adopted employer-sponsored retirement plan in the US pension system is the use of DC plans with 401(k), 403(b) plans, 457 plans among others (Brown 2016; Weisbenne; 2016). According to the 2010 annual report by then US Department of Labor, approximately 73.4 million citizens are members of the defined contribution plan of which 401(k) plan cohabits 60.5 million participants.

The 401(k) plans consists of various attractive characteristics for long-term participants, which includes deferral of tax, flexibility and portfolio control (Miller2015). The scheme provides for the delay of taxes on income and interests until the contributors start getting distributions from the scheme. Rollovers such as the transfer of 401(k) funds into an alternative competent scheme or a self-employed retirement plan can be done easily under this scheme.

This scheme caters for large participant expenses such as emergency loans and medical expenses. Furthermore, employees can be given a lump sum amount of their contributions when the saving period comes to an end.  In case an employee decides to withdraw from the scheme, the employer is provided for by the law to retain 20 % of the distribution. However, in case of rollover to another scheme, the employer is required to transfer 1005 of the contribution.

Despite having attractive features, 401(k) the idea of increasing the rate of tax when deferring tax using a 401(k) may be considered unfavorable by the employees (Adkins 2016). Besides, participants may be frustrated by restriction to utilize their shares before the end of retirement period. Similarly, the 401(k) scheme limits participants to a particular amount of annual contribution, which stops automatically, in case they are forced out of work as a result of becoming disabled.

Adkins (2014) observes that, while there have been many structural improvements on the features of 401(k) scheme, there are several problems, which needs to be addressed. Adkins argues that the problems concerning structural flaws, horizons of long investment period, high administrative costs, lackluster keeping of records should be addressed. In addition, the providers of the plan should also look into the issue of sub-Par investment plan model and options of Marginal Quality Investment as well as implications of complex tax.

According to the overview of the Canadian Pension Plan (CPP), a person or the family is entitled to partial earnings replacement after retirement, disability, or death. Regardless of place of residence, one qualifies for a pension from the country of residence. Almost every working citizen in Canada contributes to the Canada Pension Plan. However, Brown (2016) observes that, most of the employees in current generation are not saving enough towards secure retirement benefits.

Besides, in a define benefit plan, employees are only entitled to income when they die, therefore their claim for further pension assets stops when the contributor dies. Nevertheless, under some provisions, the surviving dependents like a spouse can claim the asset. Therefore, Brown recommends that the scheme be upgraded to a defined contribution plan to address this problem.

Under a defined contribution plan, participants are not promised of any retirement benefit stream. Instead, an employee contributes a certain defined amount towards building a personal fund, which develops a financial asset portfolio for generation of retirement income. The participant decides on the investment approach from a wide range of options. However, according to Kolivakis (2015), the defined contribution approach is associated with various problems.

Among the limitations of this scheme is that, in some cases, the funds offered to  workers is relatively high leading to insufficient returns. Secondly, the employees have picked unsatisfactory weightings of the portfolio particularly regarding the employer’s shares, which may turn disastrous incase the firm fails. Besides, the employees are not well vast with how large their contribution should be.

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Nonetheless, Kolivakis (2015) states that the above problems can be addressed through a well define retirement plan. He suggests that the scheme provider should ensure a reasonable allocation of expenses and portfolio. In addition, the sponsor should also ensure that the amount of contribution is adequate to realize the promised benefits (Jefferson 2011)

However, there has been a massive move-out by the private sector on the basis that there are extremely difficult to sustain in the present employment environment. The government is reluctant to chip in its support citing hidden political risks as the main reason. Compulsory pension benefits provisions

On the other hand, defined contribution is mandatory government requirement for all the citizens. For instance, the Malawian legislature enacted a pension act in 2011 and the 2010 employment amendment act to call for citizens to subscribe to retirement benefit schemes. According to Mhango (2012), the driving force behind these legislations was to ensure every employer provides a retirement plan for its employees by facilitating their membership to the national pension scheme.

In addition, the pension act also provides the minimum subscription amount that each employee should contribute. However, Coleman (2011) argues that the mandatory pension scheme is inconvenient for some people, who are forced to save at the time when it is not within their priority. Besides, participants are limited to invest in some assets, which are not of their preference.

The U.S for instance, is one of the nations that has adopted employer-sponsored retirement plan pension system with the use of DC plans with 401(k). However, some scholars argue that while there have been many structural improvements on the features of 401(k) scheme, there is still a lot to be done to make the scheme a completely inclusive. Adkins argues that the problems concerning structural flaws, horizons of long investment period, high administrative costs, lackluster keeping of records should be addressed.

An overview of the Canadian Pension Plan (CPP), states that a person or the family is entitled to partial earnings replacement after retirement, disability, or death. However, it is argued that in a define benefit plan, employees are only entitled to income when they die, therefore their claim for further pension assets stops when the contributor dies.

Besides, the limitation of this schemeis that, in some cases, the funds offered to workers are relatively high leading to insufficient returns. In some nations, the working citizens are by law required to subscribe to national pension plan. However, the disadvantage with this initiative is that, it may be inconvenient for some people, who are forced to save at the time when it is not within their priority.

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Employees understanding plans offered by the employers or the government

Employees benefits are the primary tool by which employers use to attract and retain qualified and experienced employees in an organization. Other reasons include; promotion of higher levels of morale among employees, aligning employees’ benefits with competitive offers in the market, providing promotional opportunities as employees move to other positions within the organization or when they retire and so on.

All over the world, employees’ benefits are categorized into two.  The first category is about those that are required by law which aims at providing the most essential and important needs of employees and /or their families. They include; workers compensation, social security, unemployment insurance and others.

The second category is those that the employer offers voluntarily to compensate employees. They include a wide array of programs like; Life Insurance, defined benefit Retirement plan, Health care insurance, paid jury, paid funeral leave, Unpaid family leave, Vocational pay, Holiday pay, Employee assistance programs, Dental care, Flexible compensation, Health care insurance, Paid military leave, Subsidized commuting, Flexible work place, payroll deduction IRA, Wellness programs, dependent Care Reimbursement care account, Long term Disability, Short Disability, Paid family leave, Paid personal leave, Childcare, Stock options and many others. The reasons to why most employers voluntarily offer such benefits range from a desire to be more competitive in the labor market to a genuine concern for their employee’s wellbeing.

Employees benefit plans plays an important role in the lives of employees. As such, the benefits offered by employers can be a deciding factor for a potential employee’s decision to work for a given employer. Most employees seek to know what they will get before they decide whether to accept an offer or not.

Most employees are aware of the plans offered to them by either the employer or the government. For example, most employees prefer medical insurance, paid leave and retirement plan. If you deny them, they will easily head for the door when another opportunity that promises to offer them knocks.

Most of the employees are aware of the government benefits plans. For example, every employee is aware of social security of which every employer pays at the same rate paid by their employees.

Other benefits plans provided by the government. For example, workers compensation, and unemployment insurance are a must and therefore, employers and maybe the government will ensure that all employees are aware of such benefits. The employer will take the first step by not only ensuring that employees are aware but also complying by availing them to employees. A fail to do so may impact their business negatively.

During interviews for a new job, most employers inquire more on the kind of benefits a prospective employee would prefer. Such a question would not be asked by an employer when they know that a prospective employee is not aware of such kind of benefits. 

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Although the law does not require the employer to offer a retirement program to his/her employees, if offered, it must be fully and well disclosed to employees. As such, the employees are made aware since the terms and condition of a retirement program are enforceable in some countries. More specifically, in California courts.

Most employers disclose all kind of benefits they will be offering to a new employee on the contractual letter. At this point in time, the new employee is made to know what kind of benefits her or she will be enjoying and vice versa.

All human beings fall sick at some point in their life time. Although it’s an unfortunate situation, a reasonable employee knows whether he or she like it or not, he or she will once fall sick. As such, an employee will definitely inquire from an employer if they provide a sick leave or not. Some employers will disclose such details during appointment.

Although most of the employees are made aware of the benefits plans they will or are entitled to by their respective employers, some employees who are not keen enough may to some extend not be aware of some benefits they will or are entitled to due to their ignorance.

Other employees simply do not mind some of other benefits their employers may or are offering apart from their normal salary or wages but majority of employees are aware.

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Employee choice of retirement plans

Making decision on when to retire may be one of the greatest decisions an employee makes during his lifetime. The decisions on retirement can significantly affect an individual well-being for many years. Many researches about retirement decision have explored the impact of health NIA (2007) and economic status, Gustman and Steinmeir (2002) on person decision to retire. Research shows that individuals with poor health, or whose family member or loved ones are experiencing negative health conditions, retire earlier than those in better health (McGarry 2002).

The role of the state, local government and private sectors as employers is simply to hire the right kind of employees to provide the best value services to the public or customers. It is not the responsibility of the employers to plan and prepare the employees for retirement. The truth that some individuals will make poor decisions in their retirements planning does not change this.

People still make bad decisions in their marriage and how they raise their children, but no one is suggesting that employers should intervene and make decisions for the employees.  The financial services industry has invested a lot in innovating to provide the services that their clients’ needs. There are reputable financial advisors throughout the country in case an employee requires a financial advisor. If employees require an estimate amount they want to save, there is a calculator tools on internet.

In case they want low cost, diversified investments, there various company that provide this. In case of guaranteed life time income, there multiple insurance firms that offer annuity income. If employees do not use all these services, then they really do not need them. If people want to spend the money today and forget tomorrow, who then is the employer to say their decisions are wrong.

Many employees have a low level on financial knowledge, especially when it comes to retirement planning. Sometimes the employer can provide a valuable guidance and education to its employees on the matter regarding finances and retirement. These services will not only be valuable to employees but also the employers because financial problems are major distraction from work and absenteeism. Through helping employees prepare for retirements, employers enhance smooth transition from order employees to young employees.

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Through education, employees learn financial skills that will help them plan throughout their lives. Through working with an advisor, employees are able to alter the benefits to the certain needs of themselves and their families. Education and guidance have been proven to work and increase the employee’s saving rate. When individual decide to retire, they must have a method to support themselves financially, as their previous income from work will no longer be available.

Hence the question of how to support oneself should be a great consideration in retirement decision. Commonly, income during retirement is thought to come from personal saving, pension and social security benefits. Many employees fail to consider the matter of financial well-being in retirements until retiring become imminent (EBRI 2008).

Creating decision environments that enables people to make the best choices possible is the objective of careful choice architecture which can be used to “nudge” (Thaler and Sustein 2008) retirees toward retirement decisions that are beneficial to them. In such a case, behavioral decision making research can guide the ways policymaker and retirement advisors communicate with potential retirees.

The findings from behavioral decision making research also innovate new ways to approach matters surrounding the retirement’s decision. For instance Featherstonehaugh and Ross (1999) argued that providing retirees with the option to receive a one time, lump sum benefit could encourage delayed retirement. After the survey research, majority of respondent claimed that one-time, lump-sum payment provided a greater incentive to delay the retirement, this compared to Standard Social Security annuity increase.

When deciding when to retire, employees compare what their lives would be like under different scenarios. There also some trade-offs that employees may make when thinking about retirement; more comfortable life now, less money later, working longer now, a good retirements benefits later. An important prerequisite of the retirement decision is the accuracy prediction of one’s future emotions.

There are ways individuals use to help them make accurate predictions of their future well-beings, but sometimes cognitive biases lead to erroneous predictions (Hsee and Hastie 2006). Often errors can be caused by the impact bias (Wilson and Gilbert 2003), it describe people tendency to overestimate the duration and intensity of their emotions in reaction to negative and positive future events.

Understanding the role that affective forecasting can contribute in the retirement decision may be important for recognizing why individuals retire when they do. The same way patients mentally simulate the experience of receiving a mammogram before deciding to make an appointment, just the same employees mentally simulate how retirement would be like before even deciding to retire.

Gilbert and Wilson (2007) discuss four characteristic of affective forecasts and explained why those characteristic mismatch between mental simulations and actual experiences. They argued that the mental simulations are unrepresentative, essentialized, abbreviated, and decontextualized. Unrepresentative, means they are formed from memories of past events that does not display how future events will unfold.

People tend to remember the best and worst of an event, as well as the final part of it, neglecting the instances that were simply average (Kahneman 1997). Therefore when thinking about retirement individuals may form mental simulations of future work experiences using their best and worst work related memories.

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Mental simulations are also essentialized, which means that they only hold the main features of the events but not minor details. This may involve thinking about aspects of one’s job, such as feeling undervalued by a boss, while forgetting details such as interacting with coworkers. Mental simulations are also abbreviated, meaning they are shorter than the actual event being simulated. When thinking how retirement would be, an employee is likely to consider only the early stages of retirement.

Decontextualized, means that the contextual factors present during mental simulation of the future may not be present at the time the event actually occurs. For example when an employee decides to retire, they are earning an income that will not exist once theyretire. At this moment the individuals are not feeling the strain of limited income, and the situation in which they are simulating retirement will not include negative feelings associated with inadequate funds. All of the mentioned features of mental simulations may lead to inaccurate affective forecasts of retirements.

Workers may prefer to retire early both because they think working longer will be worse than it is and life after retirement would be better. Everyday throughout the world employees are preparing or finishing planning their retirement plan. There much to look into when organizing a plan so that you can meets your retirement goals. Most employees focus on what stock and bonds they would wish to invest in and also about 401k. 

Employees find it difficult to determine which kind of stocks they would want to invest in. There are many different stocks in the stock market, therefore making it difficult for people to choose the best. Another problem would be kind of bonds they would also like to invest in. Investing in both stock and bonds does not make the individuals rich but use their money wisely as they near their retirement age.

Old age most of the time brings medical problems and health expenses. Without your own saving, living your younger years in comfort while also minding to cover your medical expenses may be a large burden to bear. To prevent any unforeseen sickness from eating on your retirement savings, you may consider obtaining insurance, such as medical and long term care insurance.

This will finance any health care that may arise. Employees considering retirement could be asked to write down the events that go down in a normal working day. This activity will help the employee paint accurate and complete picture of how it would be to worker much longer and without missing the minor details that somehow make their work more enjoyable.

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Methods

This study aims at assessing behavior adopted by the individuals while making economic decisions and the reaction of the market towards these decisions. Quantitative analysis was used to assess the correlation between dependent as well as independent variables. Understanding behavior adopted by the individuals while making economic decisions is vital when it comes to addressing the research questions of this study.

The study used quantitative technique to assess the gathered information. Different behavior adopted by the individuals while making economic decisions can be estimated by data. Information associated with behavior adopted by the individuals while making economic decisions can provide a detailed understanding regarding how DC plans implemented by various nations; decisions workers make about their retirement plans; and if employees are well placed and informed about the plans offered by the employers or the governments.

Data collection techniques

The purpose of this study is tobehavior adopted by the individuals while making economic decisions and the reaction of the market towards these decisions. The study also highlights on the how workers make decisions to save, manage the retirement investments and how they address their assets in retirement.

Data description

Much as plan-level information is an effective technique to assess the behavior adopted by the individuals while making economic decisions, a number of them are ineffective when it comes to analyzing the effect of how the workers make decisions to save, manage the retirement investments and how they address their assets in retirement. As such, survey data can address these challenges, such that it involves defined contribution plans with or without investment decisions.

This study embraces first wave from HRS, which is a household survey that was initiated in 1992. Moreover, detailed demographic information of the participants, supplementary issues, the spouse’s pension eligibility and benefits from present or previous employer or other sources of pension integrated in the questionnaire. Owing to the fact that survey technique is of elderly population, the sample does not represent pen-age group, particularly, the sample of elderly group and hence assessing this data cannot adequately depict behavior adopted by the individuals while making economic decisions.

Some characteristics of contribution degree must be highlighted. For instance, various employers offering plans require a default level of contribution rate for workers, in other words, individuals who choose to use DC plans must automaticallycontribute the default rate of their wages. However, without such data, it becomes challenging to evaluate the actual rate of contribution for individuals desiring to make contribution between 0 and default rate.

Again, employer-funded DC plans impose a maximum level of worker’s contribution. For that reason, if the individual contributes maximum rate, the desired contribution is likely to increase in comparison to the reported rate of contribution. The employer also offers certain percentage to workers’ contribution, however, to a certain proportion of salary.

This is widely known as match threshold. A number of people save in the retirement plans in terms of the amount of match threshold, which is the regarded as initial rate of rate. Nonetheless, HRS does integrate these questions, which can address the default level of contribution, match threshold and maximum amount

Regardless of these limitations imposed on individuals, they have the right to save, manage the retirement investments and how they address their assets in retirement. Firstly, individuals can chose to contribute positive rates or any amount between default or maximum rate. Moreover, individuals can contribute a higher figure that what employer or government match threshold.

This research concentrates on the aspect of workers position in terms of making informed choices regarding plans offered by the employers or the governments; implementation of DC plans in different nations; and the way in which employees make decisions regarding their retirement plans.

The decision to save, manage the retirement investments and how they address their assets in retirement used in this study is reported data by individuals in HRS. This is the aspect that differentiates limited and unlimited regulation over retirement investments. The study also integrates dummy variable showing that individuals are limited in terms of using their contributions of contribution from governments or employers. In many instance, this is common in profit-sharing and firm stock acquirement plans, whereby contributions from employers or governments are limited in firm stock and workers’ contribution in some circumstances.

When HRS was introduced it has a total of 2277 non-retired people with at least one retirement plan, of these 20.9% individuals indicated that they used DC plans.

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Analysis

The researcher used individuals with DC plans as well as those who provided their views to investment issues, which decreases the sample size to 476 individuals.  Table 1 demonstrates a summary of individuals with DC plans, sub-sample of individuals with positive contributions to personal counts and people with zero contributions accordingly.

On average, these individuals contribute approximately 5.99% of their pay o DC plans, therefore, they contribute roughly 1.84 thousand and how they address their assets in retirement, it is accessible to 60% of individuals and about 16% of them have stock acquirement alternative or profit-sharing, implicitly workers have do  not have power over employers’ contribution to retirement plan. There were about 47% women while 80% of the sample sizes were married. Furthermore, approximately 27% of the individuals have direct benefit plans and also DC plans.

In comparison to the subsample of individuals in this study who had 0 contribution, subsample with a positive demonstrated the capacity to control their savings, manage the retirement investments and how they address their assets in retirement decision, in other words roughly 71% of the subsample have the ability to make decisions about the retirement plans while 28% have such ability in the sub-sample with 0 contribution.

All individual who had access to positive contributions were less limited in the firm stocks, thus, they had additional income with less contribution from employers that is described based on the ratio contribution from employer  to the worker’s pay.

Figure 1 demonstrates the distribution of levels of contribution in defined contribution plans and decision to invest and with no decision individually. In fact, individuals with the capacity to direct investment make more savings, manage the retirement investments and how they address their assets in retirement in DC plans, than those with no decisions to save or manage their retirement investment. However, there is a significant reduction among individuals that contribute 0 amounts and a considerable rise in those that save more than 15 % of their wages. The graph below shows that investment decision encourages the amount to save in defined contribution plans.

Results

This part provides results about how workers make decisions to save, manage the retirement investments and how they address their assets in retirement influence their level of contribution in defined contribution plans. There were about 476 individuals in the DC with roughly 22 different plans with 498 observations. Average contribution is 5.99% of their pay and standard deviation of 7.82. The mean of individual’s contribution is 8.9 while 123 individuals indicated 0 contributions.

According to the basic regression, there is asset decisions financial information, and demographic characteristics of participants. The contribution of employer in the defined contribution plans is demonstrated in Column 2, and column 3 shows other plans. Investment coefficient is not only positive but also significant, demonstrating that individuals with ability to select an investment and not limited by the design of retirement plan contribute about 3.25% more of their pay in DC plan compared to other respondents.

On the other hand, the coefficient is limited decisions is negative as well as significant, providing 3.53% less of workers contribution limited by firm stock of workers as well as employer’s contribution, indicating that individuals would not invest in the retirement plans  if they do not completely  self-direct their retirement plans.

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For instance, if contribution from employer is made in firm stock in defined contribution plans, such a system encourages workers to maintain risky portfolios. For that reason, workers with complete authority over their contributions, have to alternatives to balance such risks. On one hand is investing in less risky assets in the defined contribution plans and on the other hand is going for other risky retirement plans like direct benefit. Nevertheless, for workers with partial or no power over their contribution, the effective strategy is reducing DC plan contribution while selecting risk free retirement plans.

Interestingly, to speculate the technique of an individual decision convinces respondents to pay more to their retirement plans. People have conflicting expectations. Variation in retirement plans can tip internal balance while increasing the amount of saving. Such estimates demonstrate that with an investment decision increase salary percentage as such, the effect of employer rate- the initial rate of contribution.

It can be assumed that selecting some or even all investment decisions makes individuals to maximize the contribution level, because asset decisions partially determine the return. This contrasts passive behaviors in retirement plans, particularly, where employers are in charge of managing investment. This formulation suggests that influence of asset similar across genders. With a gender variation, significant impact of asset decision for men is about 4.01 and 0.76 as the standard error while the impact for female is 1.89 and 1.11 standard error, though not correlated to 95% confidence interval.

This shows that women investment decision is determined by investment choices to save in defined contribution plans and they are careful in risky ventures. This is guided by two reasons, for instance women have higher expectations to save maybe they have a longer life expectancy compared to men. Additionally, decision unit is household and in most scenarios women secondary income earners and their revenue supplement their spouses. In such conditions, women reported revenues are considerably lower compared to household revenue and their behavior demonstrates their level of household earnings.

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Conclusion

The paper has discussed behavior adopted by the individuals while making economic decisions and the reaction of the market towards these decisions. there are different extension that emerge. Firstly, individuals with DC plans cannot adequately control the exact amount of contribution from their salaries. Second the study offers econometric impact of investment decision , however, it does not examine the  decision variable will be a constraint on the budget of the individuals.

Bibliography

Adkins, T. 2014. 6 Problems With 401k Plans Retrevied on April 2, 2016 from http://www.investopedia.com/articles/retirement/11/6-problems-with-401k-plans.asp

Beshears, J. 2011. Defined Contribution Savings Plans in the Public Sector: Lessons from Behavioral Economics. Stanford University and NBER

Brown, R 2016.The Pros and Cons of an Expanded Canada Pension Plan. Retrieved on April 2, 2016 from http://www.huffingtonpost.ca/rob-brown/expanded-canada-pension-plan_b_7571148.htm l

Brown,J.&  Weisbenne, S. 2013. Building Retirement Security through Defined Contribution Plans on April 2, 2016 from http://www.usretirementfacts.com/wpcontent/uploads/file/BrownWeisbenner_FullPaper.pdf

Coleman, A. 2011. Mandatory retirement income schemes, saving incentives, and KiwiSaver. Retrieved on April 2, 2016 from http://www.treasury.govt.nz/publications/reviewsconsultation/savingsworkinggroup/pdfs/ swg-b-m-mris-24dec10.pdf

Edwards, P. & Webb, C. 2015.Defined Contribution Plan Success Factors Framework for Plans with an Objective of Retirement Income Adequacy. Defined Contribution Institutional Investment Association

Jefferson,R. 2011. Rethinking the Risk of Defined Contribution Plans.

Kolivakis, L. 2015. Advantages and Disadvantages Of Defined Contribution Pensions. Bond economics. Retrieved on April 2, 2016 form http://www.bondeconomics.com/2015/12/advantages-and-disadvantages-of-defined.html

Mhango, M. 2012. Pension regulation in Malawi: Defined benefit fund or defined contribution Fund? Pensions (17, 270–282)

Miller, M. 2015. Pushing Aside 401(k)’s for Mandatory Savings Plans. New York Times the Catholic University of America. Columbus School of Law

Martocchio, J.J 2012. Strategic Compensation: A Human Resource Management Approach, 7th Edition.

Employees Benefit Research Institute (ENBRI). 2006.”How Many Retire Earlier than Planned? Why?” Fast Facts from EBRI No. 21.

Fetherstonhaugh, David, and Lee Ross.199 “Framing Effects and income Flow Preferences in Decisions about Social Security.”In Bahavioural Dimensions of Retirements Economics.

Gilbert, Daniel T, and Timothy D. Wilson. 2007. “Prospection: Experiencing the Future.”

Hsee, Christopher K, and Reid Hastie. 2006. “Decision and Experience: Why Don’t we Choose what makes Us Happy?”

McGarry , Kathleen. 2002. “ Health and Retirement: Do Changes in Health affect Retirements Expectation?”

Nuttman-Shwartz, Orit. 2007. “Is There Life Without Work?”

Theler, Richard H., and Cass R. Sunstein. 2008. Nudge: Improving Decisions about Health, Wealth, and Happiness.

401(K) PLANS. Retrieved on April 2, 2016 from                                                                                         http://www.referenceforbusiness.com/small/Eq-Inc/401-K-Plans.html

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The next superpower of manufacturing economy

The next superpower of manufacturing economy
The next superpower of manufacturing economy

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The next superpower of manufacturing economy

Over a period of many years, China has held its position as the world superpower of the manufacturing in the general merchandise sector. This is due to the rapid and dynamic growth in its economy, building focus in the world demand for manufacturing products and services.  The country’s population, political stability and consumer interest and pattern can be explain its position as the world superpower of manufacturing in general merchandize. The country is however experiencing stiff competition from India, one of the world’s rapidly growing country economies.

India has in the past twenty years rapidly increased its share in the manufacturing industry. The country has recorded positive improvement in its gross domestic product (GDP). India just like China records one of the highest populations in the world (Ghemawat & Hout, 2016, p. 86). This offers a vast market for consumers and traders in the region. The country has taken advantage of its growing population to invest in merchandise market development. This has posed a significant threat to China’s position as the world superpower in the manufacturing industry.

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Subsequently, it can be argued that India is rapidly rising into the next superpower after China through their shift in development of technology (Gupta & Wang, 2009, p.25). The country is facing a drastic change in the industrial revolution through adopting a modern forms of technology applied in the manufacturing industry. This has increased their overall business performance.

India has tightened its grip in both the private and public sector, embraced trade liberalization and increased their involvement in foreign direct investment (Xingxing 2015, p. 685). This has primarily improved the manufacturing industry of India, making it a viable candidate as the next superpower after China.

Furthermore, the rapid expansion of information technology in India has accounted for the growth of commerce, business services, and banking. Moreover, India has gained an international reputation as an IT enabled center of the world. This has increased its global position in the e-commerce sector, improving its strength in the manufacturing industry globally.

In addition, India is experiencing growing investment rate, with an average of thirty-two percent compared to that of China at thirty-five percent (Mahtaney, 2007, p. 2455). This rate is set to project in the next year and India could surpass China’s the rate, making it the world superpower in the manufacturing industry.

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China is facing a significant challenge in their population, as a large percentage of the population is set to experience old age in the future years. This is bound to affect its general labor output, unlike that of India which is strengthening. India has a demographic surplus of younger generation increasing their task force in the manufacturing sector (Takeuchi, Chen & Lam, 2009, 86). The growing generation is also experiencing the best form of education, expanding their expertise in the sector. Based on these projections, it is predicted that India may overtake China as the current superpower in the manufacturing industry.

Reference List

Ghemawat, P, & Hout, T 2016, ‘Can China’s Companies Conquer the World?‘, Foreign Affairs, 95, 2, pp. 86-98, Academic Search Premier, EBSCOhost, viewed 30 March 2016./

Gupta, A, & Wang, H 2009, Getting China And India Right: Strategies For Leveraging The World’s Fastest-Growing Economies For Global Advantage, San Francisco: Jossey-Bass, eBook Collection (EBSCOhost), EBSCOhost

Mahtaney, P 2007, India, China, And Globalization: The Emerging Superpowers And The Future Of Economic Development, Basingstoke [England]: Palgrave Macmillan, eBook Collection (EBSCOhost), EBSCOhost

Takeuchi, N, Chen, Z, & Lam, W 2009, ‘Coping with an emerging market competition through strategy-human resource alignment: a case study evidence from five leading Japanese manufacturers in the People’s Republic of China’, International Journal of Human Resource Management, vol. 20, no. 12, pp. 2454-2470. Available from: 10.1080/09585190903363763.

Xingxing, L 2015, ‘An Economic Analysis Of Regulatory Overlap And Regulatory Competition: The Experience Of Interagency Regulatory Competition In China’s Regulation Of Inbound Foreign Investment‘, Administrative Law Review, 67, 4, pp. 685-750, Business Source Complete, EBSCOhost,

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Making Economic Decisions about Retirement Plans

Making Economic Decisions
Making Economic Decisions

Making Economic Decisions about Retirement Plans

Assessing How the Market affects Economic Decisions about Retirement Plans

A number of aspects have emerged in the last ten years regarding the behaviors of employee in making retirement decisions. This dissertation investigates various insights from previous studies about how employees make investment, saving and manage their retirement plans. The purpose of this study understands the behavior adopted by the individuals while making economic decisions and the reaction of the market towards these decisions.

This study aims at assessing behavior adopted by the individuals while making economic decisions and the reaction of the market towards these decisions. Quantitative analysis was used to assess the correlation between dependent as well as independent variables (Christensen, Diebold and Rudebusch, 2011). Understanding behavior adopted by the individuals while making economic decisions is vital when it comes to addressing the research questions of this study.

This study uses empirical approach to report on the findings of different simulation tests performed on the Model Plan in the Model Economy (Diebold, Rudebusch & Aruoba 2006). The Model economy and Model plan are considerably streamlined; nevertheless, they demonstrate the actual behavior adopted by the individuals while making economic decisions. To assess behavior adopted by the individuals while making economic decisions simple model of pension plans is created (Diebold, Rudebusch & Aruoba, 2006).

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The purpose of this study is to assess individual behaviors while making economic decisions and the reaction of the market towards these decisions. The study also highlights on the how workers make decisions to save, manage the retirement investments and how they address their assets in retirement. The study used quantitative technique to assess the gathered information (Perlin, 2007).

Different behavior adopted by the individuals while making economic decisions can be estimated by data. Information associated with behavior adopted by the individuals while making economic decisions can provide a detailed understanding regarding how DC plans are implemented by various nations; decisions workers make about their retirement plans; and if employees are well placed and informed about the plans offered by the employers or the governments

Much as plan-level information is an effective technique to assess the behavior adopted by the individuals while making economic decisions, a number of them are ineffective when it comes to analyzing the effect of how the workers make decisions to save, manage the retirement investments and how they address their assets in retirement (Gai and Vause,  2004). As such, survey data can address these challenges, such that it involves defined contribution plans with or without investment decisions.

This study embraces first wave from HRS, which is a household survey that was initiated in 1992. Moreover, detailed demographic information of the participants, supplementary issues, the spouse’s pension eligibility and benefits from present or previous employer or other sources of pension integrated in the questionnaire. Owing to the fact that survey technique is of elderly population, the sample does not represent pen-age group, particularly, the sample of elderly group and hence assessing this data cannot adequately depict behavior adopted by the individuals while making economic decisions.

Data values with handful plan features will be suitable for empirical research in terms of contribution rates. Again, the study presents econometric effects of investment decisions, however it fails to assess the way in which decision feature will be integrated in the employee budget. Optimization model containing budget set design will be appropriate to investigate the impacts of pension to the next level.

In short the central debate in the paper was the behavior adopted by the individuals while making economic decisions and the reaction of the market towards these decisions, were divergent extensions would emerge. Individuals with DC plans cannot adequately control the exact amount of contribution from their salaries. Lastly, the study offers econometric impact of investment decision, however, it does not examine the decision variable will be a constraint on the budget of the individuals.

References

Ito, Takatoshi, 2002. Is Foreign Exchange Intervention Effective?: The Japanese Experiences in the 1990s. NBER Working Paper No. w8914. Available at SSRN: http://ssrn.com/abstract=309603

Jefferson, R. 2011. Rethinking the Risk of Defined Contribution Plans.

Kaminsky, L. R. 1997.”Leading Indicators of Currency Crises,” IMF Working Papers 97/79, International Monetary Fund.

Kolivakis, L. 2015. Advantages and Disadvantages of Defined Contribution Pensions. Bond economics. Retrieved on April 2, 2016 form http://www.bondeconomics.com/2015/12/advantages-and-disadvantages-of-defined.html

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