The European Central Bank (ECB) was established following the decision of a number of European countries, including Germany, France and Italy, to adopt a common European currency.
Individual central banks had to relinquish their powers to manage money supply and set domestic interest rate levels. A few countries, such as the UK, opted out although in time that may well change.
There are clear advantages and disadvantages of having a common European currency. Cross-border transaction costs are reduced in part because there are no foreign exchange related charges for business conducted between members. Risks arising from companies having foreign exchange positions are also reduced. Business travelers and tourists in Europe no longer have to carry cash in a dozen different currencies.
The disadvantages stem from a lack of labor mobility and variations in national fiscal policies. In a unified economy such as the US workers will react to a downturn in one part of the country by moving to a part of the countr y with better economic prospects. This is much harder to accomplish in a continent with many different languages and where there is a limited tradition of cross-border labor movement.
National central banks’ ability to use monetary policy to influence economic growth, the level of unemployment and inflation have been largely subjugated to the ECB. They cannot cut interest rates, for example, to give a boost to a local economy in recession or hike rates to choke off inflation. The extent to which this lack of flexibility will result in future problems remains to be seen.
The ECB has specific quantitative inflation targets to meet but also has the power to take action against countries that fail to keep their government’s financing deficit as a percentage of GDP below a predetermined level.
Posts Tagged ‘loan’
The European Central Bank
Saturday, October 3rd, 2009Profits and losses
Saturday, August 29th, 2009Firms earn a profit when the revenues from the goods and services that they supply exceed the opportunity cost of the resources used to make them. Consumers will not buy goods and services unless they value them at least as much as their purchase price. For example, Susan would not be willing to pay $40 for a pair of jeans unless she valued them by at least that amount. At the same time, the seller’s opportunity cost of supplying a good will reflect the value consumers place on other goods that could have been produced with those same resources. This is true precisely because the seller has to bid those resources away from other producers wanting to use them.
Think about what it means when, for example, a firm is able to produce jeans at a cost of $30 per pair and sell them for $40, thereby reaping a profit of $10 per pair. The $30 opportunity cost of the jeans indicates that the resources used to produce the jeans could have been used to produce other items worth $30 to consumers (perhaps a denim backpack). In turn, the profit indicates that consumers value the jeans more than other goods that might have been produced with the resources used to supply the jeans.
The willingness of consumers to pay a price greater than a good’s opportunity cost indicates that they value the good more than other things that could have been produced with the same resources. Viewed from this perspective, profit is a reward earned by entrepreneurs who use resources to produce goods consumers value more highly than the other goods those resources could have produced. In essence, this profit is a signal that an entre- preneur has increased the value of the resources under his or her control.
Business decision makers will seek to undertake production of goods and services that will generate profit. However, things do ot always turn out as expected. Sometimes business firms are unable to cover their costs. ossw occur when the revenue derived from sales is insufficient to cover the opportunity cost of the resources used to produce a good or service. Losses indicate that the firm has reduced the value of the resources it has used. In other words, consumers would have been better off if those resources had been used to produce something else. In a market economy, losses will eventually cause firms to go out of business, and the resources they previously utilized will be directed toward other things valued more highly.
Profits and losses play a very important role in a market economy. They determine which products (and firms) will expand and survive, and which will contract and be driven from the market. Clearly, there is a positive side to business failures. As our preceding discussion highlights, losses and business failures free up resources being used unwisely so they can be put to a use producing other things that people value more highly.