Essay

This Essay is covering the stuff which was learned on GBE paper. Essay has explored the impact of a recession on “Fonterra” the biggest company in New Zealand which is producing dairy products. Recession is generally slowdown in economic activity over a period of time. The company controls around 30 per cent of the world’s dairy exports. It is co-operative owned by over 10,500 farmers. Fonterra was established in October 2001. Firstly, one of the biggest impacts of recession for Fonterra in terms of global market is decrease in import for dairy products. It means that free trade between countries decrease in quantity, what’s cores change in economic stability level for the country. This factor affects the unemployment rate in country. It became higher because company cannot afford to contain the full employment rate. It means that Free Trade which is highly important for countries such as New Zealand can decrease economy down. New Zealand will have less income of trading dairy products to other countries like United States of America which is one of the most profitable industries in New Zealand. Secondly, the World Milk price was decrease dramatically. (FlEXNEWS., 2009) New Zealand government wiped $2 billion off the economy in 2008. For New Zealand’s farmers prices reduced from $6.60 a kg of milk solids to $6. In 2009 this prices was $5.10 of milk solids.(TVNZ., 2009) In 2010 price is still decreasing to $4.55 a kg of milk solids. This situation is bad for local New Zealand farmers because they get less income. However, is good for Fonterra because company pay less money to farmers and get higher price for overseas customers. New Zealand produces 13 per cent of dairy product for US dairy industry.(NZPA., 2010) This means that US has a big impact for New Zealand economy, if they decide to cut this percentage because of recession New Zealand can get stuck with Globalization in county. If the Economy won’t growth, county won’t get full benefits from trade. Full benefits when country which involved in trade get needed resources and capital which is needed to develop economy. Basically, Fonterra is one of the biggest companies in New Zealand which produce dairy products one of the main recourse which can be use to trade. If the world milk market is not stable company probably can get loss. Consequently, this loss for New Zealand wiped big amount of money for government which is used to develop economy in county. In economic terms it means that aggregate supply shifts to the right because decrease in a price level. Prices became higher but quantity decrease. Of course, other countries do not want to buy products with higher price. Company is needed to cut jobs which increase unemployment in the country.(Stuff.co.nz, 2007) Big gap of unemployment can increase the crime in a country because people cannot afford to buy luxury and normal goods. Also, unemployment means decrease in economic output (GDP) Gross Domestic Product. GDP – is a measure of the total income and expenditures of an economy. (Gans, 2008) GDP is divided by two categories Nominal and Real. Nominal GDP is values the production of goods and services at current prices. Real GDP is values the production of goods and services at constant prices. In addition, high unemployment drains government resources (money). To stabilise the economy in recession time government use expansionary monetary policy. This policy use to keep the inflation between 1 to 3 per cent. In the recession government is need to use expansionary monetary policy. When OCR (Official Cash Rate) is decreasing, interest rates decreasing but consumption, investment, inflation and net export are increase. (Gans, 2008) This affect aggregate demand will shifts to the right. Monetary policy only used when inflation is below 1 per cent. If the inflation above 3 per cent government is need to use contractionary monetary policy, which is increasing the OCR. Inflation – is an increase in the overall level of process. In New Zealand we are using CPI (Consumer Price Index) to calculate inflation. CPI- is a measure of the overall cost of the goods and services bought by a typical consumer. (Gans, 2008) Also, CPI used to see the changes in a cost of living over time. Come back to Fonterra is important to know that if company or world dairy industry has weakened or in the recession time, it will affect New Zealand economy and course change in GDP, CPI and OCR. However, a trade between countries is only possible if the ideology of a country allow the trade. Ideology-is a coherent set of ideas. (Synott, 2009) It is taking about how things are and how they should be. Ideology is a very important tool in politics, because people have different ideas about how society and the economic should be organized. In New Zealand national party is in power, they support neo-liberalization which support Free Trade between countries and open the trade barriers. Neo-liberalism is an approach to economic and social policy based on neoclassical theories of economics that minimise the role of the state and maximise the private business sector. (Synott, 2009) Therefore, New Zealand can do trade between other countries without a strong barriers. However, there are some countries where government supports Communism, for example China. China has communism rules in the country but they can do trade to other country. Actually, Communism is the ideology which is telling us that people get the same power and all the resources should be divided between everyone. The country that gets Communism cannot be involved in a trade, because Protectionism is supported by Communism. Protectionism (Fair Trade) is prohibited any kinds of free trade, basically is the opposite of Free Trade. Ideology has a big influence on business and government decision making. Moreover, the World Trade Organization has impact on New Zealand and many other countries. WTO is an organization that intends to supervise and liberalise international trade. It is about 10,000 multinational corporations around the world which helps to reach the agreement between countries. There are other organizations which are powerful around the world. This power called sovereignty of a country. For example, a big company like “NIKE” has they headquarter in US. However, the all manufactories located in China, South Korea, Singapore and e.g. All the profit of selling products “NIKE” going to US and manufactures country do not have “power” to say that ‘NIKE” is our product. “NIKE” just pays wages to the employers and all profit goes to headquarter. Therefore, US have a big power in a world trade and many countries want to trading with them but US has a barriers to entry the US market. (NZPA., 2010)They have high standards of quality. Unfortunately, New Zealand does not have such a big organization like in US. Therefore, the sovereignty is low, because all profit of all big multinational organization goes back to country where has been created. To sum up, the economical and social science concepts are highly important if you get involved in trade. Recession has impact to all countries which are trading. The economy level goes down, unemployment rate increases and government spending are also increases to stabilize economic stability. The company like Fonterra is important tool for government because this company pays a big tax to New Zealand and if the company gets loss it is also wiped out government wealth. Ideological view is one of the biggest influences in trade and in times of recession, those ideas are highly important to get out of recession faster and without any serious holes in economy of the country. Moreover, an organization like WTO which is supervising and liberalise international trade has impact on New Zealand trade. Trade of dairy products for New Zealand is extremely important. Especially, with big counties like US or China, because they are having lots of power and in a good relation with them country like New Zealand can be safe economically, as a result on demand for goods and services. Reference List FlEXNEWS. (2009). World Milk Prices Continue to Decline- NZ's Fonterra. Retrieved 6, 2010, from http://www.flex-news-food.com/console/PageViewer.aspx'page=21264 Gans, J., King,S., Stonecash,R., Mankiw,G.,. (2008). Principles of Economic. Australia: Cengage Learning. NZPA. (2010). Fonterra refects US free trade fears. Retrieved 6, 2010, from http://www.nbr.co.nz/article/fonterra-rejects-us-free-trade-fears-120468 Stuff.co.nz. (2007, 13/9/2007). Fonterra jods go despite record prices. Retrieved 6, 2010, from http://www.stuff.co.nz/business/farming/40882 Synott, J. (2009). Global and international studies: An Introduction. Australia: Cengage Learning. TVNZ. (2009). Fonterra forecast payout unchange at $5.10. Retrieved 6, 2010, from http://tvnz.co.nz/business-news/fonterra-forecast-payout-unchanged-5-10-2580482