Apple- Economies and Diseconomies of Scale

Economies of Scale are the cost advantages exploited by expanding the scale of production in the long run. The effect of this is to reduce long run average costs over a range of output.

A company can benefit from both internal and external economies of scale. Internal Economies of Scale are the productivity benefits that the individual firm experiences as it grows in size. External Economies of Scale are the productivity benefits that the whole industry (all firms) experience as it grows in size.

The Types of Economies of scale that Apple could face are: Technical Economies of Scale; Due to the fact that Apple produces so many devices they can maximise the amount of goods produced to maximise their economies of scale and lower average cost per unit.

Apple’s size and the fact that most of Apples products e.g. iphone, ipad share the same components the company can buy parts such as processing chips and display screens at lower prices due to buying in bulk benefiting from Marketing Economies of scale. Any company that wants to make a tablet computer that matches the ipad’s low starting price of $499 would have to endure higher production costs. Due to this Apple has 70% of the tablet computer market.

Furthermore due to the large amount of products being produced by Apple the research and development undertaken by the company is essentially free, another example of technical economies of scale.

Another example of Marketing Economies of Scale that Apple benefits from is the large amount of advertising the company has; also due to the size of the firm advertising one product essentially advertises all other products produced by apple meaning that the cost of advertising is much lower than it would be for a smaller firm.

Apple can also benefit from financial economies of scale as new competition enters the market Apple can use their economies of scale to lower the prices of their products that competition cannot match.

The Diseconomies of scale that Apple may suffer from could be the curse of the company getting to big. Apple worries that in the absence of Steve Jobs they may no longer benefit from Managerial economies of scale and may struggle to maintain the innovation and excellence that has propelled it to such a position.

External diseconomies of scale out of the control of Apple are also an issue. As apple gets bigger and bigger there are sure to be growing calls for its power to be curtailed, For example there has been rumours of a Microsoft- style anti-trust investigation which would examine Apple’s policy of requiring software developers who make apps for its products to use apples own programming tools. More recently there have been stories about Publishers confronting Apple over their efforts to control the price of e-books.

Financial Crisis and recent policy measures in Hungary

At the end of 2007 most emerging economies had either high external debt or high government debt, Hungary was the only economy which had both, this left the country in a very vulnerable position financially. As the country faced the financial crisis of 2008 Hungary was the first country to ask the IMF for assistance.

There are many factors which help to explain why the public debt in Hungary was so high. Firstly the past fiscal behaviour of the country has been that Hungarian banks borrowed heavily internationally before 2008 and offered loans denominated in foreign currency to both households and firms. Borrowing money in a foreign currency meant that Hungary was left with large amounts of foreign debt on the balance sheets of both households and firms. This debt was largely in Swiss Francs as well as Euros to a lesser extent. By November 2011 the Hungarian currency had depreciated by 26% against the Euro and by 66% against the Swiss Franc.

The Hungarian government addressed the problem of the foreign currency loans by passing legislation in September 2011 that changed the terms of the foreign currency loan contracts by allowing a one-off payment of the loans to be paid at a discounted exchange rate, these costs were paid entirely by the banks. In December 2011 the government and banks decided to share the costs of any further contracts to ease the problem of  future debts.

Fiscal situation in Hungary

During the worldwide economic crisis of 2008 Hungary was one of the most financially vulnerable countries in europe; this was due to an expansive fiscal policy as well as a large build up of debt prior to the economic downturn. Since 2005 GDP per capita has been growing at a slow rate compared with rapid growth between 1995-2004.

In order to solve this problem the main aim of the Hungarian policymakers is to increase numbers in employment as Hungary faces a low employment-population ratio. Higher employment would increase income for the given level of labour productivity as well as raise the tax base level and reduce government spending on benefits and pensions.

Hungary’s tax wedge, which is defined as the difference between the total labour cost to the firm and the take-home pay of the worker, was the second highest in the EU after Belgium from 2000-2008. The larger the tax wedge the lower the amount of income the worker takes home. This lower amount of take-home wages reduced the supply of labour due to little incentive to find work. Furthermore businesses would often pay their workers cash in hand along with their reported wages to avoid the tax that would have to be paid. Therefore in 2011 the Hungarian government decreased the tax wedge by putting in place a 16% flat income tax rate. This increase in wages had a positive effect on the labour supply in Hungary and led to an increase in the amount of people in employment or actively seeking work.

Between 2002 and 2010 in Hungary government deficit has either exceeded or been close to 5% of GDP. Also the fiscal policy of Hungary is characterized by a strong election cycle; this policy often led to rapid debt accumulation followed by a large fiscal correction before starting the cycle again. This indicates a weakness in the hungarian fiscal institutions. To try to solve this problem Hungary set up an independent fiscal council in 2008 where its staff forecast and monitor the fiscal expenditure of the country.

Hungary Balance of Trade

In September of 2011 Hungary reported a trade surplus equivalent to 741 million Euros. Hungary’s main exports are machinery and transport equipment. As well as Consumer goods, agricultural products, chemicals, apparel, textiles, iron and steel and wine. The main Imports of Hungary are machinery and equipment, fuels and electricity. The European Union is by far Hungary’s largest trading partner accounting for about 79% of exports and 70% of imports.

Unemployment in Hungary

From February to March 2012 the Unemployment rate in Hungary was reportedly 11.1% rising from 10.7% in the last quarter although seeing a slight drop in unemployment rate of the same quarter the previous year (February 2011 figures were 11.3%). Reported by the central statistics office they claim that the number of people employed in Hungary stands at 3,816,000 a figure that is down by 34,66 from data collected October-December 2011 although this employment figure is 40,000 higher than the same quarter of the previous year.

On February 28th 2012 the Budapest Business Journal reported that the unemployment rate generally increases around February each year due to the loss of seasonal employment. ING’s David Nemeth stated that these seasonal effects were the reason for inflation rising above the 11% prediction. He also predicts that by the end of the year there will be no change in the number if people finding employment due to an increase in the number of unemployment for low skilled workers. Furthermore due to large-scale redundancies in national carrier service Malev, Budapest Airport and Nokia it seems unlikely that Hungary will see a fall in unemployment figures during this year.

The graph above shows unemployment figures in Hungary from 1996  to present day, as can be seen above, since a recession in 2009 the unemployment rate has increased exponentially and today fluctuates around 11% at its lowest inflation was around 5.6% during a boom in the economy in 2002. A clear pattern of the economic cycle can be seen on this graph (boom, slowdown,recession, recovery) so predictions can be made that unemployment figures will fall as Hungary enters recovery.

Inflation Rate in Hungary

In May 2012 the CPI inflation rate of Hungary reached 5.3%  Historically from 1992 until present day, inflation in Hungary is generally falling since reaching an all time high of 31% in June 1995. On average over the time period shown inflation has been around 11.4% at its lowest inflation has been around 3% in 2005. Inflation measures the general change in price level against standard level of purchasing power.

As can be seen from the graph above the largest fall in inflation rate occurred in 1999 when inflation fell to 10% from around 18%. Currently in Hungary inflation is at low levels due to a recovery in the economy although is expected to rise in the near future as the economy picks up.

GDP Growth Rate of Hungary

GDP of Hungary contracted 1.2% in the first quarter of 2012 over the previous quarter. Historically from 1995 until 2012 the GDP of Hungary averaged around 0.56%, the highest GDP growth figure was 2% in March 2002 and the record lowest growth figure for GDP was -8% in March 2009. The gross domestic product growth rate gives information on the percentage change in the value of the goods and services produced by an economy.

As can be seen on the above graph throughout the time period shown, the GDP of Hungary fluctuated greatly. During 2008-2009 the growth rate of Hungary was negative and fell to the lowest growth rate of -8% in September of 2009 this was due to a recession in the economy that was occurring during that time. After that period of negative growth the economy was in recovery and experienced continuous growth. Between “97-06”Hungary was experiencing a boom period in the economy during which time GDP was increasing and at its highest was 5% in December 1999.

Currently Hungary is in a recovery period and is experiencing rising GDP rates as well as an increase in exports.

Politics of Hungary

Politics in Hungary take place in a parliamentary representative democratic republic, this means that as opposed to a direct democracy a representative democracy is a group of elected people all of which represent different government parties holding different views and policy objectives. Hungary has like most parliamentary republic countries has both a Prime Minister and President both of which have very different roles. The Prime minister is the head of government of a multi party system whereas the President is the head of state.

 

Economy of Hungary!!

The economy of Hungary is a medium sized open economy situated in central europe, and since joining the european union in 2004 has been a member of the EU’s single market. In the early 1990’s Hungary experienced market liberalization as part of a transistion from a socialist economy to a market economy- one which decisions regarding investment, production and distribution are based on supply and demand and prices are determined by the free price system. This is similar to most countries in eastern europe who experienced similar changes during this time.

Since 1995 Hungary has been a member of the organisation for economic co-operation and development, this is an international organisation of 34 countries founded in 1961 to stimulate economic progress and world trade. Also since 1996 has been a member of the world trade organisation.