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Timber Industry Economic Profile Essay

1820 words - 8 pages

Timber Industry Economic Profile

Following is a discussion of the timber industry including how several economic factors affect it, including: price elasticity of supply and demand; positive and negative externalities; wage inequality; and monetary and fiscal policies.

Price Elasticity

Important to note is that the timber industry and the lumber industry are not one in the same and experience differences price elasticity. The price elasticity of demand for the timber industry is inelastic. Often landowners will hold inventory to sell at a later date if demand is low. The timber will not lose value in storage so price does not need to change. The price elasticity of supply for the ...view middle of the document...

One example of this happened to a Papua New Guinea (PNG) forestry company called Saban Enterprises Limited. Throughout Saban’s efforts towards legal certification of its timber products, they were met with false claims and harassment. Green non-governmental organizations (NGOs) wanted to stop commercial forestry in PNG, despite the fact that less than 20% of the country had been set aside as forest production areas and the industry employed 10,000 workers. It could easily be concluded that they did not care about the welfare of Papua New Guinea's people (Stutz, 2008).

Monetary and Fiscal Policy

The United States government can influence various industries through the powers of the Federal Reserve. The Federal Reserve created Federal Reserve notes (dollars) which are used as the standard form of paper money in the United States. The Federal Reserve manages the integrity of the United States’ financial system by controlling the quantity of money in the system. The Federal Reserve is responsible for regulating and overseeing all other United States banks, thereby protecting consumers’ rights. The Federal Reserve also supplies loans and other financial services to the United States public, government entities, and banks, as well as foreign banks.

The Federal Reserve System is run by a Board of Governors which manages the Federal Reserve Banks, advisory committees, and member banks. The seven Federal Reserve Governors, including a chairman, are appointed by the United States President and are then confirmed by members of the Senate. The Federal Reserve chairman is an extremely influential person who’s decisions directly affect the United States economy (Mankiw, 2004 pp.634, 635).

In his 1997 article The Impact of Inflation, Hellerstein explains how distortions in economic activity may occur due to the effects of inflation. For example, the timber industry must forecast its future sales to determine how much logging is necessary to meet demand. This is accomplished chiefly by monitoring new housing starts in the housing market. The Federal Reserve often makes interest rate changes to affect the national inflation rate. Consequently, if the Federal Reserve makes a significant interest rate change that moves the housing starts market in a major direction, timber forecasts could be greatly off resulting in inadequate or over supply.

In Hellerstein’s example, the unprecedented dramatic fall of inflation in 1981 led to many timber firms holding contracts for timber they could not afford to harvest (1997). Congress passed a bill in the early 1980s enabling the timber firms to renegotiate their contracts with the Forest Service. This was in effect a government bailout which: positively affected employment rates and growthamong smaller timber firms and negatively affected prices in the industry as a whole

Inflation is calculated using a computation called the consumer price index. If CPI is rising, the economy is said to be experiencing...

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