Principles of Engineering Economy Essay

Throughout the history of humanity, efforts geared towards solving problems and finding lasting solutions have been relentless. All theories with regard to human nature agree on the fact that humanity seeks pleasure while shunning away pain. This is in line with the field of engineering and the various solutions it offers to problems that society faces. Engineering involves the use of knowledge in mathematics and/or natural sciences in a bid to economically use or harness natural resources for human benefit. The knowledge acquired either through study, practice or experience is complemented by the engineer’s own judgement.

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 The aforementioned definition approved by Accreditation Board for Engineering and Technology, ties the various engineering fields to the economy. This brings up a crucial area of study; engineering economy. It refers to the analysis of the economic implications of the decisions made in engineering fields. The solutions tabled or proposed are to be analysed from an economic standpoint and their economic viability determined. In coming up with solutions monetary and non-monetary solutions need to be considered. Engineering economy, that was introduced by A. M. Wellington in his 1887 publication, The Economic Theory of Railway Location, focuses on the monetary aspect (Grant, Ireson and Leavenworth). Engineering economy is an important field for a number of reasons. First of all employment of a decision-making process on the basis of engineering economics proves to be cost-effective.

 By focusing on the monetary implications of the solution alternative at hand, the one with the most returns is the one eventually espoused. In addition, by marrying the monetary outcomes of a solution with its technical aspects, the adopted proposal can then be fine-tuned in order to increase its returns. This leads to the second advantage of engineering economy; alternatives. By employing the principles and techniques embodied in engineering economy, the financial implications cited can push for alternative solutions. For instance the push to embrace alternative energy sources is not only fuelled by environmental concerns but also by the financial strain of the current energy sources. In addition, solar energy emerges as the most expensive alternative energy source due to the high cost of photovoltaic cells. This economic constraint in using solar energy could be overcome by a new technique of harvesting solar energy using magnetic fields (United Nations Environmental Programme (UNEP)). Engineering economy in the aforementioned instances has positively impacted the environment as well as the economy.

Concepts embodied in engineering economy include cash flow estimations, time value of money, and quantitative measurements of profit and systematic comparison of alternatives (Grant, Ireson and Leavenworth). Cash flow estimations are used to predict the monetary inputs and outputs in a certain project. This is used to determine the overall benefits of the said project and whether it is pursuable in terms of its financial feasibility over a certain period of time. Time value of money can be looked at in two ways. The first is through inflation or deflation, which refers to the purchasing power of a certain currency. The second standpoint is by determining the potential of returns from alternative investments or solutions. Cash flow diagrams are charts that show time interval, the expected inputs such as expenditures and the expected outputs such as income. These tools complemented by profit measurement and comparison of alternatives form the bedrock of engineering economy as a study.

Engineering economy has a global, economical, environmental as well as societal impact. By employing the principles of engineering economy governments are able to select the projects that are available within the annual budget limits in terms of the nation’s capital. Engineering economy provides for the financial consideration in project selection by governments. In so doing feasible projects are completed at a much faster rate because the government is operating within the financial limits. 

This benefit is also witnessed on a global scale. International organisations such as the United Nations Environment Programme are usually tasked with multiple projects at any given time. It is therefore critical that they executes the projects at hand within their given budget limits. In light of this, they usually employ financial feasibility studies on the basis of engineering economy principles. This is done in order to determine whether the project can be executed within UNEP’s annual budget. Financial analysis has been carried out on various projects such as the biomass project in India and windmill projects in Mexico. UNEP conducts these analyses in partnership with various financial firms (United Nations Environmental Programme (UNEP)). This brings about an environmental impact as well. Engineering economy helps organisations that are bent on bettering the world’s environment execute their projects efficiently. Organisations such as UNEP carry out multiple projects on a global scale. By employing concepts of engineering economy they are able to know which projects are executable within the financial constraints of the organisation.

 This benefit also emerges on a local level thus having a more direct societal impact. Projects proposed to the local authorities also need to be analysed based on their financial feasibility. Local authorities operate on restrictive budgets. However this should not be an excuse for lack of service delivery. Therefore concepts of engineering economy help local authorities implement their desired projects within these restrictive budgets.  For instance the Long Range Transportation Plan implemented in Tennessee took 25 years to complete (Tennessee Department of Transportation). The project report cites financial limitations as the main cause for the prolonged execution time frame. Therefore the project had to be stretched out over a time frame of 25 years and was completed in 2005; a move that lessened the financial burden on the local authorities and the residents as well.         

Professionalism and ethical responsibilities in economic and financial sector

Professionalism embodies competence and skill that is expected from individuals working in a given profession. Professionalism requires a number of attributes. Specialized knowledge tops this list of attributes. Success in a given field of study is determined by the level of skill and how it is used. Specialized knowledge is crucial because it enable the professional to acquire relevant skill. Competency refers to getting the job done. It refers to reliability which is an integral part of any profession. Other attributes include honesty, integrity principles, accountability and self-regulation. Some of these attributes are in line with the ethical responsibilities of professionals. 

Ethics has to do with morals principles. In order to attain professionalism, the thought process and decision-making process have to be based on the right moral principles. The issue of ethical economics is a complex matter. Throughout history, economists have asked the question; can economy be ethical? Is there a cultural and ethical standard that can be used to operate the global economy? The Manifesto for a Global Economic Ethic outlines the principles that ought to guide the operations of a global economy. This manifesto is based on the Declaration toward a Global Ethic that was published by the Parliament of World Regions in Chicago 1993 (Hemphill and Waheeda). The Manifesto for a Global Economic Ethic marries the principles embodied in the declaration with global economic practices. In doing so it seeks to establish a level ethical platform for all stakeholders.  The manifesto was launched during a business convention aimed at addressing the ethical issues in the economy. The manifesto developed was developed by the Global Ethic Foundation President, Hans Kung. The manifesto is based on the following basic principles: “humanity, respect for life, non-violence, honesty and tolerance and justice and solidarity” (Hemphill and Waheeda). It asks all stakeholders to uphold these and other globally accepted economical principles in there sphere of operation and influence. 

These conventions and manifestos show that there is need for ethical considerations when it comes to the economy. In the US, for instance, corporate tax loopholes and corporate tax evasions cost the government billions of dollars annually. Tax breaks issued to multi-billion dollar corporations are seen by many as going against the ethical grain of society. The multi-billion dollar company, Facebook was awarded huge tax breaks due to loopholes in the law. According to a report by the Citizens for tax Justice Facebook will most likely not pay and taxes whether federal or state. Exploitation of tax loopholes has caused the federal government to pay 439 million dollars in tax refunds (Coy). These loopholes are also exploited by companies including Goole, Starbucks and Apple. Though they operate within the boundaries of the law, many feel as if these tax breaks and refunds are unethical and promote greed by these major companies. This cites the need for stricter tax laws as well as setting ethical standards for these companies. In a statement with regard to such tax breaks and tax refunds, President Barrack Obama said that their legality does not make them right.    

Adam Smith, in his book The Wealth of Nations, states that in order for economic actions to be ethical, they need to have “sympathy for others” (Smith and Nicholson). Sympathy as described by Smith could be interpreted further to mean empathy. Smith argues that all economic decisions should be in line with the basic ethical principles. In order to do so one has to empathize with those that the economic decisions affect. Therefore economic decisions should not be driven solely by self-interest but should have other stakeholders in mind (Smith and Nicholson). For instance, the cost-benefit analysis for say a railway project should take into account the impact on the residents. Some people may be living within the designated area that the project is to be executed. Cost-benefit analysis should factor in the impact of the project on the lives of these residents and not just the monetary analysis. In doing so, ethical principles are upheld through adequate compensation and/or relocation. Smith suggests that such an approach to making economic decisions will enable society to uphold ethical values. Smith bases this argument on the fact that empathy and humanism are the foundation of all ethical principles (Smith and Nicholson).

Ethics and professionalism are crucial in any field of expertise. It is crucial, in order to succeed in a given field, that these two be implemented in a complementary fashion. While knowledge and skill in economics is used in order to ensure professionalism, the ethical implications of economic decision need not be overlooked. The professional nature of economics is evident. This is based on the fact that the field is regarded by most as an exact science dealing with facts and figure. Therefore acquisition of the knowledge and application of the skill is not an issue for most economists. The issue lies in the ethical aspects as aforementioned. There is need for further input as far as ethical economics is concerned.

Economic situation in the USA

The US Dollar is the currency with which most countries hold their financial reserves. Many of global trade commodities such as gold and oil are priced using the US dollar. This makes it an important part of the global economy and hence it is crucial to understand the weight of the value of the US Dollar. The value of the dollar is indicative of the inflation rates and vice versa. Inflation means that the value of the dollar goes down. Deflation means that the value of the dollar goes up.

In the recent past the rate of inflation has been increasing. As of November 2014, the annual inflation rate was at 1.7%. This was a slight increase from July where the annual inflation rate was at 2%. It is also important to note that since the creation of the Federal Reserve in 1913, the US Dollar has lost 97.8% of its purchasing power. In 1913 an ounce of gold was estimated at 20.67 dollars. As of August 2009, one ounce of gold was estimated at 939.2 dollars (International Labour Organisation (ILO)). 

The economic situation can also be indicated by the Customer Price Index (CPI). CPI indicates the effects of inflation on the purchasing power of a currency. The current price of a basket of goods or services is measured against the price of the same goods or services in the previous year. As of November 20th 2014 the CPI in the US was at 237.433, a slight increase as compared to 2013 (International Labour Organisation (ILO)). This means that the purchasing power of the US Dollar has decreased over time owing to increase in annual inflation rates.

The job market in the US is a huge determinant of the economic situation in the country. Increasing the number of jobs evidently boosts the economy. The gross domestic product (GDP) increased slightly in 2014 by 1.8% (International Labour Organisation (ILO)). The financial crisis and the recession that followed afterwards are to blame for this slow growth. It will take time for the economy to fully recover. The increase in employment opportunities was however hindered by the growth in population. According to a report by the US Bureau of Labour Statistics, November 2014 registered a total of over 320,000 new jobs created. This was over 100,000 more jobs as compares to September 2014. On average over 180,000 new jobs were created monthly throughout the course of 2014 (International Labour Organisation (ILO)). However the effect of this turnaround in the economy has been sidelined by the increase in the size of the labour force in the country. The prevalent high unemployment rates are due to the fact that the number of job seekers in the job market also increases and at a much higher rate. Consequently the level of unemployment has remained within the narrow range of 7-8 %(International Labour Organisation (ILO)). This is not reflective of the efforts put into employment creation as well as the results obtained. The efforts need to be stepped up in order to serve the growing number of job seekers in the job market.

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In order to fund its activities the federal government is forced to borrow money from various creditors. This is in a bid to strike a balance in its annual budget. Increased borrowing results in increased national debt. The debt continues to grow exponentially and as of April 2006 was estimated at over 8 trillion US Dollars. The absolute value of the federal debt is 20% of the total global debt (International Labour Organisation (ILO)). Thought the numbers make the situation seem grim, some economists argue that USA’s ratio of debt to GDP is better than other countries such as Japan. The federal government, in its annual budget includes information regarding the budget deficit. This is the budget deficit brought about by the difference between revenue and expenditure. In a perfect setting, revenue and expenditure should balance each other out. There would be no budget surplus of budget deficit. The common case is where the expenditure is higher than the government revenue resulting in budget deficits. Budget deficits force borrowing and hence national debt. The main cause of national debt is poor and excessive government expenditure. There are a number of projects and programs that have cost the federal government a huge chunk of dollars. Benefit programs such as Medicare and Medicaid have cost the US government a total of 940 billion US Dollars. This can be compared to the 882 billion US Dollar pumped into the Social Security Program. The program is aimed at financial security to retirees aged 65. In addition the government spent 718 billion US Dollars on military expenses (International Labour Organisation (ILO)). 

Solutions to the debt crisis start with cuts on government expenditure. Military expenses need to be reduced. Health care and social security programs need to be regulated as well. Stricter rules and regulations should also be put in place for admittance to these programs. There is also need for efficiency. Government projects that result in budget deficits need to be efficient. Their execution should be swift and within the given time frame so as to provide the expected returns. Projects that have stalled are an economic burden and have no returns. The next solution involves accommodating the middleclass into the job market. A productive middleclass will earn the government revenue in terms of taxes. Additionally, it would reduce government expenditure in supporting dependants. Taxation should also be factored in as a solution in order to increase the government’s revenue. The next step is to cut personal debt. This includes individual debt such as credit card debt, student loan debt and mortgage debt among others. Therefore the issue of reducing national debt requires an entire paradigm shift.

The issue of student loan debt as mentioned previously is one of the main causes of personal debt. Increased tuition fees force many to take student loans in order to pay for their education. Student loans are an investment in one’s future and are also a sort of risk gamble. Students who succeed earn much more and are able to pay off their loans with ease. Those who don’t succeed find it difficult to pay back. Failure to pay back student loans results in poor credit scores. Stafford loans are the main form of federal student loans. By the end of 2012, the total amount of Stafford loans granted was at 73 billion US Dollars (International Labour Organisation (ILO)). Stafford loans are popular because of their reduced interest rates and friendly payment plan options.

The main cause of expensive tuition is a reduction in the per-student subsidy offered by taxpayers to learning institutions. The reduction in the per-student subsidy amount, couple by inflation, forces learning institutions to raise their tuition fees. The increase in tuition fees can also be explained by the laws of demand and supply of economics. Learning institutions can respond to the increased demand for their services in two ways; either increase their student capacity and enrolment or increase their tuition fees. Many of the learning institutions opt for the latter because it involves little expenditure on the part of the institution and has maximum returns. Another cause of increased tuition is the high levels of spending more so in private institutions. The spending is catered for by increasing tuition fees. 

Colleges and universities need to reduce their spending and strive for efficiency. In addition to reduce spending they should also seek to increase their income in terms of revenue. In doing so, they will ease the financial burden on the students. The gap between private institutions and public institutions in terms of expenditure also needs to be reduced. A level playing field should be created in a bid to regulate the cost of tuition.  The solutions should be supported by the state and federal governments. Efforts from the state and federal government should be geared towards increasing the number of institutions of higher learning. They should also look into expanding the available institutions. In so doing the supply will match the demand. Consequently, the cost of tuition will decrease.

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