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Economics2:TheWorldEconomy
Rework
Content
Introduction----------------------------------------------------------------3
Section1:InternationalTrade
Threegainsfromtradinginternationally---------------------------------------3
FreeTrade--------------------------------------------------------------------------3
AbsoluteandComparativeAdvantage-----------------------------------------3
Protectionism----------------------------------------------------------------------4
Barrierstotrade-------------------------------------------------------------------4
WTOandEU----------------------------------------------------------------------5
Section2:InternationalFinance
BalanceofPaymentsandGeneraltrendsinUKTrade----------------------6
Relationshipbetweentheexchangerateandthebalanceofpayments—14
SingleCurrency------------------------------------------------------------------15
EffectsonindividualsandbusinessoftheEuro-----------------------------15
Section3:LessDevelopedCountries(LDCs)
CharacteristicsofaLDC--------------------------------------------------------16
CurrentissuesthatfaceLDCs--------------------------------------------------16
TheimpactsofmultinationalsonLDCsandNICs--------------------------16
Conclusion-----------------------------------------------------------------16
References------------------------------------------------------------------17
Introduction:
AsamemberofthegovernmentofnationontheperipheryofEurope,itismyobligationtoillustratethebenefitsofjoiningtheEUtothePremier.Inthisreport,Iwillanalyze15elementsinnextthreepartstomakeaclearexplanationofbenefitsofjoiningtheEU.
Section1:InternationalTrade
Threegainsfromtradinginternationally:
Tobeginwith,theinternationaltradecouldincreaseworldout-put.Thetendencyofglobalizationbringsthefirmsmoreopportunitiestogainthelabor,resources,contractsandnewtechnology.Thesupplyanddemandwillbeimprovedwiththeimprovementofcompany’sproductivity.
Oncethesupplyhasbeenimproved,thegoodsandserviceswereproducedatlowercostandtherearemoreandmorecompetitions,thepriceoftheproductmightfallwhichmeansconsumerscouldgetmorechoicesandcheapergoods.
Inaddition,themostimportantgainingofinternationaltradeisitcangenerateeconomicgrowth.Freetradecouldincreasesales,profitmargins,andmarketsharesandthebothdemandandsupplylevelhasupdated.Meanwhile,theproducerneedsmoreresources,laborandcapitaltoproducemoretosatisfytheglobalmarket.Itdirectresultinimprovingthematerialmarket,financemarket,andmaydeclinetheunemploymentrate.
Freetrade
Freetradeisaconceptthatthereisnobarriertogoodsandservicesexchangedbetweencountries.Sincedifferentcountrieshavedifferentterrain,weather,resourcesandtechnology,theinternationaltradewouldbringthegoodswhicharemorevaluablethanthelocalpeopleproduceitbythemselves.
AgoodexampleforfreetradeisinNov.18,2004,ChinesePresidentandChileanPresidentdeclaredthestartoftheFTAnegotiations.Accordingtotheagreement,thetwocountrieswouldstarttariffreductionofgoodstradefromJuly1,2006.Tariffofproductsaccountingfor97%ofthetotalofthetwocountrieswouldbezerointenyears.ChinaandChilewouldcarryoutfreetradeineducation,science&technology,environmentprotection,labor,socialsecurity,IPR,investmentandpromotion,mineralandindustry.ThisagreementhaspromotedthefreetradebetweenChinaandChilesuccessfully.
Absoluteandcomparativeadvantage
Absoluteadvantagereferstotheabilityofaparticularpersonoracountrytoproduceaparticulargoodwithfewerresourcesthananotherpersonorcountry.Absoluteadvantageissaidtooccurwhenonecountrycanproduceagoodorservicetopre-determinedqualitymorecheaplythananthercountry.Itstandscontrastedwiththeconceptofcomparativeadvantagewhichreferstotheabilitytoproduceaparticulargoodataloweropportunitycost.Opportunitycostisdefinedasthecostofchoosingagoodorservicemeasuredintermsofthenextbestalternativegivenup.Acountryhasacomparativeadvantageinproducingagoodiftheopportunitycostofproducingthatgoodintermofothergoodsislowerinthatcountrythanitisinothercountries.
Example:KoreaandJapanhavefollowingproductionpossibilitiesfortwocommodities,mobilephonesandcomputers;assumethatalltheresourcesownedbyeachcountryaresame.
Mobilephone
Computer
Japan
2000
20000
Korea
1000
15000
ItisclearthatJapanhasanAbsoluteadvantageoverKoreainbothcommodities.Buttheadvantageithasismuchgreaterformobiles.UsingthesameresourcesasKoreaitcanmaketwiceasmanymobilephones.
ForJapanthe‘cost’of1Mobilephoneis10balesofComputers,i.e.20000/2000
ForKoreaitis15,i.e.15000/1000
ButifwelookatthecaseofcomputerswewillfindthathereforJapanthecostofabaleofcomputersisone-tenthofaMobilephonewhileforKoreaitisonefifteenth.IntermsoftheoutputofMobilephoneforegone(opportunitycost),computerischeaperinKoreathanJapan.KoreahasaComparativeadvantageincomputerwhileJapanhascomparativeadvantageinmobilephone.
Protectionism
Protectionismistheeconomicpolicyofrestrainingtradebetweennations,throughmethodssuchashightariffsonimportedgoods,restrictivequotas,avarietyofrestrictivegovernmentregulationsdesignedtodiscourageimportsandanti-dumpinglawsinanattempttoprotectdomesticindustriesinaparticularnationfromforeigntake-overorcompetition.
Herearetwoexamplesofprotectionism:
1:Britainimportsbananasfromitsex-coloniesinSouthAmericawhileUSAownshugebananaplantationsinSouthAmerica.In1999BritainrefusedtoimportbananasfromSouthAmerica,sotheUSgovernmentslappedtariffsonsomeBritish-madegoods.Themostseriousonewasapunitivetariffof100%onScottishwoolproductsinordertolimittheimportfromBritain.
2:AnotherexampleofprotectionismisinJanuary,2009,AmericangovernmentsettledapolicythatonlytheAmericansteelcanbeusedinAmerica.TheAmericangovernmenttendedtousethispolicytoreducethelossinfinancialcrisisandithelpsthesteelworkerstokeeptheirjobs.Inthisexample,protectionismprotectsthedomesticlower-skilledlaboranddomesticindustries.
Barrierstotrade
Toprotectacountry’sownindustries,thecountrywhichinadversesideneedtofindsomewaystobebarrierstolimittheimportproducts,usually,thetwomethodsare—tariffandnontariffs.
Tariffistaxesorcustomsdutiesplacedonforeignproductstoartificiallyraisetheirpricesandthishopefully,suppressesdomesticdemandforthem.Thistaxmaybeadvalue,thatis,apercentageofthepriceofthegoodsorspecific,thatis,ataxperunitofweightorphysicalquantity.
Forexample,inJanuary12,2009theRussiangovernmentraisedtheexpropriationtariff(upto30percent)forthecarsimportinthenextninemonths.Theimportcar’spricewillbeincreasedtobeWP(priceforthewholeworld)addsthetariff,sincethepriceisincreasing,thesalesoftheimportcarsmustfalldown.ThecustomersmightchoosetheRussiancarinsteadofimportcarssinceitischeaper.
Non-tariffbarrierstraditionallyhavebeenactionssuchQuotas,embargoes,exchangecontrolandimportdeposits.Probablythebestknownoftheseisthequota.Thisisaphysicallimitationonthequantityofimport.Quotaisaphysicallimitationonthequantityofimportswhichhadbeenacknowledgedbylocallaws.Usuallytheimportersneedtoapplytopayforalicensetosellgoods.
Forinstance,Russiausesanothermethodtolimitforeigncarimportsince2008—tolimitthequantityofimport;onlyafewcompanieswhichhavetheimportlicensecouldimportcarsandhaveasellingupperlimit.Russiausesthesemethodstorestricttheimportquantity,andduringthegovernmentlimitedforeigngoodsimport,itcanpromotethedomesticindustries.
WTOandEU
In1948,theGeneralAgreementonTariffsandTrade(GATT)wasestablishedbythedevelopedcountries.In1Jan1995,theGATTwassupplantedbyanewinstitution,theWorldTradeOrganization(WTO)andaimstoimprovetradeandinvestmentflowsaroundtheworld.Itisaninternationalbodyseekingtopromotefreetradebyopeningmarketsthroughtheeliminationofimporttariffs.Theorganizationadministerstradeagreements,monitorsinternationaltradepolicyandactsasaforumfortradenegotiations.ThefourmaingoalsofWTOare:freeingglobaltradethroughuniversallyloweredtariffs,imposingthesamerulesonallmembersinordertohomogenizethetradeprocess,spurringcompetitionthroughloweredsubsidies,andensuringthesametradeconcessionsforallmembernations.TheWTOalsoprovidestechnicalassistanceandtrainingfordevelopingcountries.WTOaimsforequalrepresentationamongmembersbygrantingeachmembercountry"most-favorednation"status;whenamembercountrybestowsatradeprivilegeonanothernation,theprivilegemustbeextendedtoallothermembercountries.Anothertenetis"nationaltreatment,"whichbehoovescountriestotreatforeignimportsequallywiththoseproduceddomestically.
ThebestexampleforjoiningtheWTOisthejoinofChinain2007,afterthat,Chinaachieveslotsofbenefitsfromthedecreaseoftariff,limitationsandthesimplificationoftradingprocedures.
EUstandsforEuropeanUnionandisaneconomicunion,whichaimstoabolishtariffsandquotasamongmembers,commontariffandquotasystem,restrictionsonfactormovementsandharmonizationandunificationofeconomicpoliciesandinstitutions.Itdrawsoutregulations,monitorsmemberstates,solvesdisputesandproblemsamongmemberstatesandnegotiateswithothercountriesorinternationalorganizationsonthebehalfofEUmembers.TheEuropeanUnionaimstopromoteandsmoothfreetradeamonginternalEuropeanUnionandinitiativesforsimplifyingnationalandcommunityrulesincludesimplerlegislationfortheinternalmarket(SLIM)andEuropeanBusinessTestPanel.Forexample,inOct16,2009,EUandKoreangovernmentsignedafreetradeagreementof100billionUSdollarsaftertwoyears’negotiationandEUwillcancelthetariffsonimportsoftextileandcarsfromKoreainthenextthreeyears.ThiswillpromotethefreetradeofEUandhavepositiveimpactontheeconomy.
Section2:InternationalFinance
BalanceofPaymentsandGeneraltrendsinUKTrade
Balanceofpaymentisthenamegiventotherecordoftransactionsbetweentheresidentsofthecountryandtherestoftheworldoveraperiodoftime.ItisakeyeconomicstatisticsandUK’sBalanceofPaymentsiscomprisesbythecurrentaccount,thecapitalaccount,thefinancialaccountwhichdealswithflowofdirectportfolioandinvestmentsandreserveassetsandtheInternationalInvestmentPositionwhichshowstheStockofExternalFinancialAssetsandLiabilities.ThechartbelowshowsthecompositionifBalanceofPaymentsin2008:
a)Thecurrentaccountcanbedividedintofourcategories:tradeingoods,tradeinservice,incomeandcurrenttransfers.Positivenetincomefromabroadcorrespondstoacurrentaccountsurplus;negativenetincomefromabroadcorrespondstoacurrentaccountdeficit.
Herearethetradefiguresofrecentyears:
HerearetheCurrentAccountBalanceChartandtheChartoftradeinGoodsandservicesofUKinlast20years.
Thecurrentbalancehasusuallybeenindeficitoverthelast30years.TheUKhasrecordedacurrentaccountdeficitineveryyearsince1984.Priorto1984,thecurrentaccountrecordedasurplusin1980to1983.From1984to1989,thecurrentaccountdeficitincreasedsteadilytoreachahighof25.5billionpoundsin1989,equivalentto-4.9percentofGrossDomesticProduct(GDP).From1990until1997,thecurrentaccountdeficitdeclinedtoalowof1.0billionpoundsin1997.Between1998and2006,thecurrentaccountdeficitwidenedsharply,peakingat43.8billionpoundsin2006.Thiswasthehighestrecordedincashtermsbutonlyequatedto-3.3percentofGDP.Inthepasttwoyears,therehasbeenareductioninthecurrentaccountdeficit–in2008itcurrentlystandsat25.1billion,equivalentto-1.7percentofGDP.
ItisobviousthatUKhadalargedeficitintradeofgoodsinthelast30yearsandthedeficitbecomeslagerandincreasesgreatlyfrom1998to2008whilethesurplusoftradeinservicegrowssmoothlybutnotasmarkedlyasthegoodsdeficit.Thetradeingoodsaccountrecordednetsurplusesintheyears1980to1982,largelyasaresultofgrowthinexportsofNorthSeaoil.Sincethenhowever,thetradeingoodsaccounthasremainedindeficit.Thedeficitgrewsignificantlyinthelate1980storeachapeakof24.7billionin1989,beforenarrowinginthe1990stolevelsofaround10billionto14billion.In1998thedeficitjumpedbyover9billion,andithascontinuedtorisesince,reachingacashrecordof92.9billionin2008.
TherearetwodifferentofIncome—DirectInvestmentIncomeandPortfolioInvestmentIncome.TheDirectInvestmentIncomemeanstheprofitsearnedbyUKcompaniesfromoverseasbranchesandassociatedcompany.AndthePortfolioInvestmentIncomeistheinterestonbondsanddividends,heldabroadbyUKcompaniesandresidents.
Herearechartsofincomeoverthe10years:
Theincomesectionhasshownpositivegrowthfrom2006to2008andisverymuchinsurplusrecently.
Asforthecurrenttransfer,italsohastwodifferentparts:
Thetaxes,paymentsandreceiptstotheEU,SocialSecurityPaymentsabroad,andmilitaryexpenditureabroadistheCentralGovernmentTransfer.AndforOtherSectorTransfers,itincludesreceiptsfromtheEUSocialFund,taxesonincomeandwealthpaidbyUKworkersandbusinessestoforeigngovernments,insurancepremiumsandclaims.
ThereistheChartofCurrenttransferinlast10years
Thetransfersaccounthasshownadeficitineveryyearsince1960.Thedeficitincreasedsteadilytoreach4.8billionin1990.In1991,thedeficitreducedto1.0billion,reflecting2.1billionreceiptsfromothercountriestowardstheUK’scostofthefirstGulfconflict.Thedeficithassinceincreased,toreacharecord13.6billionin2008.
b)ComparedwithCurrentAccounts,thecompositionoftheCapitalandFinancialAccountismorecomplicate.
CapitalAccounthastwocategories:
Capitaltransfer:Itisinvestmentgrantsbythegovernmentanddebtswhichthegovernmenthasagreedwiththecreditordonotneedtobemet.
Acquisitionanddisposalofnonproduced/nonfinancialassets:Purchaseorsalesofpropertybyforeignembassyorpatents,copyrights,trademarks,franchisesandleases.
Thecapitalaccounthasshownstrongsteadysurplusgrowthespeciallyfromtheyearof2006to2008.
Thefinancialaccounthasfourcategoriesandherearethechartsofthefourcategoriesoverthelasttenyears:
Accordingtothesegraphs,investmentincreaseddramaticallyfromthemid-1990s,reflectingtheincreasedglobalizationoftheworldeconomy.Between2000and2007,otherinvestmentdominatedcross-borderinvestment,primarilybankingactivity.In2008however,otherinvestment,hasrecordednetdisinvestmentastheglobalfinancialcrisisdeepenedleadingtoareductioninloansinternationallyandarepatriationofdeposits.Inrecentyears,includingthelatest,theUKhasneededtoborrowfromabroadtofinanceacontinuingcurrentaccountdeficit,whichhasresultedininwardinvestment(UKliabilities)exceedingoutwardinvestment(UKassets).
c)Theinternationalinvestmentpositionisthebalancesheetofthestockofexternalassetsandliabilities.Between1966and1994theUK’sassetstendedtoexceeditsliabilities,byuptoarecord86.4billionpoundsin1986.Butfrom1995to2007,theUKrecordedanetliabilitypositionineveryyear,reachingarecord352.6billionpoundsin2006.In2008,theUKreturnedtoanetassetpositionof92.9billionpoundsmainlyduetoexchangerateeffects.
ThechartbelowindicatesUK’sinternationalinvestmentposition:
Relationshipbetweentheexchangerateandthebalanceofpayments
Theexchangerateisthepriceofacurrencyintermsofothercurrencies.Itseffectonbalanceofpaymentswilldependuponitsrelationshipwithothercurrenciesandhowitsvaluewillchange.Asthecurrencyweakens(devalues)theexportswillbecomecheaperabroadbutthecountryhastopaymoreforimportsbutthegoodsandserviceswouldbecomeinternationallycheaperandleadtomoregoodsaservicesbeingpurchased.Ifdemandremainsthesamethenthevalueofgoodsandservicestothecountrywillreduceandthecurrentaccountbalancemaydeteriorate.Iftheexchangeraterisesthenthecountry’sgoodsandservicesmightsufferanddemandfromabroadcouldfall.Ifthedemandremainsthesamehoweverthenthevalueofexportswillriseandthecurrentaccountbalanceshouldimprove.
Forinstance,whentheUKmarketneedstoimportAmericangoods(suchascorns)theexchangemarketinUKwouldbethedemandofU.SdollarsislargerthanthesupplyofUKpounds.IftheAmericanmarketsneedsimportmoreBritishgoods,theyneedtoexchangemorepoundsinthecurrencymarket,sothebothofdemandofUSDollarandsupplyofUKPoundsisincreasing,meanwhile,theexchangerateof£/$isincreasing.UKpoundismorevaluablemeansthegoodsofUKareusuallymoreexpensiveandAmericanpeopleneedtospendmoreUSdollarscomparedtothesameamountofpounds.Thatiswhythecurrencyexchangerateissoimportantforthebalanceofpayments.Forexample,iftheexchangerateof£/$isincreasing,theAmericanbusinessmanmightnotchooseUKgoods,becauseofthehighprice.
SingleCurrency
EuropeansinglecurrencyEurocametoexistsince1999.Thereare12memberstatesofEUwhouseEurowhileUKisstillnotoneofthememberssincetherearebothadvantagesanddisadvantagestojoinit.
Advantages:
Atfirstly,thesinglecurrencyreducestheexchangerateuncertaintybecausepeopledon'thavetoconvertmoneyfromonecurrencytoanotherwhenpurchasegoods.Meanwhile,usingthesinglecurrencywillincreaseforeigninvestmentsuchasdirectinwardinvestmentsincethereductionofuncertainty.Thenitmayproduceagreattransparency.Whetherpeoplebuyorsellgoods,consumerscancomparepriceinasinglecurrency.Itwillhelptodecreasethescopeforpricediscriminationsandcreatepressuretolowertheprice.Moreover,itcouldmaintaininterestratelowerandthecommitmenttolowinflationshouldalloweconomiestooperatewithlowercost.
Disadvantages:
Acountrymaylosetheindependentmonetarypolicyifitjoinsthesinglecurrency.Thesinglecurrencyforcesacountrytoforgoanindependentmonetarypolicy.Afterthesinglecurrencyhasbeenused,thecountry'smonetarypolicywilldeterminedbythesupranationalcentralbankandnotbythedomesticcentralbank.Thisiswhythetheoryofoptimalcurrencyareasemphasizestheimportanceofflexibleprices,labormobilityandfiscaltransfers.Flexiblepricesandlabormobilitybecomemoreimportantwhenacurrencyunionexists;governmentshaveanincentivetomakemarketsworkmoreefficiently.
Besides,therearealsopoliticalcoststothecountry.Ifthegovernmentlosescontrolovermonetarypolicytothesupranationalcentralbank,politiciansarelimitedtousingfiscalpolicytoinfluenceeconomy.
EffectsonindividualsandbusinessoftheEuro
Asfortheindividuals,theycangetlowerpricesandhigherqualitygoodsandserviceswhentheyhavemorechoicesduetoincreasedcompetitionamongcompaniesthroughtheEurozones;theycanmeasurethegoodpricethroughEuropeandchoosethebestone.Inaddition,singlecurrencyreducesthetransactioncostsoftravelinginEurope.Individualscouldtravelmorefrequentlythanpastsinceitismoreconvenientandcheaper.PeopledonotneedtoconcerntheexchangerateandcommissionfeewhenvisitingtheothercountriesinEurope.
Asforthebusiness,peoplecouldavoidtheexchangerateriskandtradersdonotneedtowastetimeandcostonpurchasingforeigncurrencies.Moreover,thebusinessmarketcouldbeexpandedtherearemoreopportunities.
Section3:LessDevelopedCountries(LDCs)
CharacteristicsofaLDC
LessDevelopedCountries(LDCs)mainlyexistinAsiaandAfrica.MostLDCs’subsistenceisagriculture.ThelandofLDCsisveryineffectivelyusedandisverylowinproductivity,therearenormallynomoderntechniquesorequipmentavailable,andthelandisalwaysthreatenedbyfloodsordroughts.ThebirthratesinLDCsareveryhighbutthereisveryheavyinfantmortalitysincethehealthcaresystemispoor.
AgoodexampleforLDCisAngola.A2007surveyconclude
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