Economics 2: The World

Economy

Rework
 World Economy

目录
Introduction:.................................................................................................................4
Section 1: International Trade.....................................................................................4
Three gains from trading internationally:.................................................................................................4

Free trade..................................................................................................................................................4

Absolute and comparative advantage.......................................................................................................5

Protectionism.............................................................................................................................................5

Barriers to trade........................................................................................................................................6

WTO and EU.............................................................................................................................................6

Section 2: International Finance.................................................................................7

Balance of Payments and General trends in UK Trade............................................................................7

Relationship between the exchange rate and the balance of payments...................................................16

Single Currency.......................................................................................................................................17

Effects on individuals and business of the Euro......................................................................................17

Section 3: Less Developed Countries (LDCs)............................................................18

Characteristics of a LDC.........................................................................................................................18

Current issues that face LDCs.................................................................................................................18

The impacts of multinationals on LDCs and NICs..................................................................................18

Conclusion...................................................................................................................19
References:...................................................................................................................19

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Introduction:
As a member of the government of nation on the periphery of Europe, it is my
obligation to illustrate the benefits of joining the EU to the Premier. In this report, I
will analyze 15elements in next three parts to make a clear explanation of benefits of
joining the EU.

Section 1: International Trade

Three gains from trading internationally:

To begin with, the international trade could increase world out-put. The tendency of
globalization brings the firms more opportunities to gain the labor, resources,
contracts and new technology. The supply and demand will be improved with the
improvement of company’s productivity.
Once the supply has been improved, the goods and services were produced at lower
cost and there are more and more competitions, the price of the product might fall
which means consumers could get more choices and cheaper goods.
In addition, the most important gaining of international trade is it can generate
economic growth. Free trade could increase sales, profit margins, and market shares
and the both demand and supply level has updated. Meanwhile, the producer needs
more resources, labor and capital to produce more to satisfy the global market. It
direct result in improving the material market, finance market, and may decline the
unemployment rate.

Free trade
Free trade is a concept that there is no barrier to goods and services exchanged
between countries. Since different countries have different terrain, weather, resources
and technology, the international trade would bring the goods which are more
valuable than the local people produce it by themselves.
A good example for free trade is in Nov.18, 2004, Chinese President and Chilean
President declared the start of the FTA negotiations. According to the agreement, the
two countries would start tariff reduction of goods trade from July 1, 2006. Tariff of
products accounting for 97% of the total of the two countries would be zero in ten
years. China and Chile would carry out free trade in education, science & technology,
environment protection, labor, social security, IPR, investment and promotion,
mineral and industry. This agreement has promoted the free trade between China and
Chile successfully.

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Absolute and comparative advantage

Absolute advantage refers to the ability of a particular person or a country to produce
a particular good with fewer resources than another person or country. Absolute
advantage is said to occur when one country can produce a good or service to pre-
determined quality more cheaply than anther country. It stands contrasted with the
concept of comparative advantage which refers to the ability to produce a particular
good at a lower opportunity cost. Opportunity cost is defined as the cost of choosing a
good or service measured in terms of the next best alternative given up. A country has
a comparative advantage in producing a good if the opportunity cost of producing that
good in term of other goods is lower in that country than it is in other countries.
Example: Korea and Japan have following production possibilities for two
commodities, mobile phones and computers; assume that all the resources owned by
each country are same.
Mobile phone Computer
Japan 2000 20000
Korea 1000 15000
It is clear that Japan has an Absolute advantage over Korea in both commodities. But
the advantage it has is much greater for mobiles. Using the same resources as Korea it
can make twice as many mobile phones.
For Japan the ‘cost’ of 1 Mobile phone is 10 bales of Computers, i.e. 20000/2000
For Korea it is 15, i.e. 15000/1000
But if we look at the case of computers we will find that here for Japan the cost of a
bale of computers is one-tenth of a Mobile phone while for Korea it is one fifteenth.
In terms of the output of Mobile phone foregone (opportunity cost), computer is
cheaper in Korea than Japan. Korea has a Comparative advantage in computer while
Japan has comparative advantage in mobile phone.

Protectionism
Protectionism is the economic policy of restraining trade between nations, through
methods such as high tariffs on imported goods, restrictive quotas, a variety of
restrictive government regulations designed to discourage imports and anti-dumping
laws in an attempt to protect domestic industries in a particular nation from foreign
take-over or competition.
Here are two examples of protectionism:
1: Britain imports bananas from its ex-colonies in South America while USA owns
huge banana plantations in South America. In 1999 Britain refused to import bananas
from South America, so the US government slapped tariffs on some British-made
goods. The most serious one was a punitive tariff of 100% on Scottish wool products
in order to limit the import from Britain.

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2: Another example of protectionism is in January, 2009, American government

settled a policy that only the American steel can be used in America. The American
government tended to use this policy to reduce the loss in financial crisis and it helps
the steel workers to keep their jobs. In this example, protectionism protects the
domestic lower-skilled labor and domestic industries.

Barriers to trade
To protect a country’s own industries, the country which in adverse side need to find
some ways to be barriers to limit the import products, usually, the two methods are—
tariff and non tariffs.
Tariff is taxes or customs duties placed on foreign products to artificially raise their
prices and this hopefully, suppresses domestic demand for them. This tax may be ad
value, that is, a percentage of the price of the goods or specific, that is, a tax per unit
of weight or physical quantity.
For example, in January 12, 2009 the Russian government raised the expropriation
tariff (up to 30 percent) for the cars import in the next nine months. The import car’s
price will be increased to be WP (price for the whole world) adds the tariff, since the
price is increasing, the sales of the import cars must fall down. The customers might
choose the Russian car instead of import cars since it is cheaper.
Non-tariff barriers traditionally have been actions such Quotas, embargoes, exchange
control and import deposits. Probably the best known of these is the quota. This is a
physical limitation on the quantity of import. Quota is a physical limitation on the
quantity of imports which had been acknowledged by local laws. Usually the
importers need to apply to pay for a license to sell goods.
For instance, Russia uses another method to limit foreign car import since 2008—to
limit the quantity of import; only a few companies which have the import license
could import cars and have a selling upper limit. Russia uses these methods to restrict
the import quantity, and during the government limited foreign goods import, it can
promote the domestic industries.

WTO and EU
In 1948, the General Agreement on Tariffs and Trade (GATT) was established by the
developed countries. In 1 Jan 1995, the GATT was supplanted by a new institution,
the World Trade Organization (WTO) and aims to improve trade and investment flows
around the world. It is an international body seeking to promote free trade by opening
markets through the elimination of import tariffs. The organization administers trade
agreements, monitors international trade policy and acts as a forum for trade
negotiations. The four main goals of WTO are: freeing global trade through
universally lowered tariffs, imposing the same rules on all members in order to
homogenize the trade process, spurring competition through lowered subsidies, and
ensuring the same trade concessions for all member nations. The WTO also provides

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technical assistance and training for developing countries. WTO aims for equal
representation among members by granting each member country "most-favored
nation" status; when a member country bestows a trade privilege on another nation,
the privilege must be extended to all other member countries. Another tenet is
"national treatment," which behooves countries to treat foreign imports equally with
those produced domestically.
The best example for joining the WTO is the join of China in 2007, after that, China
achieves lots of benefits from the decrease of tariff, limitations and the simplification
of trading procedures.

EU stands for European Union and is an economic union, which aims to abolish
tariffs and quotas among members, common tariff and quota system, restrictions on
factor movements and harmonization and unification of economic policies and
institutions. It draws out regulations, monitors member states, solves disputes and
problems among member states and negotiates with other countries or international
organizations on the behalf of EU members. The European Union aims to promote
and smooth free trade among internal European Union and initiatives for simplifying
national and community rules include simpler legislation for the internal market
(SLIM) and European Business Test Panel. For example, in Oct 16, 2009, EU and
Korean government signed a free trade agreement of 100 billion US dollars after two
years’ negotiation and EU will cancel the tariffs on imports of textile and cars from
Korea in the next three years. This will promote the free trade of EU and have
positive impact on the economy.

Section 2: International Finance

Balance of Payments and General trends in UK Trade

Balance of payment is the name given to the record of transactions between the
residents of the country and the rest of the world over a period of time. It is a key
economic statistics and UK’s Balance of Payments is comprises by the current
account, the capital account, the financial account which deals with flow of direct
portfolio and investments and reserve assets and the International Investment Position
which shows the Stock of External Financial Assets and Liabilities. The chart below
shows the composition if Balance of Payments in 2008:

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a) The current account can be divided into four categories: trade in goods, trade in
service, income and current transfers. Positive net income from abroad corresponds to
a current account surplus; negative net income from abroad corresponds to a current
account deficit.
Here are the trade figures of recent years:
Here are the Current Account Balance Chart and the Chart of trade in Goods and
services of UK in last 20 years.

The current balance has usually been in deficit over the last 30 years. The UK has
recorded a current account deficit in every year since 1984. Prior to 1984, the current
account recorded a surplus in 1980 to 1983. From 1984 to 1989, the current account
deficit increased steadily to reach a high of 25.5 billion pounds in 1989, equivalent to
-4.9 per cent of Gross Domestic Product (GDP). From 1990 until 1997, the current
account deficit declined to a low of 1.0 billion pounds in 1997. Between 1998 and
2006, the current account deficit widened sharply, peaking at 43.8 billion pounds in
2006. This was the highest recorded in cash terms but only equated to -3.3 per cent of
GDP. In the past two years, there has been a reduction in the current account deficit –
in 2008 it currently stands at 25.1 billion, equivalent to -1.7 per cent of GDP.

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It is obvious that UK had a large deficit in trade of goods in the last 30 years and the
deficit becomes lager and increases greatly from 1998 to 2008 while the surplus of
trade in service grows smoothly but not as markedly as the goods deficit. The trade in
goods account recorded net surpluses in the years 1980 to 1982, largely as a result of
growth in exports of North Sea oil. Since then however, the trade in goods account
has remained in deficit. The deficit grew significantly in the late 1980s to reach a peak
of 24.7 billion in 1989, before narrowing in the 1990s to levels of around 10 billion to
14 billion. In 1998 the deficit jumped by over 9 billion, and it has continued to rise
since, reaching a cash record of 92.9 billion in 2008.

There are two different of Income—Direct Investment Income and Portfolio

Investment Income. The Direct Investment Income means the profits earned by UK
companies from overseas branches and associated company. And the Portfolio
Investment Income is the interest on bonds and dividends, held abroad by UK
companies and residents.
Here are charts of income over the 10 years:

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The income section has shown positive growth from 2006 to 2008 and is very much
in surplus recently.

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As for the current transfer, it also has two different parts:

The taxes, payments and receipts to the EU, Social Security Payments abroad, and
military expenditure abroad is the Central Government Transfer. And for Other Sector
Transfers, it includes receipts from the EU Social Fund, taxes on income and wealth
paid by UK workers and businesses to foreign governments, insurance premiums and
claims.
There is the Chart of Current transfer in last 10 years

The transfers account has shown a deficit in every year since 1960. The deficit
increased steadily to reach 4.8 billion in 1990. In 1991, the deficit reduced to 1.0
billion, reflecting 2.1 billion receipts from other countries towards the UK’s cost of
the first Gulf conflict. The deficit has since increased, to reach a record 13.6 billion in
2008.

b) Compared with Current Accounts, the composition of the Capital and Financial
Account is more complicate.
Capital Account has two categories:
Capital transfer: It is investment grants by the government and debts which the
government has agreed with the creditor do not need to be met.
Acquisition and disposal of non produced/nonfinancial assets: Purchase or sales of
property by foreign embassy or patents, copyrights, trademarks, franchises and leases.

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The capital account has shown strong steady surplus growth especially from the year
of 2006 to 2008.

The financial account has four categories and here are the charts of the four categories
over the last ten years:

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According to these graphs, investment increased dramatically from the mid-1990s,

reflecting the increased globalization of the world economy. Between 2000 and 2007,
other investment dominated cross-border investment, primarily banking activity. In
2008 however, other investment, has recorded net disinvestment as the global
financial crisis deepened leading to a reduction in loans internationally and a
repatriation of deposits. In recent years, including the latest, the UK has needed to
borrow from abroad to finance a continuing current account deficit, which has
resulted in inward investment (UK liabilities) exceeding outward investment (UK
assets).

c) The international investment position is the balance sheet of the stock of external
assets and liabilities. Between 1966 and 1994 the UK’s assets tended to exceed its

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liabilities, by up to a record 86.4 billion pounds in 1986. But from 1995 to 2007, the
UK recorded a net liability position in every year, reaching a record 352.6 billion
pounds in 2006. In 2008, the UK returned to a net asset position of 92.9 billion
pounds mainly due to exchange rate effects.
The chart below indicates UK’s international investment position:

Relationship between the exchange rate and the balance of

payments
The exchange rate is the price of a currency in terms of other currencies. Its effect on
balance of payments will depend upon its relationship with other currencies and how
its value will change. As the currency weakens (devalues) the exports will become
cheaper abroad but the country has to pay more for imports but the goods and services
would become internationally cheaper and lead to more goods a services being
purchased. If demand remains the same then the value of goods and services to the
country will reduce and the current account balance may deteriorate. If the exchange
rate rises then the country’s goods and services might suffer and demand from abroad
could fall. If the demand remains the same however then the value of exports will rise
and the current account balance should improve.
For instance, when the UK market needs to import American goods (such as corns)
the exchange market in UK would be the demand of U.S dollars is larger than the
supply of UK pounds. If the American markets needs import more British goods, they
need to exchange more pounds in the currency market, so the both of demand of US
Dollar and supply of UK Pounds is increasing, meanwhile, the exchange rate of ￡/＄

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is increasing. UK pound is more valuable means the goods of UK are usually more
expensive and American people need to spend more US dollars compared to the same
amount of pounds. That is why the currency exchange rate is so important for the
balance of payments. For example, if the exchange rate of ￡ / ＄ is increasing, the
American business man might not choose UK goods, because of the high price.

Single Currency
European single currency Euro came to exist since 1999. There are 12 member states
of EU who use Euro while UK is still not one of the members since there are both
advantages and disadvantages to join it.
Advantages:
At firstly, the single currency reduces the exchange rate uncertainty because people
don't have to convert money from one currency to another when purchase goods.
Meanwhile, using the single currency will increase foreign investment such as direct
inward investment since the reduction of uncertainty. Then it may produce a great
transparency. Whether people buy or sell goods, consumers can compare price in a
single currency. It will help to decrease the scope for price discriminations and create
pressure to lower the price. Moreover, it could maintain interest rate lower and the
commitment to low inflation should allow economies to operate with lower cost.
Disadvantages:
A country may lose the independent monetary policy if it joins the single currency.
The single currency forces a country to forgo an independent monetary policy. After
the single currency has been used, the country's monetary policy will determined by
the supranational central bank and not by the domestic central bank. This is why the
theory of optimal currency areas emphasizes the importance of flexible prices, labor
mobility and fiscal transfers. Flexible prices and labor mobility become more
important when a currency union exists; governments have an incentive to make
markets work more efficiently.
Besides, there are also political costs to the country. If the government loses control
over monetary policy to the supranational central bank, politicians are limited to using
fiscal policy to influence economy.

Effects on individuals and business of the Euro

As for the individuals, they can get lower prices and higher quality goods and services
when they have more choices due to increased competition among companies through
the Euro zones; they can measure the good price through Europe and choose the best
one. In addition, single currency reduces the transaction costs of traveling in Europe.
Individuals could travel more frequently than past since it is more convenient and
cheaper. People do not need to concern the exchange rate and commission fee when

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visiting the other countries in Europe.

As for the business, people could avoid the exchange rate risk and traders do not need
to waste time and cost on purchasing foreign currencies. Moreover, the business
market could be expanded there are more opportunities.

Section 3: Less Developed Countries (LDCs)

Characteristics of a LDC
Less Developed Countries (LDCs) mainly exist in Asia and Africa. Most LDCs’
subsistence is agriculture. The land of LDCs is very ineffectively used and is very low
in productivity, there are normally no modern techniques or equipment available, and
the land is always threatened by floods or droughts. The birth rates in LDCs are very
high but there is very heavy infant mortality since the health care system is poor.
A good example for LDC is Angola. A 2007 survey concluded that low and deficient
niacin status was common in Angola. Many regions in this country have high
incidence rates of tuberculosis and high HIV prevalence rates. Angola has one of the
highest infant mortality rates in the world and one of the world's lowest life
expectancies.

Current issues that face LDCs

The World Bank offers aid programs to Angola to support the health care system of
Angola to reduce the infections of HIV but the aid programs they get from the World
Bank of IMF carry conditions which they feel are difficult to comply with, and are
expensive.
Besides, the indebtedness of Angola keeps increasing year on year. This makes
Angola almost impossible to borrow more. They borrow a huge amount of money to
develop their economy, purchase foreign goods and service. However, the high
interest or other factors make debts become a great stress on LDCs. They are in the
trip of debts, which prevent the development of their economy.

The impacts of multinationals on LDCs and NICs

Now days, there are more and more multi-national firms which have branches in
various countries since it can reduce the labor, material, transport cost. Companies
from newly industrialized countries tend to be MNCs. A good example for
multinationals on NICs and LDCs is Great Wall Computer Corporation from China.
This company invests 120 million dollars to build a new factory in Algeria to expand
its market and increase 34 percent of its foreign sale income. The company offers
more jobs to the people in Algeria thus increase the employment and income of

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Algerian. The company also brings new technology to this less developed country.
However, the company transfers most of profits back to China and uses their financial
strength to impose their will in host counties either.

Conclusion
After analyzing these 15 elements, you may have a clear acknowledge of the
international trade, finance and LDCs and as for the economic environment of the
whole area, it can be benefit to join the EU. It will enhance our country’s economic
growth by attracting more free capital, using single currency and enlarge the market.

References:
Web research:
http://www.statistics.gov.uk/downloads/theme_economy/PB09.pdfRelated Web sites
http://www.wikipedia.com
http://en.wikipedia.org/wiki/Protectionism
http://www.euro.gov.uk/eurocash.asp
http://www.ftchinese.com/
Book resource:
The Economics 2: The World Economy: Higher National Diploma. Scottish
Qualifications Authority
United Kingdom Balance of Payments the Pink Book 2009: Office for National
Statistics

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