Assessment Front Sheet

Assessment Title LO1, LO2, LO3 - REPORT

Qualification Module Code and title

HND in Business HP7248
Economics 2 - The World Economy

Student Name and ID Assessor’s Name

02000327
Arjun Christopher Mrs. Anushka Siriwardana

Cohort Deadline Submitted on

Batch 05
1st June 2020 01/06/2020

LO
Learning Outcome Task no
No.

 Explain international trade and the role of trade organisations

1,2,3  Analyse the balance of payments and exchange rate regimes 1 - 14
 Evaluate world economies

Learner Declaration

I certify that the work submitted for this Assessment is my own and research sources are
fully acknowledged.

Student Signature: …………………………. Date: …………………..

Page 1 of 10
Table of Contents
1. Free Trade...........................................................................................................................3
2. Absolute And Comparative Advantage...............................................................................3
3. Gains Of International Trade..............................................................................................3
4. Protectionism And Barriers To Trade.................................................................................4
5. Roles Of The World Trade Organisation.............................................................................4
6. Roles Of The European Union.............................................................................................5
7. Balance Of Payments of UK................................................................................................6
8. General Trends In UK Current Balance Balance.................................................................6
9. How The Balance of Payments Is Affected by Exchange Rates..........................................7
10 Advantages And Disadvantages Of Fixed And Floating Exchange Rate.............................8
11. Effects Of Fixed Rate And Floating Rate On Individuals And Businesses..........................8
12. Characteristics Of Less Developed Countries (LDCs).........................................................9
13. Issue Of Newly Industrialised Countries............................................................................9
14. Impact Of Transnational Firms On Newly Industrialised Countries..................................9
15. References.......................................................................................................................10

Page 2 of 10
1. Free Trade
Free trade is the exchange of goods and services across national border without any
government restrictions. When free trade exists firms are free to export and import what they
want in the quantities they want.

2. Absolute And Comparative Advantage

Country Cheese Wine
USA 2000 500
France 4000 2000
Absolute Advantage
Means that an economy can produce a higher total of goods for the same quantity of inputs.
With given set of resource USA can produce 2000 cheese and France can produce 4000 Cheese.
So, France has an absolute advantage for producing cheese over USA.
USA can produce 500 wine and France can produce 2000 wine France also has an absolute
advantage for producing Wine over USA. According to absolute advantage France is better at
producing both cheese and Wine.
Comparative Advantage
This is when a country can produce for the lowest opportunity cost. Below is the opportunity
cost for the two products.

Country Cheese Wine

USA 0.25 4
France 0.5 2
USA has a lower opportunity for producing cheese over France, so USA has a comparative
advantage for cheese
France has a lower opportunity for producing wine over USA, so France has a comparative
advantage for wine

3. Gains Of International Trade

Doing business in other countries can boost your company's reputation. Successes in one
country can influence success in other adjacent countries, which can raise your company's
profile in your market niche. It can also help increase your company's credibility, both abroad
and at home.
Efficient allocation and better utilization of resources since countries tend to produce goods in
which they have a comparative advantage. When countries produce through comparative
advantage, wasteful duplication of resources is prevented. It helps save the environment from
harmful gases being leaked into the atmosphere and also provides countries with a better
marketing power.
More employment could be generated as the market for the countries’ goods wider through
trade. International trade helps generate more employment through the establishment of

Page 3 of 10
 newer industries to cater to the demands of various countries. This will help countries to bring-
down their unemployment rates.

4. Protectionism And Barriers To Trade

Protectionism are tools used by the government to involve international trade, the main
justification for protectionism is protecting the infant industry and domestic employment.
Government uses barriers to trade which are obstacles that the government imposes to make it
difficult for foreign companies to enter into the market. Examples tariffs, quota, embargo, red
tape.
Government use barrier to entry to
1. Protect the domestic employment with the demand for imports been higher the domestic
demand is lower reducing the demand for labour.
2. To prevent dumping, refers to the process of selling gods in an overseas market at a lower
cost even below the cost of production.
3. To protect the infant industries, these industries cannot compete with the brand power
quality and prices of multinational companies.
4. To protect sunset industries, industries that are on the decline stage are protected and usually
run by government to protect employment. [ CITATION Bam15 \l 1033 ]

5. Roles Of The World Trade Organisation

World Trade Organization is an international organization that oversees international trade
agreements, more trade takes place between nations when their governments encourage
rather than discourage it. The WTO has the following roles:
1. Trade negotiations
Negotiation of trade agreements between members, trade barriers are being lowered across
countries. Therefore, the negotiation process is essential to fulfil the WTO's core functions of
ensuring that trade is conducted as freely and fairly as possible.
The largest forum for trade negotiations is the WTO Ministerial Conference, which is held every
two years and brings together all Member States. At such conferences, specific issues related to
world trade can be discussed and decisions can be made on the issues included in the
multilateral trade agreement.
2. Dispute Settlement
The WTO dispute resolution system is a multilateral system for resolving disputes between
members who have violated trade rules. If a Member State violates the WTO Agreement,
another Member State may file a complaint with the Dispute Setting Body (DSB). Through this
system, rights, obligations and agreements between Member States are maintained and
existing provisions of those agreements are clarified as they could not force.
3. Monitoring

Page 4 of 10
 The WTO's oversight functions include oversight, implementation, administration and operation
of covered agreements. In particular, the Trade Policy Review Mechanism (TPRM) allows
regular review of WTO member country regulations to ensure compliance with WTO law.
4. Information and capacity building
This consists of conducting economic research, collecting and distributing trade information in
order to gain a better understanding of trade trends, trade policy issues, and multilateral
trading systems. Capacity building involves helping developing countries, especially least
developed economies, to fully participate in the world trade system.
United Kingdom has been a WTO member since 1 January 1995. Until 31 January 2020, it was a
member European Union. European Union and the United Kingdom have agreed a Withdrawal
Agreement from the Treaty with European Union, which provides for a time-limited transition
period of 11 months to negotiating and implementing trade deals and regulation for Brexits.
The UK a member of the WTO, if there’s no new trade agreement in place then, trade in both
directions will revert to WTO terms.
WTO negotiated tariffs which act like a tax on goods -- that the EU now places on third parties.
The bloc currently accounts for 46% of U.K. goods exports, and the shift could bring costs,
controls and red tape that haven’t existed for decades. The EU’s average tariff rate is 3%, but
tariffs would be much higher for certain product[ CITATION was20 \l 1033 ]

6. Roles Of The European Union

A responsible neighbour
To the east and south of the European Union are many countries that have, or are, undergoing
dramatic political change. With the transition to full-fledged democracy, European Neighbour
Policy aims to maintain strong and friendly relations with countries on the border of the
European Union. Opening trade and cooperating in many political areas, including immigration
and visa issues, while promoting democracy, good governance and human rights, are part of
the goals of policy.
Human rights policy
The EU has made human rights a central dimension of its diplomacy, and has expressed this
focus in political dialogue with third countries, its development policies and aid, and
participation in multilateral forums such as the United Nations. Rights policy guidelines covering
areas such as death penalty, torture, and freedom of expression online and offline.
Trade blocs
The European Union is the largest trading area in the world. Trade is a common policy. That is,
international trade agreements are negotiated and signed by the EU, not by individual Member
States. This allows the EU to speak in one voice with international partners as it works to
promote a free and fair international trade system.

Page 5 of 10
7. Balance Of Payments of UK
Balance of Payments, simply referred to as BOP accounts are an accounting record of all
monetary transactions between a country and the rest of the world. These transactions include
payments for the country's exports and imports of goods &services, financial capital, and
financial transfers.
The BOP consists of four main components;
 Current Account,
 Capital Account,
 Financial Account
 Net Errors and Omissions account
The UK current account deficit widened to 4.3% of nominal gross domestic product (GDP) in
2018, from a deficit of 3.5% of GDP in 2017, and remains high by historical standards.
This was driven mostly by the widening in the trade deficit from 1.2% to 1.8% of GDP in 2018 –
the largest trade deficit since 2010; in addition, there was a slight widening to the deficits on
both primary income and secondary income, which reached 1.3% and 1.2% respectively.
The UK financial account recorded a net inflow of £77.2 billion in 2018, equivalent to 8.3% of
GDP, as foreign residents invested £177.7 billion in the UK offset partially by UK residents
investing £100.6 billion overseas.
The capital account widened slightly to £224.2 billion at the end of 2018, equivalent to 10.5% of
nominal GDP.

8. General Trends In UK Current Balance Balance

The current account is a country's trade balance plus net income and direct payments. The
trade balance is a country's imports and exports of goods and services. The current account also
measures international transfers of capital.

Current Account data was reported at -923.000 GBP million in Dec 2019. This records an
increase from the previous number of -26,109.000 GBP million for Sep 2019. United Kingdom’s
Balance of Payments: Current Account data is updated quarterly, averaging -812.500 GBP

Page 6 of 10
million from Mar 1955 to Dec 2019, with 260 observations. The data reached an all-time high of
2,431.000 GBP million in Mar 1981 and a record low of -37,213.000 GBP million in Sep 2016

Balance of Trade is the combination of both trading goods and services of a current account.
Trade data was reported at -2,960.000 GBP million in Jun 2018. This records an increase from
the previous number of -5,482.000 GBP million for Mar 2018. United Kingdom’s BoP: CA: Trade
data is updated quarterly, averaging -282.500 GBP million from Mar 1955 to Jun 2018, with 254
observations. The data reached an all-time high of 3,995.000 GBP million in Mar 1995 and a
record low of -19,962.000 GBP million in Sep 2016.

9. How The Balance of Payments Is Affected by Exchange Rates

Exchange rate is the price of one currency in terms of another. A floating exchange rate is one
determined by market forces. The price of the currency is determined by the relative strengths
of the demand for and supply of the currency.
An increase in the supply of a currency will result in a fall in its value. A fall in the value of a
currency caused by market forces is known as a depreciation.
Assuming £1= $1. A UK produced Cars and each is $10,000 in USA. A currency depreciation will
affect the balance of payment as the export price will decrease to $8000(£1= $0.8), demand
pull inflation will increase, increasing the aggregate demand, leading to an increase in net
exports, as a result the balance of trade will be surplus or decrease in deficit.
A rise in the value of the currency, caused by an increase in demand and/ or a decrease in
supply is known as an appreciation.
A currency appreciation will affect the balance of payment as the export price will increase
$12000 (£1= $1.2), the export demand will decrease in UK, that will lead to a lower demand pull
inflation, and aggregate demand, leading to reduce in net exports as export demand decrease
and import demand increase, as a result the balance of trade will be a deficit or a decrease in
surplus.

Page 7 of 10
 10.Advantages And Disadvantages Of Fixed And Floating Exchange Rate
Fixed exchange rates
Advantages
1) Advantages there are high certainty for the investors, that there will be more investments
entering the economy creating higher growth.
2) The stability in price will encourage international traders to trade more increasing world trade.
3) the effect of speculator will be low as they cannot make a profit in this market.
Disadvantages
1) The government will require a significant reserve to maintain this currency, which involve a
great opportunity cost.
2) To maintain the exchange, rate the government might have to sacrifice other policy objectives.
3) The currency might be under or overvalued, which will harm the competitiveness of the
product.
Floating exchange rates
Advantages
1) A freely floating exchange system does not require the central bank to hold massive reserves.
2) The government intervention is minimum so the government can focus on other objective like
economic growth.
3) The floating exchange rate reflects the true values of trade.
Disadvantages
1) Due to constant fluctuation, there is very high uncertainty a high risk for investment.
2) A government may rely on a fall in a floating exchange rate to restore any loss in international
competitiveness arising from inflation.
3) There is also no guarantee that a floating exchange rate will eliminate a current account
surplus or deficit.

11.Effects Of Fixed Rate And Floating Rate On Individuals And Businesses

Floating exchange rate
Company- Floating exchange rate system put forward higher requirements for company's
macro-economic management capacity and development of financial market. increases
company's management and operation cost. The company directly produces exchange loss.
Individuals- In the floating exchange rate system, exchange rate tends to fluctuate significantly,
which is not conductive to individuals’ investment with floating exchange rates, individuals
might speculate in financial markets Individuals are beginning to realize the challenge of price
advantage recession and the necessity of improving non price competitiveness. The individuals
begin to realize the importance of monetary settlement timing and monetary currency
selection.

Page 8 of 10
Fixed Exchange rate
Individual- it will make household decisions easier to make price comparisons between import
and exports. Interest rates may rise to maintain the exchange rate, this will encourage
individuals save more.

Business- businesses may be able to plan with greater certainty over prices for exports/imports,
that will give an advantage for the business to make higher profits. Government may ignore
business needs in maintaining the policy

12.Characteristics Of Less Developed Countries (LDCs)

Unemployment
The existence of a considerable amount of unemployment, underemployment, and disguised
unemployment. Traditional agricultural sector cannot cope with the rising population. As a
result, the magnitude of hidden unemployment is mounting in these countries. Finding no
alternative employment opportunities, rural people flock to the urban areas in order to survive.
GNI per capita
The most important indicator of economic backwardness is per capita income. Per capita Gross
National Income (GNI) of LDCs is very low. That is why most people in such countries live under
severe hardships. They do not get sufficient food to eat, adequate medical care and minimum
educational opportunities. About 40%- 50% people in such countries live below the poverty
line. Afghanistan a LDC, the GNI per capita is $633, the average GNI per capita for a developing
country is $7064.

13.Issue Of Newly Industrialised Countries

Singapore is to maintain a pro-business environment. Singapore ranks high on the ‘ease of
doing business’ index but the economy has now transitioned from being cost-based to
innovation-based, and the government needs to constantly refresh its incentive and regulatory
environment to seize new opportunities. For example, a consequence of the U.S.–China trade
war and the rise in protectionism has been a shift in global and regional supply chains.
Singapore is targeting high-value and innovative segments of the chains, as its competitive edge
lies in business trust, standards and quality assurance, a skilled workforce, intellectual property
protection, availability of research, and development grants and partnerships with government
agencies and academia.

14.Impact Of Transnational Firms On Newly Industrialised Countries

The companies earn, invest, & bring foreign currency into the country. Though most of their
earnings come back to the company’s country of host, all the remunerations do come to the
local economy
The salaries paid to host country workers are very low and a lot of companies have been
accused of exploiting the workforce before benefiting it. There are often tax incentives for

Page 9 of 10
these TNCs to locate in countries in NICs. Due to the fact that they get lots of their profits out of
the country that says the real economic benefit to the country could be limited.
TNCs may make use of transfer price and other tax avoidance measures to significant reduce
the profits on which they pay tax to the government in the host country.

15.References
Bamford, C. & Grant, S., 2015. Cambridge International AS and A Level Economics. 3rd ed.
s.l.:Cambridge University Press .
Ceicdata.com, 2020. United Kingdom BPM6: Balance of Payments. [Online]
Available at: https://www.ceicdata.com/en/united-kingdom/bpm6-balance-of-payments
[Accessed 01 06 2020].
MAJASKI, C., 2019. Newly Industrialized Country – NIC. [Online]
Available at: https://www.investopedia.com/terms/n/newly-industrialized-country.asp
[Accessed 01 06 2020].
UKEssays., November .2018. Impact of Transnational Corporations on NICs. [Online]
Available at: https://www.ukessays.com/essays/economics/impacts-of-transnational-
corporations-on-newly-industrialized-countries-economics-essay.php
[Accessed 01 06 2020].
washingtonpost, 2020. washingtonpost. [Online]
Available at: https://www.washingtonpost.com/business/how-britain-and-the-eu-would-
trade-under-wto-rules/2020/02/03/1470a694-467c-11ea-91ab-ce439aa5c7c1_story.html
[Accessed 24 05 2020].

Page 10 of 10