HND Economics 2 The World Economy世界经济学报告.doc

World EconomyEconomics 2: The World Economy Rework ContentIntroduction-3Section 1: International TradeThree gains from trading internationally-3Free Trade-3Absolute and Comparative Advantage-3Protectionism-4Barriers to trade-4WTO and EU-5Section 2: International FinanceBalance of Payments and General trends in UK Trade-6Relationship between the exchange rate and the balance of payments14Single Currency-15Effects on individuals and business of the Euro-15Section 3: Less Developed Countries (LDCs)Characteristics of a LDC-16Current issues that face LDCs-16The impacts of multinationals on LDCs and NICs-16Conclusion-16References-17Introduction: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 TradeThree 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 companys 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 tradeFree 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.Absolute and comparative advantageAbsolute 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 phoneComputerJapan200020000Korea100015000It 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. 20000/2000For Korea it is 15, i.e. 15000/1000But 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.ProtectionismProtectionism 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.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 tradeTo protect a countrys 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 aretariff 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 cars 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 2008to 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 EUIn 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 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 FinanceBalance of Payments and General trends in UK TradeBalance 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 UKs 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: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.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 IncomeDirect 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:The income section has shown positive growth from 2006 to 2008 and is very much in surplus recently.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 yearsThe 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 UKs 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.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: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 UKs assets tended to exceed its 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 UKs international investment position:Relationship between the exchange rate and the balance of paymentsThe 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 countrys 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 / is increasing. UK pound is more valuable means the goods of UK are usu