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Economics 2: The world Economy DE3H 35The World EconomyDiao QiweiContentIntroduction 3Three gains from trading internationally 3A recent example about what is meant by free trade 3United Kingdom (UK) absolute and comparative advantage 4The protectionism and two recent examples about demonstrate 4Two barriers of trade and two recent examples of them 5A recent example about the role of WTO 6An EU initiative about the role of the EU in promoting trade 6The composition of the balance of payments 7The general trends in UK trade over the last 30 years 8The way which the balance of payments affected by exchange rates 8Two advantages and disadvantages of the single currency for the UK 9Two effects on individuals and businesses of the single currency 10The relevant examples about two characteristics of LDCs 10The examples about an analysis of two current issues that face LDCs 10The aid of recent examples impact of multinationals on Newly Industrialized Countries and LDCs 11Assess two issues facing NICs or two issues facing LDCs 11Explain the impact of multinational on NICs or LDCs 12Conclusion 12Reference 13 IntroductionThis report has introduced the world economics simply. The content includes: International trade, free trade, Protectionism, the role of WTO and under-developed nation, UK absolute and comparative advantage, the protectionism and two recent examples about demonstrate arguments which government may put forward for its use, two barriers of trade, a EU initiative about the role of the EU in promoting trade, the composition of the balance of payments, the general trends in UK trade over the last 30 years, the way which the balance of payments affected by exchange rates, two advantages and disadvantages of the single currency for the UK, effects on individuals and businesses of the single currency, characteristics of LDCs, an analysis of two current issues that face LDCs, and the aid of recent examples about two impacts of multinationals on Newly Industrialized Countries and LDCs.Three gains from trading internationallyFrom international trade, goods can be produced at lower price as it allows economics of scale to be pursued for some large organizations. Second, it allows goods to be imported which can not be produced in the country and consumers can get more choices and cheaper goods. Third, global trade may help to reduce differences.A recent example about what is meant by free tradeFree trade is a system in which the trade of goods and services between or within countries flows unhindered by government-imposed restrictions. Such government interventions generally increase costs of goods and services to both consumers and producers. Interventions include taxes and tariffs, non-tariff barriers, such as regulatory legislation and quotas, and even inter-government managed trade agreements such as the NAFTA and Central America Free Trade Agreement.The Dominican Republic Central America Free Trade Agreement, commonly called DR-CAFTA, is a free trade agreement. Originally, the agreement encompassed the United States and the Central American countries of Costa Rica, E1 Salvador, Guatemala, Honduras, and Nicaragua, and was called CAFTA.DR-CAFTA together with the NAFTA and active bilateral free trade agreements, including Canada Costa Rica, is seen as bloc agreements instead of a Free Trade Area of the Americas agreement. Panama has completed negotiations with the US for a bilateral free trade agreement, and Belize is a member of the Caribbean Community. Haiti, also a CARICOM member, was expected to be given certain additional trade preferences with the US under the Haitian Hemispheric Opportunity through Partnership Encouragement Act before Congress adjourned during 2006.United Kingdom (UK) absolute and comparative advantageAbsolute advantage is said to occur when one country can produce a good or service to a pro-determined quality more cheaply than another country. Comparative advantage exists when although one country has absolute advantage over another in producing several commodities both countries can benefit from specialization and trade.Two countries, A and B have the following production possibilities for two commodities, Tractors and Wool. Each country has 10 resources and devotes half of these resources to each commodity. Tractors Wool Country A1001000Country B 50750So the country A has an absolute advantage over country B in both commodities. But the advantage it has is much greater for Tractors. For country A the cost of a bale of wool is one-tenth of a tractor while for country B it is one-fifteenth. In terms of the output of tractors foregone (opportunity cost), wool is cheaper in country B than country A. So country B has a comparative advantage.The protectionism and two recent examples about demonstrate Protectionism is the economic policy of restraining trade between nations, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other restrictive government regulations designed to discourage imports, and prevent foreign take-over of local markets and companies. ExampleIn 2002, Qingdao beer manufactory as the first Chinese beer company enters the U.S. marketing. In the same year, U.S. government increases the tariff for importing beer in order to protect the local beer company. In this way, Chinese beer manufactory should pay highly tax to export the beer into American market.On February 17, 2004, the American International trade Committee suggested that is native to China and so on 6 countries the freezing and canned warm Shui Xia levies the high quota counter-dumping tax. In April, 2004, our country fishery big province - - Zhejiang shrimp product to US export comprehensive stop. In 2004 3 in June, our country shrimp product main production area Guangdong shrimp product exported to the US is only 1010 tons, the range of fall reaches 85.9%. China has lost the American shrimp produce market nearly.Two barriers of trade and two recent examples of themA tariff is a tax imposed on goods when they are moved across a political boundary. They are usually associated with protectionism, the economic policy of restraining trade between nations. For political reasons, tariffs are usually imposed on imported goods, although they may also be imposed on exported goods. The tariff has been used as a political tool to establish an independent nation; for example, the United States Tariff Act of 1789, signed specifically on July 4th, was called the Second Declaration of Independence by newspapers because it was intended to be the economic means to achieve the political goal of a sovereign and independent United States.Non-tariff barriers to trade are trade barriers that restrict imports but are not in the usual form of a tariff. In some forms, they are criticized as a means to evade free trade rules such as those of the WTO, the EU, or NAFTA that restrict the use of tariffs. Some common examples of NTBs are anti-dumping measures and countervailing duties, which, although they are called non-tariff barriers, have the effect of tariffs once they are enacted. Their use has risen sharply after the WTO rules led to a very significant reduction in tariff use. Some non-tariff trade barriers are expressly permitted in very limited circumstances.A recent example about the role of WTOThe World Trade Organization deals with the rules of trade between nations at a near-global level; it is responsible for negotiating and implementing new trade agreements, and is in charge of policing member countries adherence to all the WTO agreements, signed by the majority of the worlds trading nations and ratified in their parliaments.In 1994, the WTO members agreed on the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) annexed to the Final Act signed in Marrakech in 1994. Dispute settlement is regarded by the WTO as the central pillar of the multilateral trading system, and as a unique contribution to the stability of the global economic. WTO members have agreed that, if they believe fellow-members are violating trade rules, they will use the multilateral system of settling disputes instead of taking action unilaterally. The operation of the WTO dispute settlement process involves the DSB panels, the Appellate Body, the WTO Secretariat, arbitrators, independent experts and several specialized institutions. An EU initiative about the role of the EU in promoting tradeThe EU is a political and economic union of 27 member states, located primarily in Europe. It was established by the Treaty of Maastricht in 1993 upon the foundations of the pre-existing European Economic Community. With almost 500million citizens, the EU combined generates an estimated 30% share of the worlds nominal gross domestic product.The EU has developed a single market through a standardized system of laws which apply in all member states, guaranteeing the freedom of movement of people, goods, services and capital. It maintains a common trade policy, agricultural and fisheries policies, and a regional development policy. Fifteen member states have adopted a common currency, the euro. It has developed a role in foreign policy, representing its members in the World Trade Organisation. It has developed a role in justice and home affairs, including the abolition of passport control between many member states under the Schengen Agreement.The composition of the balance of paymentsThe balance of payments is record of all financial transactions between a country and the international economy. It is split into two areas. Firstly, the Current Account measuring Trade in Goods and Services. Secondly, the Capital Account which tracks Capital flows into and out. The Current Account is including the Trade in Goods which is covering the exports and imports of goods, Trade in Services which is the result of exporting services against the import of service., Income which is a very small extent from compensation for employees and Current Transfers which is consists of payments and receipts where there is no corresponding exchange of a good or service. The Capital Account is the two parts. Capital transfers which are investment grants by the government and debts which the government has agreed with the creditor do not need to be met. The Financial Account is direct investment, portfolio investment, oil investment, reserve assets. From Croatia Central Bank preliminary statistics show that in 2007 grams of balance of payments current account deficit 3,200,000,000 euros, an increase over the previous year 514,000,000 euros, an increase of 19.1 percent. The current account deficit was mainly due to the huge amount of trade in goods deficit caused by, and trade in services has failed to improve the balance of trade in goods deficit. 2007 grams of goods trade deficit of 9,400,000,000 euros, an increase over the previous year 1,090,000,000 euros, an increase of 13%; services trade surplus 6,300,000,000 euros, an increase over the previous year 610,000,000 euros, an increase of 10.7 percent. 2007 grams of current transfers surplus 1,040,000,000 euros, less than the previous year 61,000,000 euros, down 5.5 percent.The general trends in UK trade over the last 30 yearsIt showed above that UK had a large deficit in current balance in the last 30 years. The highest surplus was in 1981. But the current balance was deficit from 1984 to 2008. And from 1984 to 1989, the current balance has been in deficit and form 1987 deficit increased steeply. The current balance deficit decreased sharply from 1990 to 1991. Between 1992 and 1997, the current balance fluctuates slightly. But from 1998 to 2006, the deficit increased sharply, although in 2002 to 2004 there has a slight decrease. From 2007 to 2008 the deficit has a steep decrease. The main reasons may large deficit in trade of goods balance although the surplus of trade of services has particularly grown in the last 30 years.The way which the balance of payments affected by exchange ratesThe Exchange Rate between two currencies specifies how much one currency is worth in terms of the other. For example, an exchange rate of 6.8 Chinese Yuan to the US dollars means that CNY 6.8 is worth the same as USD 1. Its effect on Balance of Payments will depend upon its relationship with other currencies and how its value will change. If the value of a countrys currency falls and rises, the effect can cause. Positive influence on BOP could be caused by strength of UK pounds so that its uncompetitive for positional importers. But it is good for investing abroad. The minor changes in exchange rate will influence the BOP a lot, just like goods and services prices are not steady in a certain scope. For example, in the UK, in order to cool the housing and consumption booms, the Bank of England decides to push up interest rates more quickly than had earlier been thought would be necessary. This pushes up the value of the UK pound against the US Dollar and the Euro which is the currency which Germany and France use.If the value of GBP rises, just like GBP to USD 1:1.47 in 1986 and 1:1.79 in 1990, the importation is greater than exportation. Thus the deficit occurred. If the value of GBP falls, just like GBP to Germany Mark 1:3.18 in 1986 and 1:2.88 in 1990, the exportation is greater than importation. Thus, the surplus occurred.Two advantages and disadvantages of the single currency for the UKThe United Kingdom will not join the single European currency with the first wave of countries on 1 January 1999. The Chancellor of the Exchequer, Gordon Brown, said in October that, although the government supported the principle of the single currency, Britain would not be ready to join at least until the second wave of countries join in 2002. Advantages: A single currency should result in lower interest rates as all European countries would be locking into German monetary credibility. The stability pact will force EU countries into a system of fiscal responsibility which will enhance the Euros international credibility. This should lead to more investment, more jobs and lower mortgages. On the other hand, Consumers would not have to change money when traveling and would encounter less red tape when transferring large sums of money across borders a single currency would help that transaction pass smoothly.Disadvantages: If governments were obliged through a stability pact to keep to the Maastricht criteria for perpetuity, no matter what their individual economic circumstances dictate, some countries may find that they are unable to combat recession by loosening their fiscal stance. In the United States, Texas could not avoid a recession in the wake of the 1986 oil price fall, whereas demand for Sterling changed in the light of the new oil price, adjusting the exchange rate downwards. The British Retailing Consortium estimates that British retailers will have to pay between 1.7 billion and 3.5 billion to make the changes necessary. Two effects on individuals and businesses of the single currencyFor businesses, the effect of single currency might be an increased competition. There will be more and more competitors. Also it will be removal of the exchange rate and the expansion opportunities within EU. While for individuals, there will be no currency conversion costs for holiday makers. On the other hand, making price comparisons will be easier.The relevant examples about two characteristics of LDCsSubsistence agriculture: land is very ineffectively used and is very low in productivity. There are normally no modern techniques or equipment available. Birth rates are usually high with a low life expectancy. In the LDCs it may be as low as the 1940s. Although generally more orientated towards agriculture, the land in these countries is usually poor and heavily affected by drought and floods with aid often being sought from different countries as crops fail.Unemployment is usually very high with very little industry because most people work on their own small plots of land. The social, culture and religions patterns within these countries are barriers to mobility and change.The examples about an analysis of two current issues that face LDCsDebt burden: some less developed country depend on the debt to keep the government operation. As the time going the debt is accumulating. The agricultural product cant make effective function on debt. Such as, By the end of 2000, although the African countrys foreign loan condition has the improvement, but the accumulated debts foreign loan total amount has surpassed 380,000,000,000 US dollars, increased compared to the early-1990s less than 300,000,000,000 US dollars nearly 27%, the average increases approximately 10,000,000,000 US dollars every year, the outstanding amount approximately composes the whole world outstanding amount 13%, occupies the developing country 15%.The impact on elementary product: the elementary are easy affected by the price, now as the risk of global economy. The situation is hard for exporting. Such as for china, the main exported products are tea, cotton and some other primary product, they are easy affected by the price, the RMB rise has make