Relation between Trade and World Output - Essay Example

The history of trade s back almost to the creation of the universe itself. The practice of trade has ever since been very useful to humanity in not only creating employment to the traders but also in allowing the consumers to buy what they need but cannot produce. The economy of most countries depend on trade to not only get revenue through taxes paid by traders who do business within that country or export goods but also helps in importing commodities that are needed in a country but the country doesn't produce them. This paper seeks to not only survey what trade and world output are all about but to also show their relation. Trade may be construed top refer to the business of transacting i.e. buying and selling of securities or commodities. It is also called commerce. Alternatively, trade may also refer to the willing transfer of goods or services or a combination of both from one party to another. One party is termed as the seller and the other the buyer or consumer. Therefore, for a transaction to be complete, and therefore say that trade has taken place, there must be the buyer, the seller, the commodity presented as goods or services or both and above all willingness for transfer of the commodities at agreed terms. Initially, the kind of trade done by our fore fathers was mainly barter trade but presently, many businessmen negotiate transactions through a medium of exchange called money. The two many types of trades may be distinguished by the number of parties involved in a transaction. For instance, trade between two traders or businessmen is termed as bilateral trade whereas that between more than two is said to be multilateral trade (US Congress, 1984). On the other hand the concept of world output needs to be understood before its relationship with trade can be highlighted. World Output is also called Gross world product (GWP) and it is the sum total Gross National Product (GNP) of all the nations in the whole world. Further, to understand GWP, there is need to define what GNP is all about. GNP is the measure of the average output of a country. Therefore, when all the average outputs of all countries in the world are added together they give the GWP. Gross Domestic Product, GDP also called Gross Domestic Income, GDI, of a country is the is the total cost of all the finished goods and services produced that particular country within stipulated period of time (usually a year). The other meaning of GDP is the sum total of all profits at every level of production of the finished goods and products in a country in a year. GDP is slightly different from GNP in that GNP, in its calculation includes foreign income usually in terms of investment which is not the case with GDP. Therefore, as said earlier, the GNP of each country is very important in the determination of the world output (Stutely, 2003). In the establishment of the relation between GNP and world output otherwise called GWP trade is implied because GNP is said to be the measure of the output of nationals in a given country. It usually focuses mainly on the parties that own the production. For instance, the measure of GNP revolves around American firms without regard of their location. The firms are the owners of production and this production is nothing without trade. Come to think of production: Purchase of raw material, conversion into finished goods and selling of the finished goods. So you reckon that trade is at every level of production and this production determined GNP ant this automatically tells us that trade determines or rather plays a major role in GNP and since sum total of GNP of all countries realizes the GWP, then trade determines GWP. This conclusion points to the relation between trade and world output (GWP) which simply boils down to a simple statement that the more the trade either bilateral or multilateral, the more the world output and vice versa. In 2005 the GWP rose by 4%. The growth was of course caused by increments in GNP of most countries with China leading the list with 9.3% followed by India with 7.6% and Russia was at the third position with 5.9%. Other countries posted insufficient growth such as US with 3.5% with the developing countries' output being eroded by challenges such as population growth. In 2008, it was witnessed that the world output, hence the world economy went into recession having experienced growth in the previous years represented by the increment in prices of oil and common basic foodstuffs. The world economy slowed down giving a relief from the higher prices of oil and foodstuffs and slowing down of the economy came with increased inflation (Goodman, 2008). It is during 2008, a period when the world economy dramatically slowed down, when it was realized that trade output was also affected. This observation brings out clearly the relationship between world economy (world output) and trade output. From the 2008 scenario, it was evident that the trade output suffers loss. World output affects trade output just the same way demand affects supply or supply affects demand. In other words, the relationship between trade and world output is the same as that of supply and demand. Therefore, the higher the world output, the higher the trade output and vice versa. To explain the fact that low world output means low trade output, the impact of the personal financial stability, financial future and predictability on the trade output is investigated. It is noted that that people will tend not to buy as many goods or services as could have done if they felt good about their personal financial future. This explains why business output decreased markedly during the world economy recession. Further, during recession, the currency of a given country may weaken thus making importations so expensive and imports too cheap for the country to gain su7bstancially and because of this the country may resolve to suspend imports until its currency has stabilizes and this affects trade (Hill Charles, 2003). The broad pattern of international trade can be examined by an insightful look at world output and its corresponding trade output patterns and the potential for growth in the future. The information that can be used to give the broad pattern of international trade can be got from the various agents of customs not only tell us who is buying from who but also tells us what is being bough ,by who and from who. Generally, more than 60% of world trade is witnessed to be the trade between the wealthy countries. Trade between wealthy and countries with medium wealth or between wealthy countries and those with low incomes claims about 36% of world trade. Trade between two countries both with low incomes accounts for a mere 6% of the world trade (Reuvid, 1997). As stated earlier, when the world economy slows down, the trade output is affected especially because most countries' currencies weaken thus finding it quite difficult to import some commodities. In such incidences, the country has some options some of which it can suspend imports and use its strategic reserves or import only those commodities that it cannot do without. A good example of a country that found itself in such a situation is the developing country called Kenya which faced an acute shortage of maize flour used to cook the favorite meal in the country called Ugali. This happened starting from September 2008 which coincided with the period during which the world output slowed down significantly. Its currency, the Shilling, lost ground against the Dollar, Euro and even the Pound. In short, the Shilling weakened making imports damn expensive for the country. However, there was no way the country would continue ravaging in hunger due to the shortage of maize and thus this made the country make a very expensive import of 2 million bags besides the more than 6.5 million bags it had imported initially (Standard Team, 2009). However, a country, in response to world economic recession, may suspend imports of luxurious commodities such as phones; cars etc and continue importing things it cannot do without such as foodstuffs, medicine etc. This is a choice that a country has to make and it depends on the individual country's priorities. In conclusion, the world output is affected by trade and in turn affects trade in that in an event that world economy or output slows down, the world trade will automatically suffer recession in response to the disturbance. Country's trade affects its GNP and consequently affects the GWP thus affecting trade in other countries. This is why when trade in the US slowed down, it went down with the world trade. Low world output weakens a country's currency making imports expensive this forcing the country to choose those commodities that it cannot do without and suspend that of commodities it can comfortably do without. References US Congress, 1984: Trade: U.S. Policy Since 1945, Congressional Quarterly Incorporated, pp5-7 Stutely Richard, 2003: Guide to Economic Indicators: Making Sense of Economics Bloomberg Press, pp3-5 Goodman Peter, U.S. and Global Economies Slipping in Unison, New York Times August 23, 2008 Hill Charles, 2003: International Business: Competing in the Global Marketplace Irwin Publishers, pp178-9 Reuvid Jonathan, 1997: The Strategic Guide to International Trade, Kogan Publishers pp3-5 Standard Team, 2009: No cheap flour as many face starvation, The Standard Daily 12th Jan 2009 retrieved on 13th Jan 2009 from http://www.eastandard.net/InsidePage.php'id=1144003905&cid=4 Read More