The Changing Global Economy - Assignment Example

Assignment 2: Answer 1: The global market producers are following a new trend to dominate the world market. To be more competitive and successful in global market firms need to understand the economies of scale. For some sectors couple of firms became so large that only a few competitor able to compete with them like Coca-Cola, Pepsi in soft drink sector and Google, Yahoo in search engine providing sector. It is a collection of economic models and apart of International Trade which aims to maximize the returns from scale. New Trade theory was developed in 1970’s and early 1980’s.The assumptions to constant return of scale are relaxed by theorist of New Trade. NTT uses the application of mathematical economics and network effects. Traditional theory’s explains that the trade occurs between two countries due to existing comparative advantage. Countries with similar factor endowments and technology engage in significant trade. The NTT emerge due to shift in emphasis from looking for reasons for trade to occur between different nations to looking for reasons to trade to occur between the countries. The NTT suggest the firm with an early entrant advantage will become a dominant one in the market. The reasons for this are that first firm gains substantial economies of scale. Economies of Scale in micro-economics are defined as cost advantage that an enterprise enjoys with increasing scale as the cost per unit of output generally declines. Operating efficiency is also increases with economies of scale. Answer 2: The biggest challenge against free market is the fear among the citizens about outsourcing. This is getting very dangerous every day in United States. Other nations if follow this trend then world can enter into the black days of protectionism again. And the loss for global economy will be huge. Everyday United States news broadcasters are telecasting fearsome news that millions of high paying middle class jobs are getting out of the country. Financial and technological firms are finding that they can outsource a work with a fraction of the cost from China, India or Malaysia rather than give it to an equally qualified United States employee. This put policy maker, government in a stressful situation because United States citizens have already started their protest against outsourcing. That is the reason government now making policies that will prevent the outsourcing. According to Drezner it is a publicity stunt done by the media to sale their news by scaring the citizens on their job. He also explained his ideas that American economy is a huge one with over 130millions jobs. And like when these jobs get out of the country at that time equal number of job created in this country. This is called “Creative Destruction”. He explained that when a firm is outsourcing its jobs from another part of the world to minimize its cost, instead of pressing the alarm we need to calculate how many well paid and higher proportions jobs are creating for that reason. If we look at this profit and loss structure we never have to panic any more. According to statistics during 2010 the number of job were shifted to developing nations are 220,000. These are all low paid and low quality jobs but the numbers of high paid and high quality job created in United States are 22milions. Answer 3: When a trade policy is prepared it affects more to the producer rather than consumer. Because of American trade polices limited foreign companies participate in the market openly. And it increases the price of imported commodities also. In that trade policy it is been cleared that how much portion or what percentage of the product needed to be made in America. Those foreign companies increase their product price randomly. And customers have to pay more for those products. And that is how producers win because they are making more money because of that trade policy. Trade policies are made to protect the competition in domestic market from foreign players. That is reason of increasing tariffs. Goods produced in foreign countries have a reverse effect when it comes to domestic market. The goods where exported will cost more and the country from where it exported will cost low. In this era of globalization where reach of technology and computer is everywhere it is not possible to restrict a group of customer with this tariff barrier. For example if tariffs between Japan and United States decreases customer of United States will have to pay less for cars of Japan and more United State citizen can afford those Japanese cars. Global economy is changing. The government need to looks for the consumers feelings also while making a trade policy. Worldwide firms need to regulate their prices as the products they manufacture are inexpensive and do not take the advantage of the tariffs. (Goldstein, 1993, p.5) Answer 4: There are two reasons behind government intervention in the market- Social efficiency: This is achieved when marginal cost of the production or the consumption is equal to marginal benefits to the society for production or consumption. It is very difficult to judge between fair and unfair distribution. Government also can intervene into the market to promote fairness such as promoting income distribution, basic standard of services to all citizens such as helping people with mental or physical disabilities. Another one can be promote safety where customer is not aware of the product. In United States a regulator call Consumer Product Safety Commission (CPSC) is there who has the authority to regulate the sale and manufacturing of thousands of consumer products. Also government promote sick firms or the firms which are working for the sake of human kind like green energy, bio fuel etc. Macro-economic Objectives: Macroeconomic objectives are controlling inflation; counteract the effect of economic cycle, control the countries balance of payment. Inflation can be controlled by changing the monitory policy. Economic cycle can be counteracting by keep employment steady during recession. And balance of payment can be control by putting tariffs and subsidies to discourage exports. Apart from this there several other reasons which are related to the interest of nation or defense, national pride. Making Transcontinental Railroad during Civil War in United Sates is a intervention because of national interest as well as defense strategy. And organizing summer or winter Olympic in various cities among the world involve huge cost to make world class infrastructure is a matter of prestige for that city. Assignment 3: Answer 1: In “Age of the Multinational,” Gilpin expressed how MNCs have made their presence in global market. The only institutions behind the growth last 25 years economy’s growth are MNCs. MNC can be a “firm of a particular nationality with partially or wholly owned subsidiaries within two or more national economies” . In previous days MNCs did much more investment to gain the access of raw materials of a country or to access the large market of a country. But now days because of FDI multi nationals can easily enter into any market by “Jumping Over” tariff barrier. Because of FDI, MNCs now unbundled their finished products and shifted each manufacturing unit to the least costly area and found a way to maximize their profit. This is called Outsourcing. We found that FDI is growing much faster in last quarter century and MNCs took this opportunity to enter into new markets. To bring peace in global economy MNCs are the key players. That is the reason behind changing behavior of MNC’s with FDI’s. Technological revolution and more open markets are the reason behind expansion of MNCs. Because of new communication technology an organization can be operated from a long distance. That is the reason industries are controlled now a days in global scale. It increases the coordination between firms and a specific location became famous for specific activity like India for Software, Japan for electronics, China for toys etc. Just couple of years ago when a organization tried to work globally its operating cost would have been so large that sometimes company had to scrap the idea. Answer 2: Before 1980 United States dominated the MNC and FDI. But after 1980 it rapidly grows towards Europe, Japan, South Korea, Canada and some Southeast Asian countries also. Presently MNCs are only concentrated in the high income states of the world. North American, Japanese, European MNCs are investing in each other’s countries. But MNCs from developing countries are rapidly growing. MNCs of developing nations market were of 22 billion USD in 1990 and it became 120 billion USD in 1997. From developing worlds market China itself getting 31% of the FDI and other countries getting some amounts are India, Brazil, Malaysia, Indonesia, Mexico, Poland, South Africa but rest of the Africa is not getting that much amount. MNCs bring the benefits like capital, technology, management methods and access to new markets for all the countries and mostly for developing world. Countries which do not entertain foreign MNCs they suffer a lot. Regulators seen that market friendly factors simply over take the unfriendly factors in a long term paths. That is the reason behind the shifting of world economies from restricting MNCs to attracting MNCs. The globalization of production through FDI is increasing so well that without it globalization so quick would not have possible. Now MNCs as their development program try to find out best place for setting up a call centre, best place for setting up a tire manufacturing unit, or best place to set up a research and analysis unit because of that various countries government trying to give that kind of infrastructure and locations to various MNCs, specially this is happening in developing countries. Governments are easing up their tariff policies, tax policies and regulatory environments to bring more MNCs with FDIs. Answer 3: The major performance requirements are as follows: Increased access to capital Access to superior technology Access to superior management methods FDI means incoming of new investment in the country. Most of the MNCs access international capital at a lower price than any domestic organization. MNCs invest in such sectors where domestic firms are not willing to invest and because of FDI domestic rate of investment grows along with economy. New technologies most of the time come to the developing nations via FDI and technology transfer. The manufacturer of those new technologies will not give any government or other sector those high-tech technologies freely. To access those technology for the sake of good of the country government sign a contract with those MNCs and let them access to domestic market. Two examples of performance requirements are global retail brands like Wal-Mart, Tesco are trying to enter India for last couple of years but Indian infrastructure, consumers and government are not yet ready to accept those foreign brands in market because Indian market may have developed in various ways but there still a great amount of presence of local kirana stores, those stores will lose their market and became jobless. Because of recent changes in FDI policy their Government of India allowed 100% FDI in telecommunication industry. That is the reason now a British telecommunication giant Vodafone placing their bid to own the 100% business in India without any joint venture. Location specific advantages are like various places of the world are famous for various resources. No particular area is suitable for manufacturing everything. Like Software development is done better in India because of their talented cheap labour. High-tech and robotics are famous in Japan because Japanese are best to manufacture those products. Movies and weapons are famous of America because of their prestigious past track record etc. This things help to minimize the manufacturing cost and give that much flexibility to play with the price to a MNC that it can dominate its global as well as domestic competitor. Answer 4: Licensing is the agreement between two or multiple parties over any matter where one is allowing others which is normally forbidden. It may be for certain fees or providing some capability. Here conditions and limitations will be there. Licensing for intellectual property include terms, territory, renewal provisions and other limitations. Factors need to consider by MNCs before going into FDI or Licensing: The right of establishment The right of national treatment The right of non-discrimination United States proposed a Multilateral Agreement on Investment (MAI) in 1995 which brings these global principles. Many countries opposed this idea. According that agreement it would restrict the states to pursue independent industrial policies to promote and subsidize approved firms. These policies are not entertained in many nations. Gilpin found that these rules have a little role in global business. In global transactions more than one nation get involved so many times like calculation of tax profit earned in supply chain. But the main problem is political. These terms under which investments are done are not allowed by several countries governments. Those governments are not ready to give away their rights to negotiable technology transfer, employment, export and local content performance requirements. Assignment 4: Answer 1:  The IMF since its establishment had been subjected to criticism regarding their various policies. There are discussed below. Conditionality of Loans Countries need to follow certain policies if they want to be in the lenders list of IMF. These are as follows reducing government burden on subsidies, increasing tax and revenue collection. To do that structural changes need to be done like privatization of government owned industries. After the Asian Financial Crisis during 1997 this stringent monetary policy of IMF been criticized by global leaders. During Asian Financial crisis countries like Thailand, Malaysia, Indonesia, Vietnam had very stressful situation. At that time IMF advised them to tighten up their monetary policy, reduced fiscal deficit and increase interest rates. The result was panic, economy collapsed, unemployment reached at its top and people started protesting against government. Decline in investment from government in public services dried up the economy. Joseph Stiglitz, an economist has criticized the IMF for not giving the best polices to the developing economies and slowing down their growth rate. He said that the IMF "was not participating in a conspiracy, but it was reflecting the interests and ideology of the Western financial community." Exchange rate variation was also criticized by many economists as it brings more confusion among countries. Inflationary devaluation policies of IMF faced more criticism. IMF’s free market reform theory and increasing intervention in different matters among the countries been criticized fiercely. Before implementing any policy IMF does not discuss the matter with respective countries. That been criticized at a great extend. IMF supported military dictatorship among the countries like Brazil and Argentina. This decision of IMF been criticized from the countries been registered into it. In 1960’s Castello Branco received certain amount of IMF fund which was been denied for many countries. Answer 2: As per the diagram when price of US dollars are high at 1.50 Canadian dollars the demand is at Q0, but when price of USD is low at 1.25Canadian dollar the demand is Q1. So we can say when the price of USD is high price of Canadian dollar is high. At that time availability of USD in foreign exchange market is high. But when USD 1.00 is equal to 1.36 of Canadian dollars then Qd=Qs. That means market is in equilibrium. The foreign exchange market is adjusted in the same way like others market been adjusted. That is adjusting demand and supply. For example if greater numbers of tourist visit US the demand of USD will rise and D in the above graph will shift to D2. The new exchange rate will be higher than before like 1.45 Canadian dollars. For example if a European citizen wants to buy American beer, CDs, cars that person need to collect USD to purchase American product. This transaction will be shown in the Balance of Payment book of US export department. Suppose Japanese car producer Toyota wishes to expand its manufacturing unit to US they need to buy USD for Japanese yen. Suppose an individual who leaves in Malaysia wants to buy a company’s share which is listed in New York Stock Exchange (NYSE). At first he needs to sell some Malaysian currency to buy USD, then he has to file a purchase order to their respective Malaysian stockbroker for the NYSE listed company. At last is Malaysian currency account will reduce and his broker will purchase a certain amount of share on behalf of that man. US currency demand largely controlled by- exports of US goods foreign direct investment into the United States the purchase of US financial instruments by those living outside the United States foreign visitors to the United States. Answer 3: If market stayed competitive, cost for transportation is zero, non traded goods does not exist and uncertainty is not so serious issue then exchange rate will follow PPP model most of the time. PPP is a simple model to determine exchange rate in long run. The limitations of PPP are- It does not ensure that Canadian dollar has the same purchasing power in all over the globe. So exchange rate does not always move and does not give us accurate result. It does not give a clear picture between the differences of transportation costs and barriers to trade and investment. That influence price. It does not give the idea on investor psychology that perception causing a bandwagon effect. Flow of capital guide to greater extent by investor perceptions of expected profit. This can relate to weakly price inflation. It does not give any explanation when several giant MNCs are dominating the market and fixing price. All these factors can cause differ of actual exchange rate over calculated exchange rate via PPP model. Purchasing Power Puzzle is a too familiar name to address the anomalies of real exchange rates. Real exchange rate is more volatile and persistence than most of the models. These volatility and persistence is normally referred to Purchasing Power Puzzle. It is difficult to explain volatility and persistence of PPP deviations without recognizing international goods markets are not so well integrated like domestic goods market. Answer 4: A transition economy is characterized which is shifting to free market economy from a centrally planned economy. The prices in a transitional economy are determined by free market forces that is demand supply equation rather than central planning organization. The economic liberalization is characterized by privatization of state owned enterprise and capital mobilization. Examples of transition economies include China, former Soviet Union and many third world nations. In a non-market economy the prices of the commodities and goods are fixed .The Transition towards a market –based economy from non-market economy is difficult to follow as the main steps involved are Macroeconomic Stabilization, Institutional and Legal reforms, Privatization and Re-structuring and Liberalization. The process of eliminating trade barriers to encourage Free trade and allowing price to be set by market forces is liberalization. The major Challenge in the transition of the economies is the inflation control as liberalization is followed by high inflation. The government role here is critical, it have to make well planned monetary and budgetary policies to curb the effects of Inflation. Restructuring and privatization are done by transfer of ownership to private parties. Institutional reforms are modified to promote healthy competition. Restructuring also is required in the distribution system. Due to all this factors transition towards a market-based economy is often a difficult path for a non-market economy. Throughout history transition of economies encountered difficulties Institutional arrangements can be defined collectively as the processes, policies and also the systems to plan and manage activities and resources efficiently and effectively .Institutional arrangements are made in order to fulfill the mission of the country Institutional arrangements are the “rules of the game” by which the political economy of a country affects its level of economic well-being by influencing the engines of economic growth--innovation and entrepreneurship. They are important for economic growth and development because they are the mechanism by which individuals are encouraged to stay in disadvantaged area. Brightest minds from developing nations are migrating to developed countries for better offer and life. With Institutional arrangements this can stop and result in “brain gain”. Public institution and universities working with the public sector can welcome individuals to return to their own country and work for economic development and for this they will be fairly compensated. This will result in economic prosperity. Without institutional arrangements the brilliant minds and the skilled workers will migrate to developed countries hindering economic growth. Reference: Goldstein, J. (1993) Ideas, Interests, and American Trade Policy. USA: Cornell University Press. Read More