Taking the Steps towards Economic Stability - Essay Example

?Running Header: Taking the Steps towards Economic Stability Topic The world trade organization all is experiencing the economic crisis that greatly affects and made some economy suffers on its negative impact as of today. Many economies are making some loans and borrow some funds on the several banks and other financial institutions to remedy their situations yet they also find it hard to repay. Basically, even the ordinary people when thinking of payment people tend to worry so much. Money talk is really a very complex topic. There are so many things that you have to consider. There are lots of conditions that need to face. Balance of payment is a wide varying area that needs to discuss especially by the government.  Every country of whatever government structure has balance deficit that needs to take care of by current government officials as well as incoming officials. However, this subject is not only a concern by those of the government but also those of the citizens of a certain country or place. However, looking at this concern, one must have intelligence and knowledge as there are many terms and conditions apply. Is reducing balance on the payment deficit important? If you are winding around trying to find the perfect answer to this question the main answer is yes. It is at all. Deficits on payment will simply find your status in the global market. Good reputation in the global market is necessary to set up rapport and increase market demand and supply. Study shows that those markets with good reputation have big chances of development. There are lots of consequences brought about reducing balance of payment deficit.  It is important to increase the economic status of a certain country to cope with the balance in deficit. A perfect way to increase economic state is by enhancing the foreign exchange capacity of a given country. It is important to have a sense of balance. The two main things that need to balance is the export and import capacity of a country. These two is in a unified balance. The demand for import is always reciprocal to the export demand. Any disequilibrium among the two will result into chaos.  There are lots of consequences and factors that could greatly affect the payment balance. While most of these factors are greatly controlled there are also factors that have no control over. First and most important factor is the economic situation especially the economic growth of a certain economy. If the economic state is running smoothly surely demand on the common commodities will raise as most person have the buying capacity for such commodities. Once the supply for basic commodities as well as complex needs is not enough for the consumers the perfect remedy is to import goods from other countries. The importing capacity of a certain country is a good sign.  Another important factor is the exchange rate of the monetary fund in the international market. It is important for a certain place to have a great exchange capacity. Once a country has increase exchange rate importing power is highly good. This is a good sign of growing economic state. Another most important result that needs to mind about is the borrowing of funds. Most of the third world country borrows funds in the international bank to pay their balance on the payment deficit as well as to have budget on other projects of the country. Lending a fund is good but it needs a lot of intelligence in spending capacity to properly budget each funds. Properly spending the funds is necessary to have the power to pay any balance deficit. In reality, balance of payment is not good at all. Hence, borrowing is not good either. It may just increase the burden of accumulating these payment deficits. One helpful thing that a country might consider is to increase its exporting capacity. In this effort, income generating ability of a country will boom and so with the economy. Exporting is also a beneficial way to provide adequate livelihood for people.  If the Income Account shows a negative result, then the country is paying more than it takes its dividends and interest. The capital account that shows the record on the trade flow globally on transferring the payments related to the capital products so records on the economy flow of a country’s inflows and outflows on the payments as well as the ownership on the fixed assets in terms of capital goods. Clearly, the government policy is open to use yet it’s debatable. Like for example. The export subsidies which although it severely lacks the commitments to the WTO or the World Trade Organization and on the Single European Market membership, the investment allowance on tax encourages the increase research as well as development on spending. The better implementation and strict observance of this macro policies surely can help the economy to increase its business confidence.  These policies which are devaluation, deflation and supply side rules are tremendous ingredient to lift up on the consequences of reduce balance of payments deficit.  Foreign countries are there too to help subsidize such situation of a country’s turning down economy yet it also starts charging the bigger interest rates through loans either for long-term or short-term loans making more default situations with higher debt. Such economy find it also hard to pay the loans or even the imports which is already made , the next option to resolve is asking for beg on rescheduling of payments for the foreign loans which is actually hard to pay or make additional loans. Seeking for the help of International monetary fund also shows good hope for the country’s economy but it requires some certain conditions for the IMF to grant the country’s economic loan. The BOP or Balance of payments has two main parts which are the current and capital accounts. Current account presents the net amount earn when it is in surplus or amount intended for spending when it is in deficit status while the capital account contains the records of the net change for foreign assets which composes of the reserve account, investments and loans. Economic growth and the movements of payments in balance contribute to the link of growth in economy when accelerated and improved through economic quotas and maximum performance of business sectors. The balance of payments deficit pertains to the situation if a certain country has an import of large goods volume as well as higher rate of services which serves as a short-range booster on the standard of living which let many consumers to purchase items of high quality and durability along with other items.  The broadening of trade deficit is also a result on the higher imports of Capital equipment and machinery providing the great boost in the country’s economic potential output. The investment on imports contributed to the progress with great competitive effort in raise the viewpoint of employment rate increase and best source of income from the better supply-side of economic performance. Nevertheless, in the long run, the trade deficit becomes the symptom of declining domestic economy as well as it lacks the sense of competitiveness in international market that often reduce the standard of living. There are consequences in reducing a balance of payments deficit that’s why it is very necessary to observe strict policies before making such action. The distinction between the demand and supply plays a significant effect to consider on the causes of the barriers.  Tracing the root of the main cause resulting to higher trade deficit along with the extreme level of collective demand, such deficit can then resolve automatically in the situation where there is an economic recession or collapse in economy that contributes to slow spending and real incomes downturn. Conversely, cost progress and competition when it comes to non-pricing can lead to the expansion of economic productivity which is potential and essential especially on the part of potential trade sector, making it grows which has no need for the external position in continuance of its deterioration. The improvement in UK’s trade performance is on the basis of its central manufacturing sector healthful for its economic growth. Manufacturing sector in a growing economy can intensify the economic progress which in fact accounts to 75% in the aspect of exports. Strategy of governmental growth centers in the supply part of the economy using the effective policies that take time in working it out to become successful. Various policies which can help reduce the power of spending among consumers are fiscal policy, greater rates of interest which will reduce the expenditures of the consumer and growth of the economy as well as imposition of expenditure switching policies.  The policies encourage consumers to shift the method of spending from imports to the domestic firms output or production.  Switching of expenditures happen once the relative price from imported products is increasing or when the relative rate of exports decreases in an instance. These measures include depreciation of the exchange rate that affects the increase on the imports cost and lessens the foreign prices among the exported services and items. A decrease on exchange rates can also contribute to the profit of abroad exportation of products which often on this event signals the profit , acts as good incentive for businesses on a specific country along with the good reallocation factors on resources  serve as effective tools in marketing exports. Import controls through tariffs are occasionally utilized with the country’s bounded commitments and pledge on performing well in World Trade Organization.  It is not feasible for an economy to use protectionist strategies on working out the total deficit on trade.  Observance of policies is necessary to reduce the rate of price hike in the economy lower than the international competitors heading to a step by step procedure on progress of competitive pricing. The best key for the tolerance and control of the balance of payment deficit in long-range of time for a certain economy must require a relative inflation of low sufficiency in the productivity capability so that such economy can meet the domestic demands of those consumers or users.  Usually, the pricing of goods or services is not the deciding issue for winning the demand from purchasers in a greatly competitive market internationally. Setting on the highly competitive economic markets globally bears a necessity for the driven factors that pave way for the continue research and improvement on spending in an area which affects the economy yet some were lag behind it. The gap on research and development stimulates the progress in the economy of a certain nation. Yet in UK economy, it continues a lag on this aspect like for an instance, the level of R & D like the investment in UK industries  pursue to invest on the department of Trade and Industry but after the total spending of R&D through the British Industry, it fell  at 1%  of ?17bn last year. In contrast of the investment of R&D, the world’s top 1000 business companies reached 5% to   ?220bn.  The implication is on the event when the tax incentives made to introduce but the origin of its surge in R&D which the government desired.  The expenditure of R&D is almost equivalent to the 3.8% of the UK turnover which the figure was just 2% out of the 31 industrial sectors that covers the scoreboard of which 19 experienced the failure in spending while 10 showed a progress of increasing rate. DTI R&D gave a well stated explanation of the potential importance on research spending on the competitiveness especially on single businesses operations particularly maneuvering on the particular market and also to boost the health of the economy. R&D also generates the new products, services and any other means to provide the companies a more edge on their great competition. The consistency   of a company to invest relative to R&D showing its best effort has a tendency to lose its competitive edge along with its best competitors that led the goods and services. Depreciation of currency also creates the consequences on the balance of payments deficit as it entails the risk of inflation.  The lower exchange rate can result to the increase on the costs of mostly imported products as well as services making a greater risk on inflation of cost-push. Highly important to recall that devaluation or depreciation on exchange rate  will not normally contribute on the appropriate or correct balance of payments deficit in one’s economy. This is specifically become the cause of the deficit for long-range of structural problematic condition that will essentially need the other policies using the skills and wisdom on the trend in the world of the economy. Short-term exchange rate depreciation cannot improve the current account balance of payments deficit. The elasticity on the low price of imports and exports is the great cause the urgent aftermath exists in the changes of exchange rate. The volume of imports remains consistent partly because of the contracts for those imported products with sign. Nevertheless, depreciation triggers the raising of sterling prices on the imports causing the increase on the imports total spending on imports to rise. Export demand shows inelasticity in reaction to the exchange rate for short-term basis. The balances on the trade can worsen the immediate effect in the external value of the market currency and thus this is known as “J-Curve” effect. On the other hand, Marshall –Lerner condition is known to exist when provision of elasticity of the demand on the imports and exports larger than one that the trade of balance progresses on period of time.   Progress on trade – performance I not a way of searching for the method to convert the deficit into surplus rather measuring the trade performance using a standardized criteria such as watching the rise on share of world trade in exporting the goods and services as well as making a higher rate on growth of the trade trend of exports. Seeing the short-range in trade performance involves the cyclical factors which the general trade deficit is out of the strength of domestic demand in services and products import. When the economy enters the downturn moment in global markets, the development on the products and services tends to fall which requires provision of the correction element in the trade deficit.  The higher rates in interest acts go-slow the progression in consumers’ demand and thus it relates with the cutbacks in the imports demand. Fiscal policy like the surge in direct taxes is also used to reduce some portion of the demand. The risk is there in the sharp fall during the consumer spending can lead to the great economic downfall that decreases the growth of GDP during a full result of recession. The lower rate of exchange in sterling exchange rate depreciation simply shows the method of overseeing the uplift of British firms that supply more cheaply in global markets. The export extent sales rise when the firms actually decide to show the cut prices and presence of the price elasticity on the demand from foreign consumers on the country’s products on its economy. Yet the significance on the elasticity of demand in a small time basis can change the demands on the import which a small difference which needs to workout. It requires a time for development of the exchange rate that affects the flow of economic trade.   References: Griffiths and Wall. (2007) Applied Economics, 11th ed.,Harlow, Essex, Prentice Hall  Dicken Global. (2005). Shift 5th edition Sage: London  plus  Sloman and Hinde Business. (2004) Economics, 4th ed., Harlow, Essex, Prentice Hall.  Begg D, Fischer S and Dornbusch. R. (2008). Economics 9th ed., (2008) McGraw-Hill  Read More