Introduction to Global Economics and Business - Assignment Example

Introduction to Global Business 1. What steps have been taken by the IMF to undo some of the criticisms that it has been subjected to by economists? There is a widespread critique of the IMF that states its policies hurt local populations and the environment (due to cuts in social spending in its policies). Will these measures address these criticisms as well? IMF has been criticized for their conditionalities, which exist because of the Structural Adjustment Policies (SAPs), which can greatly reduce the level of government spending in the economy, increment of interest rates, and deregulation and privatization. However, this has hurt the local populations, because the inflation rates have increased, and the standard of living in many countries have been witnessed to decrease. Privatization, although done to provide competition has its disadvantages, as well. Private firms may be largely ignorant of the environment, because they may exploit the resources to a great extent. However, one of the steps that IMF has undertaken to reduce this criticism of conditionalities is to introduce programs, which do not have conditionalities in certain circumstances. The Flexible Credit Line (FCL) does not have the traditional conditionality. Sometimes, when a complete revamp of the economic system is not required, IMF offers financial assistance under Rapid Financing Instrument (RFI) and Rapid Credit Facility (RCF). Prior actions may be required, but no present actions will need to be warranted (IMF.org, n.d). 2. Read the following and answer the questions that follow. Australians fret about their almighty dollar By Sid Astbury May 2, 2011 Economists tell you that the 380 workers sacked when Germany's Robert Bosch GmbH shifted car parts manufacturing from Melbourne to South-East Asia could jump on a plane for Perth and land better-paying jobs driving big trucks in the labor-starved ore pits. It would show in microcosm that Australia was behaving according to international trade theory and giving up manufacturing. Specialization has worked a treat, according to Chris Richardson, an economist with business consultancy Deloitte Access. 'The world is throwing more money at us than we've seen in more than a century and unemployment is already less than five per cent and headed lower,' he said. Sounds too good to be true? It is. The mining boom has helped inflate the value of the Australian dollar. It has gained 11 per cent in value against the US dollar in the last six weeks. A higher dollar makes imports cheaper but it makes life hell for manufacturers, for those in tourism and for those hawking services like education in foreign markets. 'Businesses are seeing competitiveness stripped from beneath them,' said industry lobby group leader Heather Ridout. Calling on the Reserve Bank of Australia to intervene in the money markets to help save manufacturing and trade-exposed service industry jobs, she said that when currency appreciation 'starts to drive structural change in the economy, people should be asked to justify whether it is a good thing or not.' The central bank does trade currencies, but currently it is sitting on its hands. Ridout and others would like to see the bank follow its counterparts in the United States, China and Japan and engineer devaluation. The chief job of the central bank is to hold down inflation and a strong currency helps with that. 'Increasing interest rates is hard work,' HSBC economist Paul Bloxham said. 'If the exchange rate does some of the work for you in terms of slowing down some parts of the economy, I think that's regarded as a good thing.' One reason the Aussie dollar is soaring is that the markets are betting that the bank, which has kept the cash rate steady at 4.75% for six months, will be forced to raise interest rates in the coming months to choke off inflation. A rate rise will make holding the dollar even more attractive - and strip even more competitiveness from the manufacturers that Ridout wants protected. Griffiths University economics professor Tony Makin estimated the rising dollar had the equivalent effect of chopping 40 per cent from the protection that some Australian manufacturers receive. But he does not see the central bank able to help the withering manufacturing sector. 'All in all, the staggering commodity price hikes worldwide cannot be ignored as a signal of higher inflation to come, with the Reserve Bank will be obliged to try to counter by raising domestic interest rates,' he said. Manufacturing employs 10 times as many people as mining. And most new mining jobs will be in city-based professional services like accountancy rather in positions that could be filled by those thrown off Bosch's production lines in Melbourne. So far, the central bankers are resisting pressure on them to bash the local unit down. What Ridout fears may come to pass: a high Aussie dollar and even higher interest rates. Questions: 2a. The article makes a reference to international trade theory as if there were only one such theory. As a little review of last week, which trade theory is being used? Theory of Comparative Advantage, because specialization is being done, in such a way that Australia is benefitting. Other countries may also be in the mining industry, but Australia is better on the edge. Manufacturing has also been forsaken, because it does not provide that much effectiveness. 2b. Based on the Lufthansa case, explain the options that Australian manufacturers would have to deal with the currency issue in the article. Since imports have become cheaper, the Australian manufacturers face the problem that the people in the country will not buy their goods, because they would be expensive compared to the imported goods. Additionally, the manufacturers will not be able to compete in the international market effectively, because the Aussie dollar has gotten so expensive that people will not trade their currency to buy an Aussie product. This will also lead to a balance of trade deficit, because the volume of imports will increase and the value of exports will fall. The Lufthansa case (1985), in which the dollar was greater than the German currency, involved an aero-plane, which had been pre-ordered and the dollar was bound to increase. In this way, the company was going to lose out. However, the current situation in Australia is completely reversed. Hedging can be used by Australian manufacturers in much the same way that was done in Lufthansa case. 3. Before adopting the Euro, the Greek currency was the drachma. Setting aside the debates around who’s to blame for the crisis, why would a Greek business owner be interested in keeping the Euro? Which industries? Conversely, why might other firms/industries prefer to return to the Drachma? If the currency were reintroduced, let us assume that the drachma would depreciate against major currencies after its release. A Greek business owner would be interested in keeping the Euro, because he/she will be able to trade easily with the European world, even if the exchange rate market fluctuates, his business would not be affected. Business owners, belonging to the manufacturing industry (because they can import raw materials at much the same price) and those belonging to the tourism industry will find it beneficial, because traveling would become easier and cheaper for everyone. Tourism would definitely increase. Other industries might prefer a return to Drachma, because in times of depreciation of the Drachma against major industries, manufacturers who are exporting abroad widely will benefit, because the price of the Greek goods will be low. However, those producers, who are producing goods that have elastic demand will benefit in such times. 4. What are the key factors that have contributed to the increased growth of the international equity markets? Why is this good for firms? The main reason for the increasing of the international equity markets includes this idea that the investors will gain access into markets, in which the demand for shares for equity ownership is quite high. In 1990s, this trend increased, especially in Europe. Privatization, liberalization and open trade has led to the growth of international equity markets. It is good for different firms, because it leads them to be diversified, which means that if they lose in some other investment, or another area, they can avail the profits from another equity market. Works Cited "Factsheet -- IMF Conditionality." IMF -- International Monetary Fund Home Page. N.p., n.d. Web. 22 June 2012. . Read More