International Trade and Factor Mobility - Essay Example

SUMMARY THE ECONOMICAL JOURNAL Introduction Microeconomics is the study and analysis of small economics units. It involves the consumer decisions that bases on utilizing the available resources maximally. Microeconomics also covers the personality market symmetry and the outcome of government market regulation on the individual. Macroeconomics on the other hand is simply the study analysis of market aggregated consumption and production in the economy (Marita 80). It focuses on the issues like the main causes of economic expansion and economic descent. It also focuses on the effects of fiscal and financial policy on the market and the general rule of taxation. In this empirical analysis, I focus on discussing the major roles of micro and macroeconomics, and their effect on the economy. Classical theory suggests that free mobility of factors of production among diverse regions tends to level the relevant and supreme prices of prolific services in the different regions. The shift of labor from a region of high population to a lower populated region results in a drop in wage rates in the less populated region, relative to its land rates and commodities. At the same time, the high-populated region’s land rates would drop relative to real wages, which would rise. Equilibrium of complete and relation factors prices would lead to the cease of labor migration. In the Ohlin analysis, he compares two countries, Europe and America, with land and labor being immobile. Food and clothing are mobile and obey the production theory of productions; as a result, diminishing returns change the proportional unit relevant to changes in land and labor, affects the marginal productivity. His analysis of proportional change in factors explains the difference in comparative advantage that occurs and assumes the resulting series of production and specialization. Ohlin attributes the food production in America, and land exhaustive industry to the point that the unit of American land is a lot to provide the needed labor force. In comparison, Europe has greater labor in relation to land, which alternately results in lower lands rents thus lead to the high production of clothing. This explains that each country would adapt the theory that favors their areas of specialization by using the abundant factor of production that is efficient to them. The neo-classical appearance of proportional gain In the figure below, the production-possibility curve in the American economy increases as labor and land shifts in an optimal manner compared to food production. This is possible since the proportion land and labors statistically proves the theory, while keeping the marginal ratios of land and labor the same, and market wages to rent. In figure b, the production–curve for Europe is higher in clothing than food since labor is abundant, and it determines the output production unit. The steep slope for Europe's production curve confirms this theory relatively. Conclusion The study of microeconomics prepare the learner cope with numerous understanding of the economy, the mobility factors that are involved in production, like labor, and also the shift land rates relative to rent, which maximizes the output production unit. In my view, the subject is a fundamental basis for any student willing to major in economics INTERNATIONAL TRADE AND FACTOR MOBILITY Introduction It is great achievement to come up with an economic structure that gives a framework of understand and examining major economic outcome of the day and future. In the early 1950s, the government actively regulated cross-border financial transaction. A study of the bondage among international capital community, domestic trade and international trade is vast in today’s economy. International aspect mobility acts surrogate for trade in a different sense in (H-O-S) model, this is causes a decline in the degree of trade, as the volume of factors of production increases substantially. Theoretical works have proven that diverging models with standards H-O-S assumes the results complementarily and not substantially between the good trade and the factor trade goods. External factors such as economies of scale, foreign investment, taxation, monopoly and external markets, promotes grater international trade. In order to comprehend the connection in trade factors and trade goods, it is mandatory to have a complete picture of the international linkages. For instance, the measure of the linkage between two acts as a medium of openness of the amount of international trade taken. Another significance reason of understanding the linkages is when there is arise in the aftermath of financial and current crisis. For instance, if the flow of capital to a certain country is huge, they can alter the course of financial policy. In the Latin America, exogenous changes in foreign investment can result in unevenness of factors of production in the country. The realization of physical capital and investment funds can have an adverse effect on the people and trade structure of the country. An analytical and empirical study corrects the difference in policy argument and theoretical argument. In Argentina, the net exports of food related industries have increased in comparison to the manufacturing industries. Capital trade flow in Latin America Latin American countries have been regular recipients of the U.S investments flows for many years. Latin America has been growing following a series of decline in the flow of FDI. The Latin America accounts for almost 13 percent of the FDI flow of the U.S FDI. In Latin America, transportation equipment and chemical has been the changing recipient of the united State owned investment capital. It is only recently that food, finance sectors and banking has been on the rise due to the financial flow in the Chilean republic. Concrete evidence given for the function of FDI into different industries draws resources away from basic and fabricated resources. In addition, industries that are not electrical have an important negative outcome, which is, validates after two years, thus causing the resulting coefficients to turn negative. This is enough evidence to prove that, through the regression observed in electronic equipment caused by banking and FDI flows, the net export is greatly stimulated. Conclusion The enlarging demand of foreign forward investment in the world economy attracts theoretical investigation into the way the FDI affects the bondage between two economic countries. One key question that I pose to the FDI is whether it should increase or decrease the amount of trade and investment in the country. In my opinion, I suggest that further understanding of macro and microeconomics will boost knowledge on international trade. INTERNATIONAL ROLE OF THE DOLLAR Introduction People use money as a way of doing business transactions, making payments, settling debts, and giving as presents to the loved ones. As we study international activities, we get to understand the major roles that the dollar currency has played in shaping the economy, and the various major functions it plays in economy recognition. Money as argued by many economists, functions three major functions; it is a medium of exchange, a value of wealth, and a unit of account. Internationally, money is widely accepted in making payments, fixing prices, in liquidity form as a way of international transactions. The dollar in specific plays six major roles in business transaction. The dollar is preferred in trading private transactions, and bought and sold by the central bank, hence making it an intrusion currency. It also plays as an invoice currency since major trade contracts settles in dollars, and states the exchange rate value. The private sectors usually stick to liquid dollar as asset, while the central bank uses it as reserve currency. To some degree, these role the dollar play are separate, either horizontally or vertical. For instance in the gold average, the official roles were dominated by gold. In detail, I will briefly examine the context of the dollar and the major functions it play. 1. Vehicle, this part distinguishes three parts of main transactions. First, the currency is used to settle nonbank debts as it is used as an invoice, as it playa a crucial but not sole role. Second, the currency function as the main foreign market exchange currency, where firms deals with banks and the dollar does not play any special role in this case. Finally, the dollar acts as a medium of exchange of interbank in the external market, where the interbank deal with currency exchange of the dollar to different currency around the world. 2. Invoice, most transaction globally transacts with the dollar, since the united state is the world’s biggest economy. Manufacturing companies prefers the dollar as the main invoice for the settlement debts in incurred. Most countries prefer invoicing the debt in to the exporting country, but where a large currency like the dollar is involved, it is preferred to other currency. 3. Reserve, the EMS recently introduced the accounting problems for the dollars as a reserve, but before that, the dollar accounted for the bulk nongold reserve. This description discussed above clearly shows the dollar as the main preferred international currency in major business deals, and in central bank currency reserve. International medium exchange The function of the dollar as the medium is widely attributed to the economies of scale among the foreign money markets. The dollar is widely accepted as the international trade currency in the global market, it is much dynamic of the foreign currencies. It is therefore effective in trading large amounts of cash. Economies of scale is seen if we dismiss the connection between the interbank markets and the retail markets, in contrast, we focus on the on the firms willing to purchase and sell foreign exchange. For instance, the foreign requirement for the dollar is high at the present swap rates, and currencies exchange are conducted randomly, thus the firm carrying out foreign exchange is profits a lot from the transaction. The banks that constitutes the market, and hold very large sums of currencies, will not change this perspective, but will simply assume that the size of the stock in currency form will perform as the markets expands. As a unit of account The majority of analytical work focuses mostly on the use of the dollar as an international unit of account, the great role it play in the foreign markets. Nevertheless, in the early 1960s, trade was not in the dollar currency, but rather in the exporting countries. The following table shows the share export invoiced in a country’s currency split of export, to the American dollar. In every country, a higher export than imports invoices the domestic currency. In addition, the large currencies are more preferred over the small ones. Germany has the highest exports in home currency, and a division of imports in marks. The dollar in this case is comparatively high to the other currencies concerning invoice. More so, the Japanese yen is barely used. The reason to this is that their entire exports dollar invoiced. As an international store of wealth The dollar in the present market holds a strong position of wealth. It is a dominant currency in interbank markets, and accounts for numerous international lending, and plays a major role in trade invoicing. The economies of scale also contribute to this, but in a detailed way, where the part dollars are in New York and the other in London. As a value store, the dollar is disadvantage only in the uncertainty that arises in case of float exchange. This results in the diversification of the wealth owners, and hence opposes the force leading to convergences on a single currency unit. Conclusion It is difficult to calculate the dollar, without equating it to a unit of account, and the use of three currencies to site material prices would be less important in calculating the cost due to inflation and existing exchange rates. THE PURCHASING POWER PARITY DEBATE Introduction Purchasing power parity (PPT) states that the ostensible exchange rate between two trading currencies should equate to the ratio of cumulative price levels between the two nations, so that one currency unit should the equal purchasing power in any foreign country. The exchange rate amend is key to the exchange rate terms, countries that hold fixed exchange rates should understand the outcome of the equilibrium exchange rates, and what to expect in real nominal rates. The general norm behind purchasing power parity states that a currency unit should have the purchasing power to buy a basket of commodity in one country as the same amount, at the current rates, and in the foreign country. This will enhance parity in purchasing power of the currency unit of the two economies. The belief that purchasing parity may stand because of the international goods is relate to the law of one price, which states that international selling price of a good should be the same in any part of the world, by a common currency of that country. This is important, as it would discourage people from doing riskless businesses by shipping goods from areas where the prices are low are selling them at a profit in their country. Incase the same good was to enter the basket of the other country’s market, and with the same degree, then it implies that the two countries hold a PPT exchange rate to rationalize the prices. There possible objections to this law, as it does not include the transportations costs of products, and taxes levied may differ between the two countries. More so not all countries trade commodities and the emphasis attached to equal goods in cumulative price indices tends to be different across different countries. In fact, most of the producing nations tend to differentiate their goods rather than substituted. Analysis of proper data can mage these problems that arises when trying to rationalize the PPT or the one price law. In relation, PPT is based on operating goods; the law may be, more effective if tasted with producer price indices that mostly contain the price of majority of tradable goods, rather than consumer price indices, which indicates the cost of many non-tradable commodities such as services. Research on the PPP puzzle has long interpreted the exchange rates be adjusted to the PPP average point in the long run. The evidence to support this hypothesis is baseless. For instance, not allowing standard levels of empirical significance simply rules out the null hypothesis that a single root does not simply prove that PPP in the long run exchange rate really exists. If indeed exchange rates do not turn to PPP, economists have had the strong evidence that substantiate their claim. Nonlinearity In order to solve the PPP puzzle, economists are using the approach of nonlinear dynamics to shift the real exchange rates. In linear framework, the changing speed of PPP variation from parity estimates it to be uniform at all the time, and particularly for the sizes of changes. While this basis is much convenient, suspicions still arises regarding the pace of convergence of PPP exchange rate, which should be concrete as the changes from PPP rises in complete value. Conclusion From 1970, the purchasing power parity of the rates of exchange has been the topic of ongoing and exuberating debate. My interpretation of the PPP debate is that the PPP in the short run may hold than the PPP in the long run. Further studies of macroeconomics will reveal the evidence hence should be applied in order to full understand the gnome of this debate. THE GLOBAL CAPITAL MARKETS Introduction Economic theory clearly states the advantages of global financial trading. The global financial markets allow citizens of diverse countries pool various risks that achieve insurance that is more successful, and purely domestic. In addition, a country suffers from a form a temporary recession, or natural calamity, can borrow the funds abroad. On the other hand, developing countries with minimal capital can borrow to cater for capital investment, hence promoting economic growth with minimal saving rates. Globally, the international market puts their world’s savings into their most active uses, regardless of the location of investment. The outcome economic gains are hard to quantify, as they may not cope well with the subtle mechanism. For instance, producers who can vary risks in capital markets are due to undertake more yield, but perilous investment thus increasing the average rate of economic increase, thus investors who take up more increase economic growth. The other important aspect of international capital is to discipline policymakers who maybe eager to utilize a caged domestic market. It is hard to compute the gains that most countries realizes from worldwide capital mobility as a meticulous attempt would need a fully structured model in which the counter-realistic of none capitalism can be simulated. Evidence from history is suggestive of some substantial benefits that are notably for smaller nations are at most likely to benefit from the trade. For instance, the Norwegian nation borrowed almost 14 percent of GDP to develop its oil reserves at the North Sea. Before the First World War, capital markets were successful, and operational. They linked Europe to the rest of the world, from Africa to the Far East. This strong financial market broke up at the beginning of the world war, and made a slight comeback in the late 1920s. The government at the time controlled the home financial markets, and imposed strict regulation and prohibited myriad activities. In 1960s, private capital liberation begun, and in the late 1970s, it substantially grew stronger in the 1980s. Capital Mobility and Exchange Rate Flexibility The majority of countries have tried to adjust their exchange rates for different reasons, but only a few have been able to do so for a long period. Eminently, the stability of the exchange rate seems to build up conflict with different policy objectives where votes determine priority. The authority can easily get frustrated once the paining predicament of capital markets sets upon them. Fiscal Autonomy and Income Distribution The task of making decisions that controls the interest and exchange rates confront authorities at all time. Over the short term, involvement into the global market makes it difficult to tax the international capital that is relevant to the nobility factors of production like labor. This huge loss of fiscal alternative can prove costly especially in the end. Increasing awareness of economic openness have accompanied after war experiences. In comparison to the gold standard century, our everyday lives surround democratic communities that depend on the government for economic stability. Despite regular crisis, global financial integration accounts a significant benefit to the economic main challenge that the national and foreign policy makers face is trying to maintain an economic and political society where by continuous economic integration can dominate. Conclusion The vast understanding of micro and macroeconomics tends to diversify the learner I understanding all aspects of economy, and the trend in market flows and exchange rates. The subject puts the learner in a great position to understand major role of government involvement in the economy, plus the role of different currencies that shape up the international market. Works Cited Booysen, Marita. Micro- and Macro Economics. London: Heinemann Publishers, 2008. Read More