Advantages and Disadvantages Attributed to the Free Trade and the Protectionist Policy - Essay Example

? Macro & Micro-economics of Affiliation QUESTION The Gross domestic product (GDP) refers to the market value of all formally accepted final goods and services manufactured in a nation over a given period. The GDP per capita is considered as a pointer of a nation’s standard of living. The GDP should not be bemused with the Gross national product (GNP), which means the allocation of production on ownership. The GDP can be calculated by three approaches, which includes the product approach, expenditure and income approaches (Miyajima, & International Monetary Fund, 2006). However, most economists embrace the product approach, which is more direct. The product approach sums all the outputs of each group of the enterprise to get the total. Production approach This method of GDP determination can be called the Net Value of Domestic output. The method comprises of tree primary stages, which are as follows Start by approximating the Gross value of domestic output from all the numerous economic activities within a nation (Miyajima, & International Monetary Fund, 2006). Calculating the intermediate consumption such as the expenditure of materials, services and even otter supplies used in the manufacture of the final products and services (Miyajima, & International Monetary Fund, 2006). Subtracting the midway consumption cost from the Gross cost to find the Net worth of the Domestic output (Miyajima, & International Monetary Fund, 2006). This procedure can be represented as follows Net Value = Gross Value of output- Value of intermediate Consumption Whereby the Value of output= Value of the total sales of goods and services + value of changes in the stock. The summation of Net Value Added in diverse economic activities is referred total the GDP at factor cost, whilst the addition of indirect taxes to the GDP at a factor cost gives the GDP at producer cost (Miyajima, & International Monetary Fund, 2006). In measuring the GDP, only the value of the final products and services is included. This is because the final product is the one that is bought by the final user. All the intermediate compliments help in the production of the final product, and this means that, their cost is incorporated in the cost of the final product (Linde?n, 2003). This implies that, inclusion of the intermediate products cost, will cause cost double counting, and this may not give the intended value of the GDP. QUESTION 2: Inflation can be defined as the increase in the overall level of prices for products and goods in an economy within a given period. It follows that hyperinflation is the high rate of inflation, which has gone beyond controllable level. Hyperinflation may range from 26% -50% per month. In a hyperinflation milieu, a vicious cycle is produced where a larger extent of inflation is created by the ever-increasing succession of printing money (Miller, Zhang, & Board of Governors of the Federal Reserve System (U.S.) (2005) Hyperinflation becomes visible when a nation’s money runs unchecked (Miyajima, & International Monetary Fund, 2006). This situation is in most cases linked to wars, socio-political cataclysms and aggressive currency behest or meltdowns of currency. It is notable that, most of the nations that have faced hyperinflation during the 20t and 21stt centuries suffered because of obliteration or collapse of its own fiat currency. According to Zambell (2004), chronological account indicates that fiat currencies are susceptible to failure and they have always brought down the entire empires. Some of the countries that have suffered hyperinflation include Poland from 1921-1924- 988, 235% Germany in 1923 - 326,000,000% Zimbabwe 2008 - 79,600,000,000% This study indicates frequent hyperinflation is caused by the decisions made by Central Bank to increase the money supply in financing debts and current expenditure. This reduces the demand for a country’s money. The hyperinflation state is expected to continue until such time, when excessive money printing and promotion of creation of money by increased credit banks is stopped (Zambell, 2004). Hyperinflation affects the economy in numerous ways, which include reallocation of wealth, rendering the value of money zero, causes hoarding and loss of confidence on the government and the banking system. Reallocation of wealth To start with, reallocation of wealth is an evident phenomenon in hyperinflation milieu. Hyperinflation causes transfer of mass wealth from the public, which holds capital, to the government, which grants money (Zambell, 2004). This situation causes borrowers to benefit at the expense of lenders. Rendering the value of money zero Hyperinflation can render the value of money Zero due to the sharp increase of the cost of products and goods (Zambell, 2004). This makes the currency to lose its value against other regional and global currencies. Hoarding Hyperinflation causes stock hoarding. Hoarding is the tendency of people stocking large amounts of products, which they may not require (Zambell, 2004). Lose of confidence on the government and the banking system. Hyperinflation is a worse prerequisite for the public to lose confidence on the governmental undertaking. Moreover, the public loses faith in the banking system’s credibility and this creates the behavior of not investing and saving in the financial institutions for fear of collapsing (Zambell, 2004). In conclusion, hyperinflation is not an excellent experience in a country’s economy because it drives people away from spending money on monetary transactions and leads them to barter trade (Zambell, 2004). Use of currency in a normal economy increases the economy’s efficiency compared to the use of barter trade. QUESTION 3: The issue of free trade and protectionism, which is practiced in the United States of America, is a debatable topic. This is because there are valid reasons for the opponents and proponents of the free trade and protectionism policies respectively (Noland, 2009). For the case of the USA’s protectionist policy, numerous supporting factors underscore this stand. In the first place, the protectionist policy refers to the imposition of limits on foreign trade with the intent of protecting home businesses. The USA has perfected in this policy and it has seen its businesses and industries thrive well, thus increased economic growth. Some of the supporting factors attributed to this policy include increasing job opportunities for the American populace through, manufacturing industries (Noland, 2009). Protectionism reduces over dependency on foreign countries for products not produced in the US, and this contributes to high levels of fiscal stability of the US economy and reduction of dependency vulnerability. Moreover, use of cheap labor in other nations is likely to affect job opportunities at home and this threatens the nations’ ability to sustain its labor needs. In conclusion, the proponents of protectionist policy have valid reasons for their stand, and on the other hand, those supporting free trade justify their stand with valid reasons. According to Noland (2009), both free trade and protectionist policy remain a debatable issue and whichever country adopts either of them does not stands to gain at one end and to lose on the other. In essence, there are advantages and disadvantages attributed to both the free trade and the protectionist policy, which is embraced by the United States. References Linde?n, S. (2003). Assessment of GDP forecasts uncertainty. Brussels: European Commission, Directorate-General for Economic and Financial Affairs. Miller, M., Zhang, L., & Board of Governors of the Federal Reserve System (U.S.). (2005). Hyperinflation and stabilisation: Cagan revisited. Washington, D.C: Board of Governors of the Federal Reserve System. Miyajima, K., & International Monetary Fund. (2006). How to evaluate GDP-linked warrants: Price and repayment capacity. Washington, D.C.: International Monetary Fund, International Capital Markets Dept. Noland, M. (2009). The new protectionists: The privatization of US trade policy. London: IEA Trade and Development Unit. Zambell, R. G. (2004). Hyperinflation or depression?. West Palm Beach, Fla: Weiss Research. Read More