Economics And Economic Change - Essay Example

Economics and Economic Change Discuss the impact of globalization on inequality and support your answer with real life examples. Globalization is generally defined as the increase in openness of the trade policy. It can be interpreted in terms of increasing wage inequality, or equality both within the country and on the global scale. Studies have shown that there is a positive link between globalization and rising inequality (Squire and Milanovic, 2005). Globalization has a hotly debated topic amongst economists and politicians both. Some critics regard globalization as an instrument for increasing the rate of development. For others, globalization is a threat to the economic prosperity of under-developed countries. Although globalization is hard to define, when one considers the lives of more than one-fifth of the population of the world, earning less than $1 per day, at stake, it is necessary to address the impacts of globalization. Globalization has increased the income gap in countries such as Pakistan where the government has been unable to keep updated with the latest technological advancements and financial integration (Danacica, 2005). Where globalization implies greater opportunities for economical advancement and progress, it cannot assuage the chances of growing inequalities and cultural uniformity. Moreover it fails to deliver equal advantages to all countries. Markets give reward to those who are well-equipped with appropriate capital, labor and entrepreneurial skills (South Center, 2006). In countries not equipped sufficiently, including those “under transition”, are harmed by globalization. The impact of globalization on these countries renders environmental issues, social disputes and immigration tendencies in them (Danacica, 2005). The integration of markets and the easy flow of capital along with the rapid popularity surge of the internet have contributed to an increase in the demand for skills than as compared to their supply (South Center, 2006). In countries where demand and returns for skills are high, people from other countries will be encouraged to immigrate there. Immigration from the skilled individuals from poorest countries also increases the resultant inequality, since the correct asset for today’s individual is higher education. Another argument presented by critics is that markets are not perfect and there are chances of their failure. One such failure of the market system is pollution, where the polluter can get away with pollution without being accountable for the complete costs of pollution. For instance, the environmental costs of greenhouse gas emissions of the US are levied on poorer countries. Moreover it has also been argued that “trade, migration, and intellectual property regimes” on the international playing field represent the greater authority that the richer countries have (South Center, 2006). This can be exemplified from the discrimination that is occurring towards the poorer countries as a result of reduction of agricultural tariffs and subsidies (South Center, 2006). Poorer countries complain of the resulting injustice that they are victims of as a direct consequence of inequality. The US is an example of a country where inequalities have been on the rise since the start of the 1970s. Markers used to investigate the impact of globalization on inequality have shown that US has the greatest inequalities as compared to other developed nations, with the median value of the incomes of the families becoming stagnant since the last twenty years coupled with an increase in the necessities. In the US, as compared to other rich countries, the rich people have the greatest income, whereas the poor earn only the most meager pay. Another factor that has led to the development of inequalities is the creation of the center and the periphery in the US, with North-East and West Middle developing in to the center and South and the West representing the peripheral. The USSR region is also an example of how globalization has increased inequality. The former USSR was subject to a phenomenon known as passive liberalism. Underproductive and corrupted institutions are a major impediment to foreign direct investments. Moreover, trends in Russia showed that the disparity in incomes in the population can amplify significantly as a result of lack of mobility among various economical areas or by the absence of an effective structural body for providing social assistance (Danacica, 2005). List the factors affecting international trade flows and show the role of the international agencies to facilitate international flows. Support your answer with empirical illustrations. International trade flows are a primary determinant of the prosperity of the economy. As a result, it is crucial to not only identify but also comprehend the factors that affect international trade flows. These include inflation, national income, government policies and exchange rates (Madura, 2008). The inflation tends to decrease the value and demand of goods in the international market. In a country marked by high rates of inflation, consumers will prefer buying imported products rather than local ones because of their higher rates. The current account of the country will be likely to decline. Moreover, when exporting goods, the inflated prices are going to deter the sale of the goods abroad. National income also serves to affect the international trade flows. If there is a marked increase in the national income of a country as compared to other countries, the current account of the country is likely to fall. This will set off a series of reactions, starting by an increase in the real income level to accommodate inflation effects, followed by an increase in the consumption and hence the demand for goods (Madura, 2008). This increase in demand will reflect a rise in the demand for imported products. The trading policies of the government also contribute significantly to international trade. Governmental policies such as subsidization of exports, greater barriers for imports, or absence of effective legislations to regulate piracy can significantly impact the international trade flows. Subsidies can help the organizations to make products at a lesser cost than rival businesses, giving the subsidized exporter a competitive edge in the global market. Tariffs and duties on the goods that are imported push up the costs of these products. The price of domestic goods thus becomes lesser as compared to foreign products, decreasing the demand for foreign products. Lack of laws on privacy also impact the demand for goods, since companies that produce counterfeit or pirated goods sell them at a lower price than original goods. Consequently, in countries like China where piracy is high, the demand for imports is less. Exchange rates are also intended to make the process of transactions between various countries smoother. If the exchange rate for a country’s currency is high it is likely to decrease the demand of the country’s exports, since the price of the goods become high when converted into another country’s currency (Madura, 2008). There are also a number of agencies that have been made to facilitate the process of international trade. These include the International Monetary Fund (IMF), World Bank and the World Trade Organization (WTO). The role of these agencies is to make the process of trading not only smooth between countries but to offset the negative effects of exploitation and deleterious trade policies. For instance, the IMF plays a crucial role in the promotion of cooperation between countries on matters of money and finance. Similarly, the WTO aims to increase bilateral trade ties and to devise policies for the protection of industries when trading with each other such as the Anti-Dumping Agreement. The WTO also seeks to solve disputes arising out of trading between various Members. The IMF contributes to the maintenance of stability between the exchange rates (Madura, 2008). It also seeks to assist countries to stabilize their balance of payments by providing funds. The organization has also been notable for its contribution in helping countries during global financial crises, such as the Asian crisis. The IMF also plays a crucial role in the development of cordial trading relations with Member countries and to encourage free trade and free movement of capital funds from one Member state to another (Madura, 2008). The World Bank also seeks to help poorer countries in correcting their trade deficit. It has many programs for the alleviation of poverty and the development of the economy of poorer countries. One such program is the Structural Adjustment Loan, which aims to promote the long-term economic progress of the country (Madura, 2008). International organizations also play a role in enforcing rules and regulations for international trade and maintaining international standards (International Monetary Fund 1992). From Fixed to freely floating exchange rate system, discuss the current different types of exchange rate systems and explain your countrys exchange rate system according to IMF classification. Exchange rate systems are defined as the methods for the determination of the conditions of exchange between various currencies (Anderton, 2006). According to Weerapana (2003), countries can be divided into three main exchange rate systems. These are the flexible exchange rate systems (or floating exchange rate systems), the managed exchange rate system and the fixed exchange rate system (or pegged exchange rate systems). A flexible exchange system is characteristic of a regime where the currency value is determined by the demand and supply for it and is regulated by the various elements of the market. These include the institutions such as banks and organizations that are involved in the exchange of currency for the purposes of clearing, hedging and speculation (Weerapana, 2003). In this system, an increase in the demand of the currency would result in its appreciation and vice versa. Since the 1970s, there has been a shift in the economies of the countries, and many of them, particularly the OECD countries, are adopting flexible exchange regimes although a handful can be considered as characteristic of purely flexible regimes. On the other hand, the fixed or pegged exchange rate systems were the widely used mode of regulating exchange rate before the 1970s. The countries used to follow the Bretton-Woods system. The system defined the exchange rate of the countries in terms of the US dollar, and the US dollar was ascribed a certain amount of gold (Weerapana, 2003). Although the system is not used anymore, there are still some countries in the world where the central bank assigns a certain value for the exchange rate of the currency and then transactions of domestic currency are carried out at this value. The major reason for firms to opt for a fixed exchange rate is to even out any disturbances that occur due to fluctuations in exchange rate values and insecurity. Many small countries today are functioning under the fixed exchange rate regime (McDormit, 2006). The managed floating rate exchange regime is characterized by a combination of a fixed exchange rate and a flexible exchange rate system. In this regime, the central bank holds the authority for the regulation of exchange rates. Although there is no fixed value that is ascribed to the currency, the central bank does not make accommodations for the influence of the market in determining the exchange rate. The system is characterized by an explicit or an implicit target value set by the central bank. The role of the central bank is to keep the exchange rate within narrow limits of this targeted value. Therefore when there is a shift in the exchange rate and it deviates from this desired value, the central bank interferes and regulates demand and supply to bring the exchange rate back to its desired limits (Weerapana, 2003). The Saudi Arabia government has a fixed exchange rate regime; the currency of the country, i.e. the riyal, is pegged to the US dollar. The dollar-to- riyal exchange ratio has been set at 3.75 since June 1986. In the country, foreign exchange is primarily in the hands of the government, and the Saudi Arabian Monetary Agency is in charge of fulfilling the foreign exchange requirements of the private firms and figures through the sale of dollars against riyals in the domestic banks of the country (Al-Jasser and Banafe n.d.). Reference List Al-Jasser, M. and Banafe, A. (n.d.) ‘Foreign exchange intervention in Saudi Arabia’. (Bank for International Settlements)Available: http://www.bis.org/publ/bppdf/bispap24v.pdf (Accessed: 2010, December 21). Anderton, A. (2006) Economics. Pearson Education India. Danacica, D. (2005) ‘The Impact of Globalization on Inequalities and Poverty’. (Waikato Management School)Available: http://www.mngt.waikato.ac.nz/ejrot/cmsconference/2005/proceedings/developmentglobalization/Danacica.pdf (Accessed: 2010, December 21). International Monetary Fund (1992) Final report of the Working Party on the Measurement of International Capital Flows. International Monetary Fund. Madura, J. (2008) International Financial Management, Abridged Edition. Cengage Learning. McDormit (2006) ‘What Are The Two Major Types Of Exchange Rates’. (blurtit) Available: http://www.blurtit.com/q896861.html (Accessed: 2010, December 21). South Center (2006) ‘Globalization will increase inequality’. (Global Policy Forum) Available: http://globalpolicy.org/component/content/article/218/46552.html (Accessed: 2010, December 21). Squire, L., and Milanovic, B. (2005) Does tariff liberalization increase wage inequality? Some empirical evidence. World Bank Publications. Read More