The Importance of International Trade to an Open Economy - Assignment Example

European Business Task 1 Explain the importance of international trade to an open economy such as the UKAs the world economy continues to be more integrated, international developments together with their impacts on the local economy are becoming more essential for policymakers. The microeconomic stance for the open economies can especially be influenced significantly by the international developments. For instance, the UK, Canada and the United States economies have become much more incorporated into the economy of the world for the past few decades, as global or international trade has increased and economic or fiscal integration with the remainder of the world had increased. There is proof that available connections, for instance, via the prices of products might have become more significant over the past few years. Since the economies of such countries are highly open, they are exposed to the world cycle of business, and the comprehension of the way these developments affect the local economy is essential for the identification of the most appropriate policy response to the developments (Jørgensen, Pollack & Rosamond, 2007). International trade has been able to grow and improve over the past decades because of the various advantages that it has presented to the different nations around the world. Since it is the sharing of capital, products and services among different nations and areas with minimal limitations, we find that is accounts for a significant part of the gross domestic product of a country. In addition, it is a fundamental source of income for a developing country as well as developed countries. Some other benefits that international trade present to the open economies include taking advantage of the global or international trade technology, where for instance the United Kingdom can benefit from the technology imported from the United States or Canada. It also helps in increasing the profits and sales because it reduces a country’s dependence on the available markets, thus expanding it further. Furthermore, it enhances the growth of companies as they are able to expand into other countries where they can get additional resources or even affordable labor for their productions (Leal, Luengo-Fernández, Gray, Petersen & Rayner, 2006). 1.2. Comparative Advantage, Absolute advantage and Terms of Trade & Exchange Rate a. Definitions Comparative advantage Comparative advantage refers to an economic principle that shows the manner in which protectionism is important for free trade. The concept claims that free trade is possible even if a party in a deal has exclusive or total advantage in all of the production areas (Li, 2010). Absolute advantage This is the ability of a person, corporation or country or even area to produce a service or item at a relatively lower price per unit as compared to that cost whereby any other party produces that item or service. Terms of Trade & Exchange Rate This refers to the average cost of exports divided by the average cost of imports. In other words, it is a measure of the relative competitive advantage of a country. b. Significance to the UK economy Comparative advantage Comparative advantage could help the UK in increasing its revenue by specializing in particular services and products and then selling then on the foreign or international market. In addition, businesses in the country may also be able to have a competitive advantage over their rivals as a result of expertise, resources and geographical factors (Saurugger, 2010). Absolute advantage Parties with absolute advantage are in a position of producing an item or service by the use of a smaller number of resources and a more proficient process as compared to any other entity producing the same item or service, thus a boost to the growth of the general economy of the United Kingdom. Terms of Trade & Exchange Rate An improvement in the United Kingdom’s terms of trade benefits the nation in the sense that it is in a position of purchasing more imports for any amount of exports. The terms of trade can be affected by the rate of exchange because an increase in the value of the currency of the country reduces the local prices of imports though it might not influence the prices of the products for export directly (Saurugger, 2010). 1.3. The structure of the balance of payments The balance of payment is composed of the following: Visible Exports – Visible Imports = Balance of Trade, denoted as (A) Invincible Exports –Invincible Imports = Balance of services, denoted as (B) Balance of Income denoted as (C) Net Current Transfers, denoted as (D) 1.4. What is Surplus and Deficit in an economy? a. Surplus and deficit definitions Surplus This is the amount of a resource or asset, which is more that the percentage that is used or utilized. The term can be used in the description of several excesses such as capital, revenue, profits and products or services. Deficit Deficit can be described as the difference between what is spent by the government and what the same government receives in income, majorly from taxes. b. Significance of long-term deficits to open economies Long term deficits in an open economy means that there is high rate of unemployment, thus less tax revenue. With a continuation of such conditions for a longer period, it would mean that the economy of the country, which is an open market would start falling or even collapse. Task 2 a. Exchange rates in European Business Exchange rates is the rate at which the currency of one country exchanges for that of international or another country. Exchange rates are very important for the European business cycles as it determines or dictates how the countries within that business block trade. For instance, if the exchange rates for the currency of a certain country is high or low, it would affect both the imports and exports to and from that particular country (Saurugger, 2010). b. Advantages of a single European currency There are several advantages associated with the adoption of a single European currency. For instance, it helps eliminate the existence of fluctuations in the rates of exchange between the currencies of different countries. It also reduces the costs of transaction because anyone traveling within the block or region does not have to carry any other currency. In addition, the single currency encourages activities of trade and free movement of resources and people. c. The difference between free trade and protectionism and the role played by tariffs, quotas and deregulation within the EU Protectionism occurs when a countries tries to stop doing business with other nations and becomes exclusively independent, which is not good for any economy as it limits production and market. On the other hand, free trade is the concept whereby a country decides to do business with one or more nations, which enables the exchange of products and services as well as skills required for production (Boyle & Ferlay, 2005). The role of tariffs and quotas in the EU is to control imports and exports, an production rates so that the member states can benefit from the cooperation. d. the importance of geographic and occupational mobility in wealth creation for EU member countries The geographic and occupational mobility in wealth creation for EU member countries is important such that the member states are able to share various factors of production such as labor and skills as well as capital. This helps the member countries that do not have a particular factor of wealth creation to acquire it from another country. Task 3 a. Advise to the UK government on what role the main EU institutions play in the determination and legitimizing of EU policy; and discussion on whether there is any veracity to the argument that the UK has relinquished too much powers to these institutions. Most institutions of the European Union were established with the creation of the European Community in the year 1958. Since then, there are a lot of changes in the framework of changing the balance of power away from the council going to the parliament. The EU institutions such as the Commission has always been carrying out mediation or arbitration between the two. Nevertheless, the commission is presently becoming more answerable to the parliament. In the year 1999, we find that it forced Santer Commission to resign, and compelled a restructuring of the suggested Barroso Commission in the year 2004. However, the establishment and strengthening of the institutions accompanied by incremental changes from the accords or agreements confirms the development of the structures of the union without a single clear master plan. The United Kingdom seems to have relinquished much of its powers to the institutions such that its influence is currently not as much as it was some years back. This has even prompted the administration of Prime Minister Cameron to consider a referendum in the year 2017 in order to decide whether they should remain in the union or pull out. 3.b. 1. Advise to the UK government on the function of EU directives and whether or not you think they will be in breach as described above The functions of the EU directive is to ensure there is sanity and conformity to the agreements signed by the member states so that one country does not go against any set principles. However, These agreements should be well deliberated and made in accordance with the agreements signed with the members states, and since the directive by the EU against selling of fire arms outside of the region was a fictitious one, the country can go ahead and do what they intend to do because they can defend themselves. This is because according to the agreements, there is no where it is states that at any time they may operate on fictitious directives. 2. EU funding streams The European Union offers funding for various projects together with programs that cover areas like: Urban and regional development Employment and social inclusion Development of rural and agriculture Fisheries and Maritime regulations Innovation and research Humanitarian assistance Task 4 4.1. A profile of the EU as a trading bloc and its importance to member states The EU is in a good position in terms of global or international trade. The EU trade block is open meaning that it is the major player on the world business or trading platform and remains the most preferable area to trade with. The Union or trade block has attained a very strong standing by doing things together on the international platform, instead of doing it with the twenty eight distinct strategies of trade. The region has deeply become incorporated into the world markets. As a result of the ease of enhanced communications and transport, it has now become easier to carry out production, purchasing and selling of products all over the globe, which is beneficial to the member states, since their individual companies have now been given the potential and facilitation of doing business outside the region. Workers always offer their services across various nations within an international or by particular service agreements. As business individuals do well in a steady, safe and predictable surrounding or atmosphere, they are in search of investment hindrances so that they can be eliminated and their business practices or investments protected. 4.2. Significance to EU operations Linguistics affects communication since people from other countries may not be able to communicate adequately with those from other countries. Cultural practices can also affect EU operations in a way such that some countries might not agree with the decisions made or activities carried out because they contravene their cultures (Saurugger, 2010). Improper logistics affects the movement of goods from their point of origin to their final destination, which is the consumers. Environmental barriers such as bad weather or natural factors also affects trade because there is no possible movement of factors of production and finished goods. All these barriers may affect the national budgets in a manner such that the member states may be forces to increase their spending in order to overcome them. 4.3. EU funding streams that may be available and relevant directives to support companies in France or Italy during their financial situation in the case study Since some of the major funding streams of the EU include Urban and Rural development and employment, the body would not like to see the companies collapse since there would be loss of employments, consequently affecting the development of rural and urban areas. Therefore, the body would look for means of salvaging them in their situation. 4.4. Action plan which lists the actions necessary for Wonga to begin an investment venture in EU For Wonga to carry out a successful venture within the EU, the first stem would be to carry out research if the venture is profitable. After establishing its profitability within the region, then it would be important to review all the requirements provided by the EU for a foreign company wanting to invest into another within the region. After completion and adherence, then the company can go ahead with the plan. References Boyle, P., & Ferlay, J 2005, Cancer incidence and mortality in Europe, 2004, Annals of oncology, 16(3), 481-488. Leal, J., Luengo-Fernández, R., Gray, A., Petersen, S., & Rayner, M 2006, Economic burden of cardiovascular diseases in the enlarged European Union, European heart journal, 27(13), 1610-1619. Li, S 2010, Does mandatory adoption of International Financial Reporting Standards in the European Union reduce the cost of equity capital?, The Accounting Review, 85(2), 607-636. Jørgensen, K. E., Pollack, M., & Rosamond, B. (Eds.) 2007, The SAGE Handbook of European Union Politics, Sage. Saurugger, S 2010, The social construction of the participatory turn: The emergence of a norm in the European Union. European Journal of Political Research, 49(4), 471-495. Read More