Importance of International Trade for Open Economies - Assignment Example

Task 1 Importance of International Trade for open economies like UK The different benefits which UK is able to get due to involvement in open trade is as It has helped UK to develop their domestic industry due to competitiveness which has ensured that the domestic industry looks to compete at a global level and has thereby strengthened their local industry as well It has provided an opportunity where UK has been able to use international technology to develop their business. This technology transformation has consolidated their business and has provided the required dimensions through which business development has improved International trade has helped to increase sales and profits as it has provided an opportunity where they can trade and sell their products and services to other countries. This has thereby provided new avenues and has increased the opportunity of carrying out business The risk for the domestic industry has reduced as opportunity to work in different markets has helped to diversify the risk and has thereby provided new and better avenues through which business has increased The process of international trade has further helped to increase their global market share which has thereby helped them to get a global presence. This has helped UK to ensure that their products are available elsewhere and has thereby multiplied their market share and capacity International trade has also helped UK to earn foreign exchange as trading in currencies of other countries while being involved in trade has increased their foreign holdings. This has helped to strengthen the manner in which UK works and has helped the economy to grow at a faster rate The dependence on present market has reduced as availability of other markets through which international trade can be carried out has increased their overall reach and has helped to increase the bargaining power. The process has led towards ensuring that the society is conserved and the people don’t have to pay more thereby ensuring better customer satisfaction Thus, the above are some of the different benefits which UK has been able to get due to international trade and has helped the economy to grow at a rapid pace. Comparative Advantage It is defined as an advantage which an economy has over another economy when it is able to produce goods and services at a lower opportunity cost compared to its trading partner. To put is in simple words it means that economies should look towards producing those goods which provides them the least inefficiency as compared to other producing nations since the economy doesn’t specializes in the production of any goods and services. Absolute Advantage It refers to the fact that economies should look to produce and specialize those goods where they have an advantage and will be able to produce the goods and services at the lowest cost possible or by using fewer resources. The production provides an advantage as the economy is able to gain specialization as compared to other economies. Terms of Trade It is the trade index which is calculated by dividing the index of goods which have been exported by the index of goods which have been imported. It helps to provide a clear indication of the exchange and imports which has taken place in UK and thereby helps to determine the trade which has taken place Exchange Rate It is the price of goods and services which has been expressed in the currency of another country. It can be either expressed as the number of foreign currency units that 1 pound can buy, or as the number of UK pound that are required to buy one unit of a foreign currency. Significance of comparative advantage, absolute advantage, terms of trade and exchange rate Comparative advantage and absolute advantage has a lot of significance for business and the economy as it helps to determine the manner in which efficiency is gained by the economy. This concept helps economies to understand their core strengths and areas and helps to identify the different dimensions through which overall performance will improve. The different terminology like comparative advantage, absolute advantage, terms of trade and exchange rate determine the different areas where economies are efficient and helps to determine the process through which majority of the work will be carried out. This thereby carves a path for the future and provides a framework through which different activities can be carried out in the best possible manner so that both resources and energy are preserved. Different Financial Calculations a. Visible Trade Balance = Visible Exports – Visible Imports = 400 – 500 = -100 million of visible trade balance b. Current balance = Export – Imports + Net Income from abroad + Net Current Transfers = 400 – 500 – 45 + 200 – 150 = -95 million c. Balance for official financing = – 45 + 200 – 150 = 5 million Surplus & Deficit in Economy Surplus in an economy means that the government income is more than the government spending which results in additional funds which can be lend or used elsewhere Deficit on the other hand for an economy means a situation where the government spending is more than the government income and thereby creates a shortage of funds and results in improper budgeting Significance of Long Term Deficit Long term deficit has a negative impact on the economy and requires that different mechanism is found out so that it can be controlled. One of the major issues associated with long term deficit is that the balance of payment become negative which thereby has an impact on foreign funds holdings, the manner in which different expenses will be financed, impacts the capital investment activity and on the whole has an impact on the economy. It creates a situation where the economy is unable to manage its current expenses out of the planned current budget and thereby reflects on the manner in which different business decisions are taken. The impact of such a situation can be witnessed even after long period of time and will lead towards controlled growth and impact the future prospect of the economy. Task 2 Role of Exchange Rate in European Business Exchange rate has its importance in European Union as the different economies are in constant trade relation with one another so changes in the exchange rate have an impact on their business. Exchange rate is the ratio at which the currency of one country is expressed in relative to another. It has an impact in international business as changes in exchange rate could either increase the price of the product or reduce the price of the product thereby having a long term impact. Further, every economy looks to trade with other partners and in case of European business the share in higher. This thereby impacts the business as appreciation or depreciation in the value of exchange rate will have an impact on the domestic economy. This is an important aspect which European businesses need to look at and develop mechanism through which fluctuations and risk associated with exchange rate is controlled. Advantage of a single European Currency The advantages of having a single currency like the European currency are The overall business for the economy would increase as having a single currency helps to prevent from the risk and shock associated with currency fluctuations and thereby reduces the degree of risk for the business It helps the different people associated with the business as they don’t have to undergo the difficulties of paper work and currency conversion which saves time and effort which could be used elsewhere to find new business opportunities and improve the manner in which business is carried out The cost associated for the business would go down as they don’t have to make arrangement for hedging cost and would be able to insure themselves from the risk associated with currency fluctuations The business don’t have to face issues associated with accounting in different currencies as the same financials and accounting can be used easily The overall business cost would be reduced as it would shape a path where the business will be able to ensure more and more investment, reduced interest cost, better predictability and developing the different business dimensions which helps to improve the long term performances Difference between free trade and protectionism Free trade is an agreement where the government has developed open policies and allows people to trade with one another even across global boundaries. This process helps to protect the interest of the consumer as it looks towards ensuring that the market forces determines the rate which will be charged in the market. Free trade thereby looks to allow economies to trade with one another. Protectionism on the other hand looks towards protecting the domestic industry as the government looks to develop rules and policies which prohibit trade between economies. The protectionism can be either for a particular sector, industry or for the entire economy as the economies don’t look into international trade. This is done with the main purpose of protecting the domestic industry from other big international players and is aimed towards ensuring that economies become self sufficient. Role of tariffs, quotas and deregulation in European Union European Union has the presence of tariffs, quotas and deregulation but is largely limited. The European Union has looked to have quotas so that the different industries can be protected, some preferential rights are given to certain economies so that trade relations can be improved and concessions are given based on volume of trade. This is done with the intention that business of European Union increases with other world countries and the overall framework and parameter provides an opportunity to grow the business. This has had a positive impact on European Union and has helped them to grow their business especially in goods and services where they have a comparative advantage. The overall phenomenon has thereby transformed the manner in which different decisions are taken and has developed their business. Role of geographic and occupational mobility in wealth creation in European Union Geographic and occupational mobility has helped the European Union in wealth creation. Since, the different economies which are part of the European Union has an advantage with relation to geography as the different places are nearby has helped them to grow their business. This is in addition to the fact that different economies specializes in different products and services which has provided an opportunity for occupational mobility. This has thereby transformed into one where the overall long term potential of the business has increased. This has helped to ensure that European Union is able to consolidate its position and take different business decisions which have helped to increase the volume of trade. Further, since the different economies which are part of the European Union has been able to develop its business based on different strengths it has helped to ensure that the overall business potential of the business improves. Further the mobility of workers in the European Union is higher compared to Australia by 2 percent and US by 3 percent which has helped them to ensure easy availability of employees. This has helped the economy to carry out different business at a lower cost and has thereby been able to create a niche market where easy availability of resources like employees has contributed towards their growth. This is matched by close proximity due to geographical mobility which had played a role in shaping the manner in which different decisions are taken and business effectiveness has grown. Task 3 Role of EU institutions in legitimising EU policies Reasons why UK should pull out of the EU UK government steps and consequences with regard to directives EU funding stream Read More