European Business - Assignment Example

The paper 'European Business ' is a great example of a Macro and Microeconomics Assignment. Not all countries are equally endowed with natural resources and other factor inputs. Therefore, there is a need to depend on other economies to supply what the country is deficient in and also to supply to other economies what the country has produced and has demand in other economies (Czinkota, 2003). In this way, there is a positive zero-sum game. When a country trades with other countries it is able to tap on the benefits from other economies hence improving the lives of its citizens.

Task 2

Task 2 (a)

Comparative Advantage refers to the ability of an economy such as the UK to produce a certain product at an opportunity cost that is lower than another product still produced in the UK.

Absolute advantage refers to the ability of an economy such as the UK to produce a certain product at an opportunity cost that is lower than a similar product produced in another economy.

Terms of Trade refers to the ratio between the price of exports and the price of imports

Exchange Rate refers to the price of one country’s price against another country’s price.

Task 2 (b)

Significance of comparative advantage to the UK economy

Each country is differently endowed with natural and capital resources from another (Morrison, 2006). This, however, will not mean that since the UK may be comparatively disadvantaged in terms of factor inputs it should not produce goods and services that require these inputs. However, it should choose to produce those goods and services that it can produce at a low opportunity cost than others. This helps it to improve its competitiveness in an open market.

Significance of Absolute advantage to the UK economy

There are goods that the UK produces cheaply than many other economies since it is naturally endowed in resources that require these factor inputs. By producing these products the UK is able to compete effectively with other economies and improve its trade position.

Significance of Terms of Trade to the UK economy

There are certain economic factors that cause a general problem in almost all economies such as recessions and booms, inflation and high-interest rates can also be experienced in more than one economies that are partners in trade. What should worry the economists in such cases is the terms of trade. If the percentage change in the price of exports is higher than the percentage change in the price of imports, trade is said to be improving and the reverse is true.

Significance of Exchange Rate to the UK economy

The exchange rate affects the trade balance, especially the current account balance, between the UK and the rest of the world. A higher exchange rate means that the UK pound has depreciated against other currencies whereas a lower exchange rate means that the UK pound has appreciated against other currencies. When the exchange rate is high the imports become expensive whereas exports become cheaper to the rest of the world hence the current account balance improves (Richardson & Mazey, 2015). On the other hand, when the exchange rate is low the imports become cheaper whereas exports become expensive to the rest of the world hence the current account balance deteriorates.

Task 3

Structure of the balance of payments

The balance of payments (BOP) measures all money flows between a home economy and the rest of the economies in the world. The major components of the BOP are the current account and the capital account.

The current account part of the BOP records the movements of imports and exports of goods and services and unilateral transfers within a specified period. This can be shortened by the formula below:

Current account = exports – imports + unilateral transfers

The capital account part of the BOP records the movements of investment capital flows carried out by an economy with the rest of the world. It includes borrowings to and from abroad, investments to and from abroad, and changes in foreign exchange reserves. This can be shortened by the formula below:

Capital account = Borrowings + investments + changes in foreign exchange reserves

Task 3 (a)

Visible trade balance = 400 – 500 = -£100

Task 3 (b)

Current balance = -£100 - £150 + £200 = -£50

Task 3 (c)

Balance for official financing = current balance + investment and other capital flows = -£50  -£45 = -£95

Task 4

Task 4 (a)

A surplus in the economy means that an economy is exporting more than it imports

A deficit in the economy means that an economy is importing more than it exports

Task 4 (b)

Significance of long-term deficits to open economies

The current account is a good measure of the competitive position of an economy against another on an international scale. A current account deficit shows that an economy is importing more than it exports which indicates that the economy is relatively uncompetitive.

Long term deficits cause depreciation of the currency of the net importer. The economy can, however, take advantage of the currency devaluation to improve their trade position. However, this is only possible if the economy is comparatively advantaged in the production of certain goods and services which have high demand in the foreign economy. Otherwise, the trade position will continue worsening.

Too much importing from foreign economies have the effect of stagnating and destroying the home industries since the home demand is satisfied by goods and services imported from other economies.