Management Economics: Globalization - Essay Example

"Management Economics" Module Unemployment is not simply the number of people in the population who are without work. Instead a good definition of unemployment is the number of people out of the total population who are willing and able work but cannot find a job. By willing and able to work, we mean those people who are at their job-seeking age and are seeking jobs actively. They are also able to work given their physical abilities and mental aptitudes. The types of unemployment include: Frictional unemployment occurs when people leave one job and are looking for another and remain unemployed for the period. For example, a person leaves a job after having a fight with job and will look for the job. It is very unlikely that he will find a job before at least a week and until then remain unemployed. This is frictional unemployment. Cyclic unemployment is unemployment that occurs due to recession. For e.g. Recession which hit the world in 2008 resulted in record number of unemployed in the USA. Many other countries also experienced the record rates of unemployment during this period. Seasonal unemployment occurs when hot season of a particular job gets over and people are made redundant. For example, after harvesting period, harvester often lose their jobs at farm in which they work until the next harvesting period. Voluntary unemployment occurs when people don't want to do any job. Technological unemployment occurs when technology replaces labor in factories and where people work. They may choose to remain unemployed either because they are lazy, disable or for any other reason. The easiest way government can curb unemployment is by creating more jobs. This can be done be investing in the economy through fiscal and monetary policies. Making policies so that they encourage foreign investment and by giving tax incentive or paying the companies grants for opening up their factories in the areas of high unemployment. Governments can also implement policies to increase the overall spending in the economy to get rid of cyclical unemployment. These can be inflationary measures which increase the overall aggregate demand in the economy, so that people spend more and industries do not plan to down size due to lack of demand. Government can pay subsidies to industries which are labor intensive to discourage the entry of technology to some industries. This way the problem for technological unemployment will be solved and many industries will focus on remaining labor intensive rather than shifting to technology (capital intensive). Government can also improve the job information so that frictional unemployment time period is reduced. Another more controversial solution to reduce voluntary employment is that the government should reduce the unemployment benefit fund. This will make the voluntary unemployment more expensive in terms of tradeoff between leisure and work. These people will now look to work to maintain their minimum standard of living and there is every chance that voluntary unemployment will come down as a result of this. 2) Globalization occurs when two or more countries trade goods and services and in simple words when two or more companies become interdependent. The two events that can be attributed to the start of globalization are as follows: a) Technological Improvement b) Prices variations among different continents Technological improvements in 18th century are attributed to the rise of globalization. Many historians correctly relate the development of steam rails as the major cause in the start of globalization. The reasoning they give is that the development of steal engine eased the transportation facilities for trade. For example, earlier ships were used for transportation, but development of steam rails made it easier for people to engage in inter-country trade. Similarly, due to comparative advantage and absolute advantage prices of some goods are lower in some countries than other. These price variations encourage people to trade and hence the cost advantages provided by production in different countries triggered the start of globalization. This shows that globalization does not harm the environment as it reduces the number of resources that are being used up is now less due comparative and absolute advantage. This is also a good thing to fight the problem of scarcity as the resources being used are less and we can use them for longer period of times than if they are used or exploited by countries that are not efficient in using them i.e. they do not have any competitive or absolute advantage. However, there is a flip side to the argument and people who are against globalization say that it harms the environment as there are transportation costs for the environment which means burning oil and using other non renewable resources. They also argue that it can lead to more exploitation of environment in the country which is deemed to have the absolute and comparative advantage in the production of a certain commodity. More over there is environmental opportunity cost of this product, as the same resources could have been used to produce some other goods that are demanded by the local population and not by the global consumer. Similarly, the same environment depletion could have resulted in the production of something else that is more value by the residents of the country. In the end we can safely conclude, that globalization is neither harmful, not it is too innocuous. It depends on the cost and benefit analysis to determine whether it is harming the environment more than the benefits that it is providing. Only if we have the knowledge of costs and benefits to the environment as a result of acts of globalization, we can judge whether it is harmful or helpful for the environment. It must be remember that there is no absolute answer to this and answer will vary from one case to another. 3) Many people consider free-trade leads to efficiency and their claim can be assessed by seeing the affect of tariff or import tax on imports. Here it must be kept in mind that imposing tariff on international trade is complete opposite of free trade and hence we are going to look what difference does the imposition of tariff poses on the supply and demand. D Price Y2 Y Y1 SW SW + TARIFF SW + TARIFF Quantity Y3 Figure : Impact of Free Trade vs. Charging of Tariff Source: Brue and McConnell Suppose that at first no trade was occurring as a result of which the original demand and supply curve, D & S respectively are the country's demand and supply. At the point equilibrium occur at point Y at the interaction of two points. However, if a country indulges in free trade SW curve becomes its supply curve and new equilibrium occurs at Y1. The result why the equilibrium quantity of supply is lower than for the demand curve S is because some countries can produce these products at a lower price than others because of comparative and absolute advantages discussed below and as a result our country will stop the production of this good citing that other countries can produce it cheaply. This is a point of controversy among supporters of free trade and people who are against free trade. The people who oppose free trade argues that domestic production will reduce from Y to Y1 as result of free trade and hence this implies closing down of factories, downsizing and unemployment of local factors of production. They say that free trade is an evil that should be stopped from penetrating a local market for the reasons discussed above. However, the supporters say that this leads to more efficient use of global resources as efficiency as more products are being produced where they can be produced cheaply. Although it might be beneficial on the global basis, it should be discourage in the developing economies which are seeking to maximize employment rate and implementing policies for the growth of local industries. Faced with this problem many countries often charge a tariff on imports which increase it's price and hence reduces the impact of imports on local industry and market. This increase reduces the local supply from Y to Y2 which is creates a lesser impact on domestic supply but still it is large enough to affect domestic industry and hence receives criticism from people who suffer from unemployment etc. However, once a a high tariff is charged raising the price of imported goods above what is being incurred in local market, it does not affect the local industry, in theory. This is the right amount of tariff and completely against the free trade, but people who oppose free-trade are appeased by this as local industry is not harmed. Similarly, supporter of free-trade argues that this is against the economic teachings of productive and allocative efficiency as the benefits of low-cost are not being enjoyed by the people resulting in less demand and people who want to consume the products at lower prices are not being catered i-e allocative inefficiency. 4) Commodity prices are those prices setup by the forces of demand and supply through the function of price mechanism. Remittances are the money sent by local individuals working abroad to their families or some form of money sent by the foreign financial institution to the local instructions, no matter what the reason maybe. Commodity prices are important for low and middle income countries because without it they can be exploited by large buyers of these products both in the context of local market and foreign market, where countries trade with each other. By giving a price to a commodity in terms of costs associated with the product, the countries and sellers make sure that they do not make a loss selling a particular item. This is of utmost importance as without this there will be no benefit of trade or exchanging goods with each other. Middle or low income companies, by the virtue of this, can be exploited in the international market and may lose out. This will hinder their development and they may never escalate to high position if this is the case. Another important concept is that of remittances. Remittances are important for various reasons. They increase the foreign reserves of a company which are particularly helpful when the country engages in international trade. Similarly, remittances increase the money supply in the economy and increase the standard of living, balance of payment and in turn, it may lead to economic growth. Economic growth is really important in the growth of low and middle income countries. Nowadays, it is common to judge the development of a country by looking at its foreign reserves. Investors will often want to invest in countries whose foreign reserves are high and thus remittances can command additional investment toward an economy. This again is particularly helpful for low and middle income countries to achieve their macroeconomic aims and targets. References Richard Lipsey and Alec Chrystal. Economics. 10th Edition. Oxford University Press 2003. Campbell McConnell and Stanly Brue. Economics. McGraw-Hill (2005) Robert Pindyck and Daniel Rubinfield. Microeconomics. Prentice Hall (2004) John Sloman. Economics. Prentice Hall (2005). Read More