Economic Theories and The International Market - Essay Example

 The vast increase in both global consumption and production has quickly created an international business environment. Global economic growth appears to be determined as positive or negative largely based on the moment in time one is referring to and where you are located in the world. Jessica Irvine’s article(2005), “Fed governor’s remarks provide relief for the dollar,” serves as another reminder of how closely the United States and Australian economies are interlaced. The article, dated May 17, 2005, states that for the last three days the position of the United States currency seemed to improve.

However, once the March figures were released illustrating that the United States economy failed to bring enough capital to cover its significant trade deficit, the temporary improvement ceased. The Australian currency struggled to hold its ground against the US dollar, during this period of improvement. The Australian currency lost ground by more than US2c’s during that three- day period. Needless to say, Australian economists were excited to see this struggle end, even though it may be short-lived.

The announcement of the United States account deficit was strong enough and felt potentially damaging enough that the United States Federal Reserve governor addressed Australian economists and stated that the condition of the dollar would have a definite impact on the United States’ account deficit. The article goes on to explain that the trade deficit of the United States has been estimated at approximately $US9.3 billion dollars. The United States trade deficit, along with its account and budget deficits are a direct result of its spending imbalances.

The Federal Reserve governor stated that the prognosis for the dollar in the future is good, but whether good or bad, the United States economy should not depend on global savings as a form of revenue. The governor stated that United States’ interest rates would invariably continue to gradually increase, in order to create a better position for the dollar. Below is a chart taken from Bloomberg.com that can be used to compare the difference between the various currencies across the globe.

For our purposes, the comparison between the United States and Australian currencies are most significant. Benchmark Currency Rates USD EUR JPY GBP CHF CAD AUD HKD HKD 7.7915 9.785 0.072 14.2358 6.315 6.1544 5.8908   AUD 1.3227 1.6611 0.0122 2.4166 1.072 1.0448   0.1698 CAD 1.266 1.5899 0.0117 2.3131 1.0261   0.9572 0.1625 CHF 1.2338 1.5495 0.0114 2.2543   0.9746 0.9328 0.1584 GBP 0.5473 0.6873 0.0051   0.4436 0.4323 0.4138 0.0702 JPY 108.16 135.8327   197.6191 87.6641 85.4344 81.7744 13.8818 EUR 0.7963   0.0074 1.4549 0.6454 0.629 0.602 0.

1022 USD   1.2558 0.0092 1.8271 0.8105 0.7899 0.756 0.1283     USD: U.S. Dollar GBP: British Pound CAD: Canadian Dollar EUR: Euro CHF: Swiss Franc AUD: Australian Dollar HKD: Hong Kong Dollar JPY: Japanese Yen (Market Data: Currencies 2005, Blomberg.com, viewed 20 May 2005, . The United States has focused its attention on addressing its trade deficit. In order to do this will require that imports be decreased and exports increased.

Of course, one method of doing this is to decrease the value of the dollar on foreign markets. A lower dollar makes for more expensive imports and cheaper exports on the foreign market. As the dollar weakens, the prices of imports increase and fewer foreign products and services may be purchased by the American consumer. On the hand, exports become more competitive and the exporters have the ability to earn more revenue. This is exactly what is required to reduce the trade deficit that the United States has built for itself.

A higher interest rate would encourage foreign investment, yet this may also drive interest rates higher in other unintended areas in both the United States and other countries, like Australia. Dr. Kohn, who is mentioned in the article, confirmed to the Australian economists, that portion of the American trade deficit and currency value have been exacerbated by a high demand for American assets abroad. Jessica Irvine’s article(2005) is correct in stating that the American economy is in need of repair, yet a weak dollar is not necessarily a “bad” thing to possess.

A strong dollar is usually representative of a strong economy, but it means that American exports are less competitive than those of its foreign cohorts’(Warde 2005). These simple economic theories or rules of thumb are worth mentioning because the fluctuating costs of production are at work during these times when one economy, particularly those operating globally, tries to gain its economic strength back. The Australian economy does well against the weak dollar, but because fewer products may be sold to the Americans, it is likely that their costs of production will increase, in order to offset certain costs.

The increased costs of productions and/or export prices realized by Australia could be adjusted by the Americans through new economic policies, such as trade barriers or an additional tax. Prices that do not accurately reflect the costs of production represent a failure in the market. A failure in the ill-represented costs of production means that prices are too high and wealth will be distributed unevenly(Market Failures 2005). Multinational corporations have definitely made it possible for firms to compete on a global level.

Such linkage is encouraged in many international countries. The Australian and American form of currencies may adversely affect one another at times, but the fact that they do is an implication that the firms of these countries are operating in a competitive market. The number of producers seeking to satisfy the needs of consumers and the ease with which firms between the two countries can enter and exit the market freely determine its measure of competitiveness. Competitiveness within markets can exist in varying degrees; from a highly competitive market where there are many suppliers to a market that only has one supplier.

Those markets that have only one supplier meeting consumer’s needs are called monopolies. Monopolies are often regulated by the government, in order to regulate prices. An oligopoly exists when there are a few major producers of a good, but the industry has a large number of small producers in the industry. The optimum economy to operate in is the competitive market. In order to operate in a competitive market certain conditions have to exist. Firms operating in a competitive market have such a small share of the market that it is unable to adversely affect market price, the products supplied by the firms in a particular industry are homogenous, the firms in the market have equal access to resources, easily entry and exit to the market and any supplier that prices his products outside of market value will be easily substituted by another producer’s goods.

Furthermore, no externalities exist in a competitive market. An externality is cost or benefit that falls on someone other than the supplier or consumer in a market transaction. Market prices are not designed to reflect this third party cost; they are supposed to reflect the “private” costs of the producer and consumer. An externality can be either positive or negative. Most governmental structures discourage negative externalities with by implementing penalties, taxes or subsidies. Positive externalities are encouraged as they benefit all concerned.

An example of a negative externality would be pollution that non-consumers suffer from due to the manufacturing of a product. A positive externality could be a free service or product given to those non-consumers that may be affected by the creation and/or sale of a product (McEachern 2000). A competitive market is the best market to operate in because consumers get products at a reasonable rate, producers and suppliers are constantly aware of competition, therefore better products and technology are continually being created.

Also, a greater variety of products and new inventions are more likely to be brought to the market. Such intense market competition is a driver for international competitiveness. The degree of competition, as stated earlier, is dependent upon several factors. Companies are more mobile internationally and with more firms operating globally the business rules in doing so seem to change often. Global competition can allow one country to adversely, positively or have no effect at all on another economy, simply by doing well or falling into despair.

The article chosen has allowed for a firm analysis of various economic theories. The temporary improvement of a weak US dollar, brought havoc to an Australian currency that was improving due to the US dollars’ weakness. These two global giants are definitely linked in the international economy. The article allowed for a description of firms operating in competitive markets and gave brief explanations of monopolies, oligopolies and externalities. The costs of production play an important role in any competitive industry or environment.

In short, one is sure to view several economic theories at work when international competitors are fighting for fiscal position. REFERENCE LIST McEachern, W. 2000, Economics: A Contemporary Introduction, South-Western College Publishing, Cincinnati, OH Market Failures 2005, Market Failures, Externalities and Public Goods, viewed 17 May 2005, http://www.socialstudieshelp.com/Eco_market_failures.htm. Market Data: Currencies 2005, Bloomberg.com, view 20 May 2005, http://bloomberg.

com/markets/currencies/fxc.html Irvine, J 2005, Fed governor’s remarks provide relief for dollar, viewed 17 May 2005 Warde, I 2005, High Price of a Cheap Dollar, viewed 17 May 2005, http://globalpolicy.org/socecon/crosos/tradedefocot/2005/03highprice.htm