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World Economics assignment Essay

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In this report, it will introduce the World Economy. Main focus is the key feature of the global economic environment. The core economic issues that are focused on in this report are trade, international payments, exchange rates and economies undergoing change.


To gather the required information to produce this report, extensive usage of the internet, various search engines and university library to understand global economics theory and current affairs.

Analysis on Element 1

Firstly, international trade increased word-wide output. International trade activities have develop and explore the comparative advantages of a country, meanwhile, boost the professionalism of industries, higher efficient because of this.

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If the world-wide output is enhanced and comparative advantages are well-exerted, producers can obtain benefits of economies of scale, accordingly, the cost will descend and profit ascend.

Secondly, it provides greater range of commodities for consumers and more choice. Customers coming from varied counties could buy commodities which are not produced domestically by the means of international trade. It contributes to enlarging purchasing market. Since, no matter the similar types of products or goods that not are able produced in domestic area, they could be got through international trade.

Additionally, world trade has made an overall increase in standard of living. Specifically, a host of job vacancies offered by muti-national companies help solving the employment problem, then corporation’ revenue and individual revenue are elevated. Consequently, increased tax will be invested to welfare and infrastructure system.

Analysis on Element 2

According to wikipedia, “Free trade is a system of trade policy that allows traders to act and or transact without interference from government. According to the law of comparative advantage the policy permits trading partners mutual gains from trade of goods and services.(1)”

According to wikipedia, “The Latin American Free Trade Association (LAFTA) was created in the 1960 Treaty of Montevideo by Argentina, Brazil, Chile, Mexico, Paraguay, Peru, and Uruguay. The signatories hoped to create a common market in Latin America and offered tariff rebates among member nations. LAFTA came into effect on January 2, 1962.

When the trade association commenced it had seven members and its main goal was to eliminate all duties and restrictions on the majority of their trade within a twelve year period. By the late 1960s the area of LAFTA had a population of 220 million and produced about $90 billion of goods and services annually. By the same time it had an average per capita gross national product of $440. The goal of the LAFTA is the creation of a free trade zone in Latin America. It should foster mutual regional trade among the member states, as well as with the U.S. and the European Union.(2)”

Analysis on Element 3

According to wikipedia, “In economics, principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources. Adam Smith first described the principle of absolute advantage in the context of international trade, using labor as the only input(3).” For instance, the capital market of UK is absolute advantage when comparing to the developing countries.

According to wikipedia, “The law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a product with the highest relative efficiency given all the other products that could be produced(4).” For instance, during the end of 19 century and beginning of 20 century, textile industry of UK developed well. However, in the middle and end of 21 century, China’s textile industry became a comparative advantage because of enhanced efficient by means of adopting new product technologies.

Analysis on Element 4

According to wikipedia, “Protectionism is the economic policy of restraining trade between states, through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to discourage imports, and prevent foreign take-over of domestic markets and companies(5).” It’s a practice of regulating imports and exports with the purpose of shielding domestic industries from foreign competition. Governments adopt protectionism in order to help the country become self-sufficient, to protect new industries, or as a bargaining tool.

In terms of tariff which was applied in protectionism, there are two examples. On September of 2010, Chinese government enforce new import duties ranging from 50.3 to 105.4 percent on US chicken lasting for five years, since a investigation found that US chicken was being sold at low prices a process called “dumping”(6). Another instance is, according to the webpage, on November of 2009, Brazil would raise cane over U.S. ethanol tariff. The reason for that is Brazil sugar producers say sugar-based fuel is more environmentally sound than electricity or corn ethanol for as an alternative for powering cars(7).

Analysis on Element 5

Trade barriers are constraints that tend to hinder the motivation to engage in the importing or exporting of goods(8). There are two types of barriers that a government can employ, which are Tariff barriers and Non-Tariff barriers. According to the student guide, “Tariffs are taxes or customs duties placed on foreign products to artificially raise their prices and this hopefully, suppresses domestic demand for them.(9)” According to wikipedia, “Non-tariff barriers to trade (NTBs) are trade barriers that restrict imports but are not in the usual form of a tariff.(10)” it can take many forms, including quotas, embargoes, exchange controls, import deposits, voluntary export restrains, product standard procedures, subsidies and etc.

There are two instances that indicate how tariff barriers influence the global trade. According to the webpage, “On September of 2010, china’s commerce ministry announced that it would impose import tariffs on American poultry of up to 105.4 percent(11).” Another is, on August of 2010, Mexico’s new list which includes meats, vegetables and household items face tariffs of 5 percent to 25 percent, which will hurt Texas more(12).

Analysis on Element 6

In brief, according to the webpage, “the World Trade Organization (WTO) is an organization which can provide a negotiating forum, offer a set of rules and helps to settle disputes for its memberships between nations.” Its main function is to ensure that trade flow as smoothly, predictably and freely as possible(13).

According to the publication of European Commission, ” on 8 December 2003, the EC requested consultations with India on 27 antidumping measures imposed on a variety of EC exports, including pharmaceuticals, chemicals, paper, textile and steel. The problems in the Indian cases mainly referred to the highly insufficient injury and causality analysis, the failure to provide meaningful disclosure documents and a continuous disregard of arguments presented by EC exporters and the EC. Following the consultations held in February 2004, India opened a review process which has led to the termination of most of the contested measures, including those of most economic interest for EC exporters (steel and pharmaceutical products)(14).”

Analysis on Element 7

The aims of EU are following: Firstly, Eliminate customs duties and quotas between members. Secondly, establish common external tariff for non members (operated through common commercial policy). Thirdly, establish free movement of people, service, goods and capital between members, meanwhile, reduce anti-competitive practices. Fourth, associate with countries outside union to increase trade. Further, move towards full economic and monetary union. Lastly, develop common foreign, security and defense policy(15).

In respect of trade, EU has encouraged to use one single currency which promotes the development of trade. Regarding to administration, the applying of Schengen Visa decrease administrative impediments and encourage the flow of individuals and business. Moreover, it implements unified foreign policy when confronted with trade disputes.

Analysis on Element 8

The Balance of Payments can effectively be broken down into two parts. According to the webpage, “The Current Account records international trade in goods and service, international income flows and current transfers. The Capital Account and Financial Account form the counter part to this, recording the changing pattern in the international ownership of assets. While the Financial Account records changes in the cross-border flows of assets the international Investment Position measures the total stocks of foreign assets and liabilities held by a nation(16).”

The trade in goods balance is the difference between the value of goods exported and the value of goods imported. The trade in services is recorded in the same way, with credits to the Current account reflecting services exports and debits services imports. Net income flows reflect international payments associated with the ownership of the factors of production (land, labor and capital). Current transfer records a miscellaneous set of net payments including workers remittances, social security, foreign aid and contributions to international organizations(17).

In 2009, the current account deficit stands at�15.5 billion. The deficit of trade in goods account falling to�81.9 billion. The trade in services account has shown a surplus of �49.9 billion. The investment income balance rose to a record level of �32 billion. The deficit of transfers account reached a record of �14.8 billion. Additionally, The capital account represented in �3.2 billion and financial account had a net inflow of �5.6 billion(18).

Analysis on Element 9

According to the bar chart of trade in good and trade in services, the UK trade was fluctuated over the last 30 years. The UK trade has really only been in surplus in the very early 1980s which around �3 billion. However, after that, there has a apparent drop from 1982 to 1989 where at a bottom in minus �25 billion in 1989. Then, from 1990 to 1997, it roughly remained same which around �10 billion deficits. What is worse, the UK trade has a substantial decline which from �21 billion deficits in 1998 to �90 billion deficits in 2008 during the ten years. In 2009, the trade of good has a deficit around �81.9 billion(19).

As for the trade in services, the UK has traditionally been in surplus and certainly has been so from 1976-1997. The services trade approximately remained surplus �4 billion during four years which from 1980 to 1984. Then, it peaked at �7 billion within 3 years which from 1985 to 1987 during the 1980s. From 1991 to 1997, it ascended gentlely from �4 to �11 billion deficit. However, there was a sharply growth after 2005 which from �25 billion positive to �56 billion positive in 2008. In 2009, it dropped to �49.9 billion trade in services.

Analysis on Element 10

According to the wikipedia, “The exchange rates between two currencies specify how much currency is worth of a foreign nation’s in terms of the home nation’s currency(20).” It has two forms which are fixed exchange rate and floating exchange rate.

As to the floating exchange rate, according to the student guide, “if the value of currency rises imported goods will be cheaper, therefore the trade in goods is likely to move into deficit. If the value of a currency falls, domestic goods and services will be dearer in domestic markets. This should mean an improvement in trade in goods(21).” With regarding to the fixed exchange rate, according to the student guide, “a persistent surplus could be dealt with by measures which allow domestic consumers to feel confident to purchase more. If the domestic economy cannot respond then imports would probably increase and exports might become less competitive.(22)” Therefore, it will lead to a decrease of trade in goods. “If the opposite were the case, a persistent deficit then measures could be used to restrict domestic demand and also to place greater restrictions on imports.(23)” Hence, an increase of trade in goods will be emerged with that.

For example, it is suggested that the American government has a requirement of increasing the value of RMB (increasing the exchange rate of RMB to change dollar) in 2001. In the end of 2006, Chinese government put the policy to take the exchange rate, it means originally 100 US dollars exchange 826 RMB, now only swap about to 800 RMB. In this way, they can make use of less money to change more products of Chinese in order to offset the quota of currency.

Analysis on Element 11

The single currency is usually a double edge sword, which both bring the UK government strengthens and weaknesses.


To the UK economy, keeps interest rates lower, the commitment to low inflation should allow the economies to operate lower cost.

Increase foreign investment, if the UK join the single currency system, direct inward investment should be attracted because the reduction of uncertainly there is not the need to calculate demonstrate the UK pound(24).


For the UK government, changes from old currency may be costly; the government needs spend additional money, like, purchase the new equipment and staff training.

The UK government will lose the independent monetary policy, since when UK adopt the single currency, the scope for fiscal policy adjustments is restricted by need to stay within 3% of GDP(25).

Analysis on Element 12

To individuals, adopting the single currency could eliminate cost on exchange currency. No matter Tourists or citizens, they do not need to care about more money will be spend because of changing exchange rate.

Besides, it renders purchasers convenient and efficient shopping, most essentially, a wide range of selections of goods and considerations without additional expenditure.

To the business, utilizing a single currency intensifies stiff competition among members within EU. By the contrast, it also provides corporations with increasingly opportunities and possibilities of expansion, so that these firms could produce their product to wider within EU. What’s more, it decreases the cost of foreign investment to dedicate domestically.

Analysis on Element 13

According to wikipedia, “Least Developed Country (LDC) is the name given to a country which, according to the United Nations, exhibits the lowest indicators of socioeconomic development, with the lowest Human Development Index ratings of all countries in the world. A country is classified as a Least Developed Country if it meets three criteria:

* low-income (three-year average GNI per capita of less than US $905, which must exceed $1,086 to leave the list)

* human resource weakness (based on indicators of nutrition, health, education and adult literacy) and

* economic vulnerability (based on instability of agricultural production, instability of exports of goods and services, economic importance of non-traditional activities, merchandise export concentration, handicap of economic smallness, and the percentage of population displaced by natural disasters)(26)”

For instance, Bhutan and Maldives in Asia is confronted with several problems which include shortage of education investment, out-dated medical treatment and high incident of employment.

Analysis on Element 14

NICs like Kiribati may face the problem of indebtedness. According to the student guide, “As the living standards and per capital income of NICs approach those of the mature economies they will certainly find it difficult to sustain growth, they may well have benefited from aid from the World Bank or IMF. Were they clever enough to pay off all debts they might have owed externally or as close to it as they could before being exposed to some fairly fierce competition(27).”

In Cambodia, the unemployment is usually very high with very little industry because most people work on their own small plots of land. The social, cultural and religious patters within these countries are barriers to mobility and change(28).

Analysis on Element 15

The impact of multi-national firms on NICs and LDCs may be broadly similar. The benefits have increase employment, the new methods and technology and contribute to economic growth, to name just a few. At the same time the problems have which may eliminate domestic competition, occupy the local nature resources and the profits are mainly transfer back to Home County(29).

Volkswagen as the first group company into Chinese marketing, they merger the Shanghai automobile firm and established the Shanghai Volkswagen Company. The professional training designed for Chinese worker brought in the updated technology and management skills. The other instance is about Samsung Electronics. The organization install their manufactory in developing countries like India, it may use up the natural resources and give extreme detrimental environmental influences on host country.


All those are the 15 key elements about the world economy. At present, the global economy tends to integration, so to realize world economy is very necessary for countries, businesses, and even individuals.


(1) http://en.wikipedia.org/wiki/Free_trade

(2) http://en.wikipedia.org/wiki/Latin_American_Integration_Assosiation

(3) http://en.wikipedia.org/wiki/Absolute_advantage

(4) http://en.wikipedia.org/wiki/Comparative_advantage

(5) http://en.wikipedia.org/wiki/Protectionism




(9) Economics 2: The World Economy by China Mordern Economic Publishing House Page34.

(10) http://en.wikipedia.org/wiki/Non-tariff_barriers_to_trade

(11) http://www.nytimes.com/2010/09/27/business/global/27yuan.html

(12) http://www.mysanantonio.com/business/local/article/Mexico-s-new-tariff-list-may-hurt-Texas-621156.php

(13) http://www.wto.org/english/res_e/doload_e/inbr_e.pdf

(14) http://trade.ec.europa.eu/doclib/docs/2007/may/tradoc_134652.pdf

(15) Economics 2: The World Economy by China Mordern Economic Publishing House Page 66.

(16) http://en.wikipedia.org/wiki/Balance_of_Payments

(17) http://www.statistics.gov.uk/elmr/09_09/downloads/ELMR_Sep09_Chamberlin.pdf

(18) United Kingdom Balance of Payments – The Pink Book

(19) United Kingdom Balance of Payment-The Pink Book

(20) http://en.wikipedia.org/wiki/Exchange_rate

(21) Economics 2: The World Economy by China Mordern Economic Publishing House Page 91and 92.

(22) Economics 2: The World Economy by China Mordern Economic Publishing House Page 103.

(23) Economics 2: The World Economy by China Mordern Economic Publishing House Page 103.

(24) Economics 2: The World Economy by China Mordern Economic Publishing House Page 112.

(25) Economics 2: The World Economy by China Mordern Economic Publishing House Page 113.

(26) http://en.wikipedia.org/wiki/Least_Developed_Country

(27) Economics 2: The World Economy by China Mordern Economic Publishing House Page 134 and 135.

(28) Economics 2: The World Economy by China Mordern Economic Publishing House Page 139.

(29) Economics 2: The World Economy by China Mordern Economic Publishing House Page 148-149.

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