I. Introduction

This report introduction some economics about the world economy including free trade, exchange rate, balance of payment, NIC and LDC and so on. In this report i will analyze 14 elements to make a clear explanation about world economy.

II. Text

1.Explain free trade including the theory of absolute advantage and comparative advantage

Free trade had the original intention that goods and services could be exchanged freely between countries with no barriers to this exchange.

Trans-Pacific Partnership Agreement, or TPP, as it’s more commonly know. 12 countries like America, Japan, Australian and so on, they reach on agreement about TPP on 5th of October in 2015. Between TPP members, the products and service price will decrease and logistics speed will increase. Add the 12 countries which accounts for 40% of the global economy. The TPP will reduce or decrease tariff on 18000 categories of products.

Absolute advantage is said to occur when one country can produce a good or service to a pre-determined quality with less resources than another country.

The benefit or advantage of an economy to be able to produce a commodity at a lesser opportunity cost than other entities is referred to as comparative advantage in international trade theory.

In 1970s, manufacture industry take up large proportion in UK, its manufacture industry has absolute advantage. However, its industry began transfer to overseas from 1980s. Particularly manufacture industry, UK environment become very bad duo to much manufacture industry, so UK government decide close some domestic factory and invest Financial industry. Financial industry rose sharply base on this opportunity. Financial industry don’t have to cause pollution, and its profitability also very good.

2. Identify three gains from international trade

First of all, goods and services could exchange freely between countries with no barriers to this exchange. And the goods can decrease cost, and that can increase employment rate and rose the economic in the local area.

Second, International trade can improve global productivity because that can use absolute advantage and comparative advantage to make cost deduction and after that the productivity will increase.

Third, International trade customer can get more products from other countries, and low product cost can make the goods become more cheaper and international trade make the market become large and increase product will make scale effect.

3.Explain barriers to trade including two forms of protection

Trade barriers are government-induced restrictions on international trade. The barriers can take many forms, including the following tariffs and non tariffs.

Give a example about tariffs, 35% tariffs on Chinese tyres imposed on the United States on 11th September in 2009. It make Chinese tyres firms have to increase price if sales in America.

For example about non tariffs, Russia to Ukraine for embargoes which suspension of Ukraine imports of juice on 29th July in 2014. It make Ukraine’s juice not allow sale in Russia.

4.Explain why government may wish to rise barriers to international trade

Because government want to protect the country’s job opportunity and avoid anti-dumping. For example, Local shoemaker in Elche, the capital of Spain’s once flourishing footwear industry, argue that “Made in China” is taking away their jobs by means of ultra-low pricing.

For example about anti-dumping, earlier in May 2012, solar panel manufacturers in the United States led the U.S. Government to impose anti-dumping duties, ranging from 31% to 250% on solar panel imports from China, which were accused of selling panels in the U.S. Market at prices below cost.

5. Describe the role of WTO in development of free trade

The WTO was founded in 1994 on April 15. WTO has 164 member states, headquarters in Geneva, Switzerland. WTO objective is improve life level ensure sufficient job opportunity and solar improve income level and keep the sustainable development road and ensure developing country’s interests.

WTO basic on open, equality and mutual benefit, escalate decrease tariffs and non tariffs and eliminate discriminate between the member states in the international trade. That will promote the development of free trade.

On 7th December 2013, 18 years have passed since the establishment of the WTO’s first global trade agreement was born. That will promote the development of tree trade.

6.0 Explain how EU promote free trade

European Union or EU establish 1st of November in 1993. There are 28 member of country in the EU now like Netherlands, France, Italy and so on. Headquartered in Brussels, Belgium. The purpose of EU is Strengthen the coordinated development of economy and society and establish the economic and monetary union of the final implementation of the unified monetary union, and promote the balanced development of economic and social development of the member states.

EU make many rules for member states like removal of the member countries of the border control, member states capital can flow freely. These rules help EU member countries escape the trade barrier.

And other rules like free trade between member states, and use a same currency which is euro to make trade, these rules help the member states expand market to economic growth.

7.0Explain the composition of the UK's balance of payments and its recent trends in the last 30 years

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This accompanying picture above shows detail about balance of payment in the UK in 2010.

This above table gives information about current account, capital account and financial account in UK from 1980 to 2010. In terms of current account,according to the data, there just four years the figure is positive when between 1980 and 1983. And then the figure almost negative from 1984 to 2010. And the figure gain the lowest number about -55190 million in 2008. This situation illustrate UK’s economic development is not very good.

In terms of capital account, according to the data this account experience a fluctuate trend. At first, the figure was -4 million in 1980 and then the figure decrease to -79 million in 1981. After that the figure was 6 million in 1982 increase to 159 million in 1987. What is funny thing is the figure fall again to -39 million in 1988. After that the figure experience a fluctuate and what is no table is the figure gain a lowest number -1527 million in 2006.

In terms of financial account, the figure see an positive trend from 2157 million in 1980 to 122 million in 1986. And then the figure experience a negative trend between -9690 million in 1987 and -23296 million in 1993. And from -20261 million in 1999 to -30276 million in 2010 this account experience negative trend again, and get the lowest number in 2008 because of the financial crisis the figure was -39301 million.

8.0 Explain British trade trends in the last 30 years

The table shows the evolution of trade in goods and services in UK between 1980 and 2008. The trade in goods account stand 20 billion in 1980. The trade in goods account has remained in deficit. The deficit grew remarkable in the late 1980s to reach a peak of about 24 billion in 1989. And then decreased back to 20 billion in early 1990s and keep a stable at 10 billion from 1991 to 1998. In 1998 the deficit jumped by over 9 billion, and it has continued to rise since, reaching a cash record of 92.9 billion in 2008.

Overall, the evolution of trade in goods experience an upward trend. With the development too fast, UK need to keep up with the times, the country must through trade in good to increase country’s income so with the passage of time, there are more and more trade in UK.

The trade in services account stand 8 billion at first and the figure keep until in 1995. From 1995 to 2003 the figure keep around 18 billion. After that, the figure experience an upward trend and peak at 56billion in 2008.

Overall the evolution of trade in service see an upward trend. With the development of the times, services like financial service, travel service become more and more popular for people. So the the number of trade in service will be increase.

9.0 The relationship between exchange rate and balance of payments

Exchange rate is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency. Cheaper currency helps boost the export. If demand keep keep the same, the value of goods will reduce and the current account balance may deteriorate. If the exchange rate increase, the country’s goods might suffer and demand from abroad could decrease.If the demand keep the same volume, the value of exports will rise and the current account balance should be improved. For example, China allowed the yuan to rise 21% against the dollar in the three years to July 2008, but since then it has more or less kept the rate fixed. As a result, the yuan’s trade weighted value has been dragged down by the sickly dollar, while some other currencies have soared. Since March the Brazilian real and the South Korean won have gain 42% and 36% respectively against the yuan, seriously eroding those countries’ competitiveness.

When currency appreciation, it benefit for overseas investment and capital outflows. On the contrary, currency devalue, it will influence overseas investment and benefit for foreign capital inflows.

10.0 The advantages and disadvantages about floating exchange rate and single currency

In terms of advantages about floating exchange rate, first is expected to provide an automatic correcting mechanism, it will help country adjust the function of balance of payments.

Second is the exchange rate will not become a target because whichever way it moves, the mechanism should start to operate quickly to restore equilibrium.

Third is if a country imports more than it exports then the supply of its currency will exceed demand for it and its price will fall. Exports will become cheaper and imports dearer, restoring equilibrium.

In terms of disadvantages about floating exchange rate, it adds uncertainty. Price may fluctuate in very short time scales. Purchasers have to watch two things. The price of the goods and the price of the currency. They may buy the goods at one price but when the deal is concluded find that they have to pay more for the currency than they envisaged.

Second is demand may be unstable because external prices of domestic goods will be subject to change. Planning production may be difficult.

Third is if there is inflation a floating exchange rate will not always deal with it effectively because the depreciation of the currency in the foreign exchange markets will make imports dearer and assist possible cost push inflation

In terms of advantages about single currency, first is can reduce costs, firms and individuals do not have to pay as they move themselves or goods or services from one EU country to another.

Second is it can reduce exchange rate uncertainty, like the UK pound will be at the same rate for all Euro members.

Third is increased foreign investment, direct inward investment should be attracted because of the reduction of uncertainty.

In terms of disadvantages about single currency, first is loss of independent monetary policy like scope for fiscal policy adjustments is restricted by need to stay within 3% of GDP.

Second is misalignment of exchange rates, an exchange and interest rate which benefits most members may not benefit all.

Third is regional differences, different place have different custom, there may affect firms which be persuaded to move to more prosperous areas.

11.0 Explain the influence of floating exchange rate and fixed exchange rate on economic individual

As for the individual, floating exchange rate change will influence individual, like raise the floating exchange rate that mean is native currency devalue, so it will influence people take more money in the foreign countries like travel or study in foreign countries.

Second, floating exchange rate is difficult for long term trade and contracts like people speculation on foreign exchange is difficult for long term trade because people have no idea about tomorrow the exchange will be increase or decrease.

Third is fixed exchange rate can avoid inflation, so people can avoid currency devaluation by the fixed exchange rate.

As for the business, floating exchange rate will influence business,too. For example, decrease the floating exchange rate will make native currency appreciation, so it will impact business export, business will decrease export and increase import. And it will decrease business profit from foreign area.

On the contrary, if rise the floating exchange rate, it will attract foreign investor and promote business export.

Fixed exchange rates can reduce the risk of exchange rate fluctuations that business can avoid affect revenue and increase profit.

12.0 Explain the two characteristics of NIC or LDC

Somalia is one of the LDCs. Somalia has a large proportion of the inhabitants live in the countryside with subsistence agriculture, living in a family with many children and working on a small piece of land with much too little funds to purchase adequate agricultural machinery, fertilisers or pesticides. Somalia has a poor infrastructure is very likely to hinder the revitalisation of economy in Somalia. So their trade capacity is bad, too.

In Somalia,unemployment is usually very high with very little industry because most people work on their own small plots of land. And high unemployment rate influence national gross domestic product,so Somalia’s GDP always low.

13.0 Analysis NIC and LDC face the main economic problems

Zimbabwe is belong to LDC, and Zimbabwe inflation rates are generally much higher, Zimbabwe’s hyperinflation at very beginning of the 21st century. And this country is caught in a various circle of poverty. It stay poor because it is poor, low per capital incomes make it difficult for Zimbabwe to save and invest, a condition that perpetuates low productivity and low incomes and government gain low tax that influence Zimbabwe build infrastructure like education, medicine, military. Furthermore, rapid popular growth may quickly absorb increases in per capital real income and thereby destroy the possibility of breaking out of the poverty circle.

Chinese firms might well be very critical. They have been very successful in moving their resources around the world to where they get the best return. As wage and salaries and other begin to rise in the China, with increasing labor costs, rising inflation and a manufacturer of consumer goods. Rising costs are forcing companies, such as Nike, to take a closer look at new sourcing locations across Asia.

14.0 Analysis the economic impact of multinational companies to NIC or LDC

Adidas company set some branch companies in the Thailand. In terms of advantages, Adidas company can being high technology, management experience to the Thai, it can let them improve their own quality. And Adidas company can supply many job opportunities that can improve Thailand employment rate and then, government can gain more tax to build some infrastructural like invest education system, medicine and military and so on.

In terms of disadvantages, Adidas will use sources which from Thailand and make some pollution in Thailand. The most worst thing is Adidas basic on high technology and reputation will beat some Thailand’s firms that will make these firms have to lose down.

III. Conclusion

After analyzing these 14 elements, you may have a clear acknowledge of the international trade, balance of payment, LDCs and so on, It will help you to realize the world economy.

IV. Reference

(1)http://www.economicshelp.org/micro-economic-essays/marketfailure/positive-externality/

(2)http://www.economicshelp.org/micro-economic-essays/marketfailure/negative-externality/

(3)http://www.investopedia.com/terms/i/imperfect_competition.asp

(4)http://economics.about.com/od/termsbeginningwithm/g/monopsony.htm

(5)http://www.investinganswers.com/financial-dictionary/economics/oligopoly-104

(6)http://examples.yourdictionary.com/oligopoly-examples.html