International Economic Environment

The role of state in the Economics 1. The role of govt. in the economy: Controlling inflation Stable economic growth. Reducing unemployment. A favorable balance of payments. Stable exchange rate. Control of govt. borrowing. 2. Govt. is big consumer, spending around 1/3 of the total that all households spend on goods and services. 3. Interest payments for govt. debts are an important problem for a country. 4. During election years, the budget tends to deteriorate relative to the previous year and that the growth rate of the economy is relating higher.

Unemployment Full employment: If everyone who wants a job and is capable of doing a job and also to find one then is called full employment.

Reasons behind the Unemployment 1. If the labor cost consists of more than wage including tax. 2. As technology advances, further there is an interesting problem of labor being replaced by new technology- A concept known as technological

unemployment.

3. Increased unemployment also leads to a decrease in the demand for goods and services causing further increases in unemployment and still further deduction in demand. Economists refer to this type of unemployment as

cyclical unemployment.
4. Industries such as mining, ship building, agriculture and so on, where demand for such products may well be made by imports from other countries with businesses capable of maintaining lower production cost. This concept is called structural unemployment.

International Trade
Benefits of international trade: 1. Specialization (Comparative advantage) 2. It let the domestic firms achieving economics of scale. 3. Providing wide array of product choice. Recent trends of international trade: 1. There has been growth in trade. 2. Trade has become increasingly focused on particular trading blocks. 3. There should be specialization through trade. 4. Some countries may lose from trade as their particular historic advantages are avoided. Reaction or responses of international trade 1. Subsidies on product produced in the domestic market to reduce their prices down than the world competitive levels. 2. Tariffs results the rise of the price of importing products. 3. Quotas limit the supply of import into the domestic market. 4. Voluntary export restraints prevent the free flow of goods between countries and enhance their own goods and services.

Various types of international trading blocks 1. Tariffs: It is a tax, imposed by government of a country on goods entering its border. 2. Quotas: It is a specific unit or dollar limit applied to a particular types of goods. 3. Voluntary export restraints (VER): It is an agreement between the importing country & exporting country for a restriction on the volume of export such as Japan & USA. 4. Boycotts & embargoes: A government boycott is an absolute restriction against the purchase and importation of certain goods from other countries. An embargo is a refusal to sell to a specific country. 5. Standards: Here, govt. of a country set standard to protect health, safety and product quality. It is an indirect way to restrict trade. 6. Monetary barriers: A govt. can efficiently regulate its international trade position by various form of exchange control restriction.

Differences between GDP & GNP Basis Definition GDP A essential value of the total worth of a countrys product & services, calculated over the course on one year. Gross domestic product. GNP GDP + Total capital gains from overseas investments income earned by foreign nationals domestically. Gross national product.

Standards

Formula

GDP = Consumption + Investment + govt. expending + (export -import) Total value of products and services produced within the territorial boundary of a country.

GNP = GDP + NR (Net income received) Total value of goods and services produced by all nationals of a country (whether within or outside).

Meanings

Benefits/effect/reason for involving international trade 1. To gain the benefit of comparative advantage: It means when a country produces similar goods with lower cost compare to other countries, it will have a comparative advantage over other countries. 2. To minimize the risk: It means concentrating on domestic business may have many risk during the period of economic slump. To support this situation international trade may be effective. 3. Diversification: It means expanding the business beyond the domestic territory in order to maintain a constant market share. 4. Utilization of domestic resources: In some countries, due to, small market size, resources cannot be fully utilized. 5. Exploring untapped resources in foreign market. 6. To take the advantage of technological expertise.

Goals of macroeconomics 1. Maintaining high level of economic growth. 2. Creating strong balance of payments.

3. Retaining low level of inflation. 4. Try to maintain low level of unemployment.

Governments initiatives to stimulate domestic economy by 1) Reducing taxes (Fiscal policy) 2) Increasing the amount of money available or lowering the interest rate in the economy (Monetary policy). 3) Increasing trade barriers to encourage domestic consumers to buy more homes produce goods.

The circular flow

Domestic households

Flow Of Resources

Expenditure On resources

Goods & Services

Household Expenditure

Domestic households

1. Income flows round the economy in exchange for goods, resources and services. 2. Income generation is related to the expenditure on goods, resources and services. 3. The output of firms in related to the expenditure of households.

4. The expenditure of households is related to the income received for supplying resources. 5. The use of resources in related to the expenditure of households.
Withdrawals: Domestic households Income (Y) Domestic business
Consumption (C)

Savings (s) Taxation (T) Imports (M)

Injection: Investment (I) Govt. spending (G) Export (x)

There are some relations between withdrawals and injection: 1. Savings (S) are linked to investment. 2. Taxes or taxation are linked to spending. 3. Imports are linked to exports. The reasons for linkage between withdrawals and injection:

1. Savings are linked to investments because if more money is saved, then more money will be available for banks and other financial institutions to lend out to businesses for investment purpose. 2. Govt. spending is directly linked to taxes. More money taken out of an economy in taxes should provide greater amounts for the government to spend on essentials. 3. If imports from one country increases, the income of employees abroad will increase, making them more affluent and that will enable them to purchase exports from other countries.

Structural changes in the major economies There are 3 sectors in a economy: 1. Primary sector: It includes activities directly related to the natural resources, such as firming, mining and oil extraction.

2. Secondary sector: It includes production industries in the economy such as manufacturing, the process of materials produced in the primary sector and construction. 3. Tertiary sector: It includes all private sectors services. For example: Banking, finance and tourism as well as public sector services such as health and defense. The developed economies have become more oriented towards the service sectors. Countries have tended to specialize in industries. For example: France in food products, Germany in engineering and chemical, Spain in leather goods.

Economic growth It is a macroeconomic objective shared by government and business. From a business point of view, increased output is a sign of increased consumption leading to increased consumption leading to increased investment and higher employment.

Growth brings improvement in real income and greater variety of goods and services to all sectors of the economy. Normally GDP of a country indicate the economic growth.

Factors affecting the growth rate Changing the structure of economy. The constraints caused by the size of the well-fair of the state. Aggregate supply imbalance. The interaction of extra ordinary shocks and macroeconomic policy.

Costs of growth Consumption expenditure.

Negative externalities like pollution. Impact of resources particularly on non renewable resources.

How can a country minimize the cost of economic growth? Costs benefit analysis. Give importance to the individual thinking about the matter. Maintaining the standard level of environmental protection. Maximize the rates of resource depletion.

Inflation Inflation may be define as an upward movement in the level of price over a given time period (normally one year). Perhaps it is better way to view inflation as fall in the value of money. Causes of inflation: 1. Rising wage cost. 2. Increased energy cost. 3. Increase in the cost of imported materials. 4. Reduction in the levels of taxes. 5. Lower interest rate. 6. Excessive government spending.