Specialization of Trade and Exchange - Essay Example

? Changing Global Econ FINAL Question Introduction Globalization is the trend in which countries merge economically, politically, socially and academically; globalized countries view themselves through their national identity and as one part of the world. The process of globalization links people of all walks through a common media such as schools, internet, and global markets. Currently, globalization is rapidly advancing between the North (developed countries) and the South (developing countries). Agents such as World Bank, International Monetary Fund, World Trade Organization, and other UN-based organizations are the primary accelerators of globalization. The main features of globalization include liberalization, specialization of trade and exchange, increased connectivity, multi-dimensionality and top-down process. Liberalization Globalization is characterized by liberalization; liberalization is the freedom granted to businesspeople and industrialist to establish industries and carry out trading activities within the boundaries of their own countries or abroad. Liberalization involves free exchange of capital, goods, services, and technological advancements between countries and regions. Globalization guarantees increased trans-boundary cultural exchanges resulting from free flow of immigration, more differentiated products, tourism, and economic integration. Specialization of trade and exchange Specialization is the basic way through which trade works to improve people’s lives. International trade takes place because one country can produce what another country cannot produce. Prior to globalization, cross-border business was limited because most of the national economies were self-contained entities separated from one another by barriers to international trade and investments. Globalization has enhanced cross border business opportunities and enabled firms to sell what they can produce and buy those commodities they do not have the capacity to produce. Regional and international organizations have been formed to oversee the seamless trade among countries across the world. Member countries have to follow the guidelines provided. Trade and exchange has allowed countries, multinational companies, small companies, large scale and small scale producers to gain economically and small Increased Connectivity Globalization makes it possible for various localities to be connected with the rest of the world through removal of barriers to connectivity. This is achieved through the role of globalization of breaking national boundaries and enhancing the links between one community and another. Globalization creates proper links between countries through international transmission of information, literature, culture, technology, and knowledge. The space age device, the internet, has enhanced communication and knowledge exchange among people from different locations in the world instantly. It has also permitted people to understand the various cultures in the world, making it easy to interact and do business together. Multi-dimensional Process A multi-dimensionality approach to globalization implies that the concept can be looked at from three dimensions: economical, political, cultural, and ideological. Globalization in economic terms means opening up of global markets by enhancing free trade and commerce among countries of the world. Politically, globalization means decentralization of power and functions of state, which grants more rights and freedoms to people through empowerment of the private sector. In cultural terms, globalization refers to the exchange of cultural values among various societies and nations of the world. Ideologically, globalization is the spread of liberalism and capitalism. Top-down Process Globalization origintates from the industrialized world and Multinational Corporations, and spans to less industrialized countries. Technologies, capital, goods, and services are manufactured in industrialized countries and sold to the developing world. It is the responsibility of the developing countries to accept these products, adopt them, and be influenced by their effects. This explains the reasons for values and norms of the developed countries being rooted in the developing countries. The Top-Down process has enabled the less developed countries to appreciate industrialization and development improving the livelihoods of the people. Many people are employed in the industries reducing poverty. However, there are some negative effects associated with the globalization Top-Down process. People in the less developed countries nowadays get the western, developed countries diseases for example obesity affecting their livelihoods negatively. The major problem is developing nations do not have good mechanisms to respond to such diseases. Conclusion Globalization links people of all walks through a common medium such as schools, internet, and global markets. The visible manifestations of globalization include increased cross-border movement of commodities, capital, people, information and technology. Globalization has empowered many people across the world but is also has some demerits. The globalised and the developing countries should seek ways of maximizing on the advantages and strengths of globalizations and adopt sustainable mechanisms to address the ramifications associated with its disadvantages. The developing countries should follow the example of the developed countries to be better. Countries can come together to address the issues they face together through the international and regional organization blocks. Question 2(a) Clear Definition of Patents and Copyrights Different countries of the world are occupied by millions of people various knowledge, resources, and desires that they intend to implement to provide solutions to the society. The owners of such ideas have to be protected through certain laws and regulations. Patents and copyrights provide the necessary protection of the ideas and vary in the different countries. The idea is to protect them from duplication and copying the by other people. The patents and copyright systems of various countries can work best if the intellectual properties are clearly defined, enforced and exchange of property rights properly allocated. Without proper definition of patents and copyrights, the countries cannot have the clear picture of what they want to protect. They will need to invest huge amount of finances in drawing clear boundaries around the ideas of their citizens to prevent trespass on patents and copyrights. Patent and copyright laws created have to be appreciated by all the people in the country. Organizations involved have to do enough awareness campaigns for the people to understand the importance of the laws and the consequences associated with breach of the regulations. Creation of Property Rights Countries concerned with protecting their patents and copyrights must assume the responsibilities of creating property rights. Creating property rights in the context of intellectual property poses problems in the form of patent races. Patent races imply that the social value of having a certain invention made may be large; the inventor who secures the intellectual property expects a large income from the licensing fees. The implication here is that countries must stay tuned to the changes in the global legal aspects concerning protection of intellectual property. Global changes in the intellectual property rights may affect the laws of another country especially when the changes are made by the developed countries, which have more weight in global decisions. The Cost of Transactions A third tradeoff that countries should consider is the cost of the transactions. Assigning property rights involves costs in addition to handling cases where these rights have been violated. The legal systems of countries interested in protecting their patents and copyrights have the responsibility of determining their losses and benefits associated with patents and copyright laws, and come up with laws that are desirable both locally and internationally. Question 2(b) Copyrights A copyright is a property right that used for protecting original literally and written work such as published novels, and content in the websites. Countries can protect their intellectual properties such as computer softwares, illustrations, and photography by enacting strict laws on their copying. The owners maintain the rights to what they invent unless they exchange the rights for money. Any changes in the rights have to be forwarded to the necessary governmental organizations. Otherwise, a person may be sued yet they have paid the price for the rights. Design right Design right is used for automatic protection of the shape of something that has been originally designed. Design right is a way of protecting intellectual properties such as vases and monuments with unique shapes. The designs protected by this method are usually not commonplace, ordinary, or everyday. The design is thus protected from imitation, distribution and selling by one person to others without the designer’s permission. Trademarks Trademarks recognize sign, expression, and design that identify a product or service of a certain source from the products from other sources. Individual people, business organizations, and legal entities own trademarks for purposes of claiming exclusive intellectual property rights of commodities. The law prevents other people from using a trademark owned by another company for their own benefits unless they have the permissions of the trademark owner. Such permissions are rare but they are used by the subsidiaries and partners of the trademark owner depending on the agreements among the organizations involved. Patents A patent is a way of protecting intellectual property where a set of exclusive rights is granted by the state to an inventor for a limited period of time in exchange for disclosing the invention to the public. The requirements, extent, and procedure for granting patents vary between countries depending on the national laws and international agreements. Patent applications are required to meet the requirements for patentability such as novelty and non-obviousness. The law grants exclusive rights to a patentee, which prevent other people from making, using and distributing the patented invention without the inventor’s permission. In most countries, the primary requirement to get patent is to have an innovation that has never been patented. This presents challenges as some people may have thought of the idea and actualized it without the patents. The law acknowledges the first person to patent the item they invent as the original owner. Lack of enough awareness campaigns may be the consequence of such case scenarios. Question 3 The Liberal Argument in Support of Globalization The liberal argument of globalization is based on its ability to permit free exchange of capital, goods, services, and technological movements between countries and regions. Globalization opens up the world for businesspeople from all corners of the world to do businesses in any country as they wish and at the time they want. The primary role of globalization under the liberal argument is to eliminate all the boundaries that limit the continuity of trade in other markets to make it possible for businesses to have their way into other regions for marketing their merchandise. International economic integration occurs when technology enables people to pursue their own goals, and they have the liberty to do so. The advancement of technology supports trade across countries, leading to integration. Liberalism argues that because people have chosen to adopt the technology brought about by globalization, then globalization is desirable. Globalization is expected to have economic benefits because people have voluntarily chosen it. However, there are countries that chose to remain isolated for reasons that are not well known. Countries like North Korea chose to be isolated from all others by not following international regulations. Such countries do not benefit a lot from globalization. In fact, they suffer because many countries prefer to not associate with them. Limitations of the Liberal Argument Regardless of its advantages, globalization poses some negative implications on average citizens of globalized countries. Globalization has not been able to achieve its objectives as illustrated in the liberal argument. Globalization causes unemployment in industrialized countries that move their firms to developing countries where there is lower labor costs and easy access to low materials compared to their home countries. Multinational companies have to do this to make good profit margins to remain in business while still maintaining competitive edge. Companies that relocate to developing countries can afford to lower costs compared to their competitors with the low costs of production maintaining competitiveness. Globalization leads to widespread capitalism. It is the march of international capitalism, which accelerates oppression, exploitation, and injustice. For example, companies and businesses are interested in making profits come what may. In that regard, employees may be paid less for the business to meet the profit margins. It is no wonder businesses and companies lay off many people during economic crises. In addition, the developed countries decided to be the prefects of the developing and underdeveloped countries dictating what these countries have to do and what not to do. It is interesting that what the developed countries state has to be done is a command with no negotiations. This causes frustrations and anger among the exploited and oppressed societies. Most of the terrorist activities that occur in the modern world are carried out as a counter-response to anger caused by poverty and oppression especially in the developing countries. Globalization encourages specialization of trade and exchange. Despite the fact that specialization is economically feasible, excessive specialization may lead to overdependence between countries and cause crises when the transacting countries conflict in their contract terms or are unable to produce quantities that can meet the needs of the partner country. The recent economic crises in some of the developed countries were felt throughout the globe as a result of independence. Countries that over depend on one another may find themselves in economic challenges in case the trading partner is attacked by a disaster or when the relationship between them spoils. Globalization is the main cause of continued downward of pressure on wages and salaries of skilled and unskilled workers. Price for labor is determined based on its demand and supply. Globalization opens up labor markets to all parts of the world. Some areas such as less developed countries have large pools of labor compared to the number of jobs available. Increase supply of labor leads to downward pressure on wages and salaries. This explains why wages in the less developed countries are way below the standard international guidelines. The low wages in the developing countries has negative consequences to the developed countries. Work is outsourced to the developing countries by organizations and businesses in the developed world leading to unemployment of some people. At the same time, even when these businesses relocate to the developing countries, they cannot employ the entire pool of labor available. Globalization is mostly blamed for the environmental degradation that occurs in less developed countries. Globalization permits industrial transfer to less developed countries, where multinational corporations build mass waste release from factories in countries that do not have strict regulations on environmental conservation. In addition, the developing countries tend to fear organizations and businesses from the developed world. In that case, they cannot pursue them in most cases. Some organizations in the developed countries are also very influential that they dictate to the government for example Coca cola. This leads to rapid spread of human and animal diseases that have long-term implications on the affected populations. Question 6 Purchasing Power Parity This is an economic theory used for estimating the amount of adjustments required in the exchange rates between countries to make the exchange rate equivalent to the purchasing power of each currency. Mathematically; Purchasing Power Parity =the cost of good x in currency 1/the cost of good x in currency 2. The purchasing power parity rate is used for comparing different countries in terms of purchasing power and income. Additionally, purchasing power parity is used for predicting the trend of the exchange rate. This is because the rates of exchange have a tendency of moving in the general direction of the PPP. Foreign Portfolio Investment This is the entry of funds into a country, which occurs through foreigners making purchases in a country’s stocks and bonds. Interested investors buy the stocks and bonds in another country if they expect their values to rise in the near future. Foreign portfolio investment is mostly done by speculation since it is influenced by high rates of return and risk reduction through geographic diversification. The investor does not have direct control of the company’s affairs. Foreign portfolio investment is important since it enables the host countries to access the required capital for investments and investors to gain returns if they had accurately predicted the speculations speculated. Institutional Arrangements These are the policies, systems, and processes used by organizations to legislate, make plans, and effectively coordinate the functions of the members in order to fulfill their mandate. Institutional arrangements constitute delegation, distribution, and sharing of power related to participative management and implementation of authority. Institutional arrangements are critical in organizations since they enable companies to draw accurate plans that are in line with their objectives. Managers are able to regulate the functions of people through coordination and providing for employee participation in management decision making. Intellectual Property Intellectual property is a legal concept that denotes the creations of the mind, which allows for recognition of exclusive rights. Intellectual property law grants certain exclusive rights to the intangible assets. Intangible assets are the property that cannot be seen and touched. Examples of intellectual property include music, literally and artistic works, designs, symbols and inventions. Intellectual property ensures that people’s works are protected from pirates that may copy them for distribution and selling. This is achieved through intellectual property rights such as copyrights, trademarks, trade secrets and industrial design rights. Question 7 Foreign direct investments constitute directly investing into production or business in a country by an individual or corporation of a foreign country. Foreign direct investment involves either buying a company in a foreign country or expanding an already operating business in that country. In either case, there is massive transfer of sums of money from developed countries to developing countries. The reasons for increased foreign direct investments include reduction of costs, efficiencies of domestic production and vertical integration. Foreign direct investments have improved the economies of many countries including the developed ones. In fact, these investments are used to determine the economic growth of countries. Countries with good trading, economic and political conditions attract more foreign direct investments. On the other hand, unstable countries do not attract any investors at all and do not gain from the foreign investments. Reduction of costs Multinational corporations believe that it is cheaper to produce in overseas countries than in their home countries especially in the less developed countries. This argument is based on lower labor costs due to increased supply of cheap labor in less developed countries. For example, most of the European companies have extensive foreign direct investments in Asia because of guaranteed cheap labor. Additionally, most of the raw materials used in production are found in less developed countries. Setting up manufacturing units in these countries reduces the costs of transporting bulky raw materials because they only transport refined and high value products to markets in home countries. Shipping costs could have significant effect on the profitability of the businesses if the product is heavy or bulky. It also emerges that the large market share of some products and services is in the less developed countries. This strategy allows a company to make huge savings while selling the products and services at the same rate realizing higher profits. Efficiencies of domestic production A foreign plant requires new investment in property, plant, and equipment. The newness of the company is usually associated with efficiency as the company seeks publicity, sales and sustainability. Foreign direct investments are also critical when goods and services being produced need to be customized to meet the tastes and preferences of the local people. Producing huge volumes of output at lower costs per unit ensures economies of large-scale production and efficiency. Examples of products that guarantee high economies of scale include high-tech consumer products, semi-conductor waivers, and computer chips. Therefore, investors prefer foreign direct investments in areas where customers have specific requirements regarding the functionality and design of a particular product. Vertical integration Vertical integration is process of controlling the value chain of a product throughout its manufacturing process. Companies need to monitor and control their products as they move from raw materials to production, distribution, and selling. Companies tend to adopt the approach of supply-oriented as opposed to market oriented especially in areas where supply of raw materials is uncertain or unreliable. Some companies such as Unilever, Nobel and Thompson Newspapers have found it easier for all production functions by them instead integrating outsiders. Foreign direct investments, thus, allows the company to maintain production and distribution and reduce critical costs due to certainty in raw material supply. Conclusion Foreign direct investments promises several advantages to both foreign and host country. Companies prefer foreign direct investments to other forms of investment because they want to reduce costs, increase efficiencies of domestic production and enhance vertical integration. Host countries should develop policies to prevent the negative consequences of foreign direct investments such as cutthroat competition with local industries, exploitation of workers, dumping, and pollution. Home countries also have to protect the workforce which may suffer as a result of company relocation to another country. Question 8 Currency crisis A currency crisis is a sudden devaluation of a currency that sometimes ends in a speculative attack in the foreign exchange market. The main causes of a currency crisis include chronic balance of payments deficits and market speculation about the ability of a government to back its currency. Currency crises are detrimental to small open economies, but do not affect the sufficiently stable economies. Central bankers in a fixed exchange rate economy try to maintain the current exchange rate by using foreign reserves or allowing the exchange rate fluctuate with the forces of demand and supply. However, Central banks have challenges maintaining the rates during currency crises. Banking Crisis Banking crisis refers to rapid reduction of the value of the financial assets and institutions that mainly affects banks. Banking crises constitute bank runs, banking panics systematic banking crises. Bank runs affect single banks, banking panics affect several banks while systemic banking crises involves a large number of corporations and financial institutions facing great difficulties in repaying contracts. The main solutions that have been adopted in the past to curb banking crises include deposit insurance funds, bank support, and prompt closure and payout. Despite these measures, a bank crisis can occur and the consequences would be detrimental. Foreign Debt Crisis This is a situation where a country borrows finances from another country to the extent that the required loan repayment exceeds the earning power of the indebted country. Foreign debt crisis causes incomes to drop, stagnates economic growth and development heightens the levels of unemployment, and leads to galloping inflation that constrains the purchasing power of the middle classes. Countries have always responded to debt crisis by abandoning import substitution industrialization models and adopting export-oriented strategies. These strategies sometimes lead to negative reactions since every country want to export more than the other and not to import; however, different countries try to regulate their imports in a way such that they do not exceed the exports. These regulations do not hold water as some countries need much more than they can export. Most developed countries import more than they export because their needs for imports surpass what they export. Question 9 The global financial crisis that began in 2007 is believed to have preceded the increased globalization of capital capital. The financial crisis started with the depreciation of the United States subprime mortgage in the mid 2007. The period was characterized protracted period of growth in debt and leverage ratios. There was a rapid increase in global financial integration, growing United States external deficits, and low real interest rates. The total debt for the total United States increased constantly over years and reached a total of 230% of gross domestic product in 2007. Gross public debt as a proportion of gross domestic did not significantly change, but foreign holdings of public debt grew larger than domestic holdings. This was particularly due to the surge of foreign reserves in emerging economies. The removal of controls on cross-border capital flows and innovations in financial markets accelerated unprecedented inflows of foreign assets and growth in stocks. The United States experienced increased gross foreign borrowing; therefore, the United States increased its gross lending to foreign countries, but the expansion of lending was smaller than the growth in foreign borrowing. This implies that a substantial increase in net and gross foreign borrowing contributed to the financial crisis of 2008-2009. Increased foreign borrowing influenced the credit boom observed during the financial crisis. This implies that there is need to understand thoroughly the role of global capital markets during the financial crisis. Numerous distortions and imperfections of capital markets caused credit expansion and collapse of financial markets because of widespread international financial integration. Understanding how financial capital globalization caused the 2007-2009 financial crises is the first milestone in curing its ramifications. The financial crisis propagates through financial institutions when their capital requirements become binding. Counteracting future financial crises will require regulatory frameworks that make the requirements pro-cyclical in order to act as a stabilization mechanism. Another method of preventing future financial crises is to use the tools of monetary control when a financial crisis is expected. These tools include open market operations, increasing the reserve requirement by the central banks, and adjusting the discount rates. Although these strategies seem to work, it is evident there are loopholes, which have escalated to financial crises. Question 10 The economy of Egypt remarkably improved during from 1990s. The Egyptian government successful tamed inflation and brought it down to a single-digit from a previous double-digit. During January 2011, there were several street demonstrations in Egypt addressing unemployment, food inflation, corruption, and desire to raise the minimum wage levels. Egypt held a constitutional referendum in 2011 and a constituent assembly was founded in 2012 to implement the new constitution. Constitution implementation promised the nation benefits of improved performance, leadership, and equitable distribution of resources. Egypt faced prolonged labor market recession and social deterioration during the financial and economic crisis, particularly in mid 2008. The impact was most felt in the real economy more than the banking sector. The main reason for this was due to the limited integration of the Egyptian banking institutions into the world financial market. The impact of the financial crisis on the Egyptian economy was evidenced by decline of gross domestic product growth, reduced flow of foreign direct investiments, drop in remittances, capital market collapse and a decelerate in sectoral growth. Egypt has not yet recovered from the effects of global financial crisis. This is reflected by the chronic macroeconomic situation of the economy of Egypt and tensions that characterize policy choices between requirements of social welfare and those of economic efficiency. The gap between the rich and the poor is one of the contributors towards widespread demonstrations and riots along the Egyptian streets. In 2011, for example, the president of Egypt, Hosni Mubarak announced that he would not seek office again; this signaled the beginning of a new transition in Egypt. Crowds continued to riot along the streets of Egypt claiming that they will not stop until they are assured of political change. Egypt faces the challenges rising economic inequality and failure to address properly the roots of poverty, leading to widespread economic grievance. The wide margin between the rich and the poor will make citizens continue rioting along the streets until their grievances are heard. In the short-run, the wide gap between the rich and the poor may continue deteriorating the country’s political economy because citizens will continue rioting, less work will be done and destruction will continue to be felt across the nation. The political conflicts between the rich and poor will span across all sectors of the economy, leading to reduced economic growth and development in Egypt. The long-term implication of this phenomenon is continued political instability throughout the country which could really affect the lives of Egyptians in many ways. International organizations, companies and businesses may find it challenging to work in Egypt as a result of all these factors. As such, foreign direct investments are likely to reduce and companies with offices there may find it necessary to close. This would increase the unemployment level in the country which can in turn increase the poverty levels. In this case, globalization may fail in Egypt in future. Read More