Globalisation starts with increasingly open economies, countries that are exporting and importing more than they used to. With globalisation comes structural change. Resources will be allocated: in some sectors, more resources will be needed to make profitable exports. In other sectors, business find they cannot compete with imports. They adapt their products to improve competitiveness or reduce their output.
A main reason why globalisation happened is due to investment in new markets. Foreign direct investment (FDI). Many bigger businesses don’t just want to export: they want to invest in new markets. They want to build businesses in a range of countries. Most of FDI goes to developed or fast growing economies. Many poor countries are not attractive to foreign investors due to limited profits and various other factors. However in recent years poorer countries are gradually starting to attract more FDI, due to the development in their economy. Investment creates jobs and enhances prosperity. Many government offer incentives for investors. For example keeping business tax low. FDI is a two way thing. The country the investment goes in, also benefits. China being a prime example. Reasons why businesses are eager to invest into China is because of their labour costs and also to gain access to Chinese market of 1.2 billion people. Apple being an example of this. Shifting the production process to other businesses in order to reduce input costs. Also known as outsourcing.
Trade matters for an economy to develop. GDP is a measure of total output or income. It stands for gross domestic product. Global GDP is just the total value of all economies output. Slow growth was seen by many countries during the 80s. But the usual trend is for trade to increase trade. The recent drop in global GDP was seen after the 2008 financial crisis. Trade will remain an important element in economic growth process. International trade enhances the force of competition. When it becomes possible to import product that were previously not at reach or very expensive, consumers get to enjoy different variation of things. Imports also become popular, therefore wages go up. Soline of production and management both benefit due to globalisation. Globalisation will also cause some businesses to close down due to their lack of competitiveness in the market. An efficient economy needs skilled people. People might learn new skills and improve their income and keep searching for a better job.
Globalisation was only made possible after World War II. Governments understood that tariffs made products more expensive for consumers which affected many weak businesses. So therefore the government worked together to create the General Agreement on Tariffs and Trade, known today as World Trade Organisation (WTO). The aim is to make imports more cheaper and markets more competitive, helping to raise standard of living. Fewer import controls meant firms could export more, and trading becomes much more freer. This process became known as trade liberalisation. Overall globalisation plays a vital role in improving the economy as a whole, and still continues to do so.
Greece joined the Euro in 2001, and its confidence for the economy grew leading to a big economic boom. In 2007, the financial crisis hit 5,000 miles away in the United States. It then hit countries around the globe and every country in Europe experienced the recession but Greece suffered the most as it was one of the poorest countries and had a lot of debt at that time already. The unemployment rate reached 28% in 2013, which was worse than the United States during the Great Depression.
The government debt carried on rising and as it was the aftermath of the global financial crisis, investors were concerned that Greece would not be able to pay back their debt. This meant that it became expensive for Greece to borrow money, resulting to their first bail out loan in 2010. This was provided by the European Central Bank and the International Monetary Fund on a condition that they would decrease government spending. Many economists did not agree with this agreement and believe that it might be the reason for why Greece is in this situation. Government spending is important because it likely to increase aggregate demand and as it is an injection into the economy which could increase the rate of economic growth.
Greece could not pay their bills, interest/dividends on their bonds, payments due on loans nor could it pay for all the new jobs it had unwisely creates. This then led to a decrease in unemployment, a crisis of confidence, a decrease in foreign direct investment and political uncertainty. This debt carried on increasing. The Greek people have been rushing to ATMs to withdraw as much money as they can, after they have been giving a limit to withdraw up to sixty euros per day. The Greek government spent more than it received in revenue and over the years this accumulated deficit became extremely large compared to their GDP. Not to say that other countries do not have large deficits, the US deficit is large and growing larger and it is unsustainable; Japan’s debt is also very large.
However, the US and Japan are not considered broke, while Greece is because:
Japan’s currency (yen) and the US’s currency (euros), can be printed whenever needed (this will cause inflation in the future but they can use the printed money to pay their bills). Greece has to pay in euros, which cannot be printed whenever needed.
Also, creditors know that Japan and the US will be able to handle their problems and pay off their debts with valuable currency. But Greece, has failed to implement reforms and so creditors do not believe that they can pay off their debts.
Unemployment is defined as those without a job but who are actively seeking work at current wage rates. In the UK, there are two ways in which unemployment is calculated: the claimant count and the Labour Force Survey (LFS). The claimant count measures unemployment by counting the number of people claiming benefits for being unemployed (Jobseekers’ allowance). The claimant count is not an international measure so it cannot be used to compare UK unemployment levels with those in other countries. The labour force survey is an internationally agreed measure of unemployment, conducted by the International Labour Organisation (ILO). It is the number of people who have actively sought work in the last four weeks and are available to start work in the next two weeks.
Unemployment occurs for a variety of reasons:
o Frictional unemployment is when workers are unemployed for short lengths of time between jobs.
o Cyclical (or demand-deficient) unemployment is when a fall in AD, leads to a fall in economic output, therefore firms employ less workers. It is the idea that unemployment rises and falls with changes in the economic cycle.
o Seasonal unemployment is when workers are unemployed at certain times of the year, such as building workers in the winter.
o Real wage or classical unemployment is when workers are unemployed because real wages are too high and inflexible downwards, leading to insufficient demand for workers from employers.
o Structural unemployment is when the pattern of demand and production changes leaving workers unemployed in labour markets where demand has shrunk.
There are different policies which can be put into place by the government to reduce unemployment.
The fiscal policy can decrease unemployment. The expansionary fiscal policy must be put into action, this involves increasing government spending and decreasing taxes. This will increase aggregate demand and the rate of economic growth. Lower taxes mean an increase in disposable income and it will help to increase consumption, resulting in higher aggregate demand. As AD increases, real GDP also increases. So, firms produce more and so there will be an increase in demand for workers and therefore there will be lower cyclical unemployment. Furthermore, there will be stronger economic growth so there will be fewer job losses as fewer firms will go bankrupt.
Monetary policy would also reduce unemployment by cutting interest rates. This would involve cutting interest rates. Interest rates are the cost of borrowing so lower rates encourage people to spend and invest. This increases AD and so increases GDP. This is because there is an increase in demand for workers to help produce higher amounts of goods and services so reduces unemployment.
The policies states above are examples of demand-side policies. However, there are also supply-side policies which help reduce unemployment. These are:
Education and training can provide the long-term unemployed with new skills which enable them to find jobs in new industries. Although the unemployed may be unable or unwilling to learn new skills and this policy may take several years to affect unemployment.
Trade unions are organisations of workers that exist to promote the welfare of their members. By reducing the power of trade unions, it will help to reduce real wage unemployment because unions will not be able to bargain for wages above the market clearing level.
Furthermore, the government can provide employment subsidies. Firms could be given subsidies for employing those who have been unemployed for a long time. This helps give them new confidence and job training for them to increase their skills. However, it will be quite expensive and may encourage employers to replace their current employees with the long-term unemployed.
The trade cycle is a term that is commonly used, and one that many people assume that you know the definition of. However, the trade cycle has many different features and types to it, which are not very easy to understand. So what is the trade cycle? The trade cycle, also known as the business cycle or economic cycle, are regular fluctuations in the level of economic activity around the productive potential of the economy.
Trade cycles tend to have four main phases:
o Peak or boom:
When the economy is at a peak or is in a boom, national income and output is said to be high. It is likely that the economy will be working beyond full employment. Overheating is therefore present. As a result of this, consumption and investment will be high as households and firms will be willing to consume and invest. Tax revenues will be high. Wages will be rising and profits will be increasing. Imports will also be increasing as people will have more disposable incomes and so are likely to demand more from foreign countries. There will also be inflationary pressures in the economy.
When the economy moves into a downturn, output and income will fall. This then leads to a fall in consumption and investment, as consumers have less disposable income and they will be less willing to spend. Tax revenues begin to fall and government expenditure on benefits begin to rise. This is because unemployment rises and more people are on low-incomes. Imports decline and inflationary pressures ease.
At the bottom of the cycle, the economy is said to be in recession (or depression or trough or slump). Economic activity is at a low in comparison with previous years. High unemployment exists, so consumption, investments and imports will be low. Prices of goods and services will be falling, so there will be deflation. People generally have less money and
As the economy moves into a recovery (or expansion) phase, national income and output begin to increase. Unemployment begins to fall and consumption, investments and imports begin to rise. Workers feel more confident about demanding wage increases and so government expenditure on transfer payments begin to fall. Inflationary pressures begin to rise.
A very well-known example of the recession phase is the Great Recession, which occurred between 2008 and 2013. The recession began after the global credit crunch and led to a long period of low economic growth and rising unemployment, which lead to a number of other problems.
The causes of the trade cycle can be categorised into two main types: demand-side shocks and supply-side shocks.
o Demand-side shocks are those that affect aggregate demand, and include:
• House prices rise too high and there may be a sudden collapse in the demand for housing which leads to a fall in house prices. This decreases consumer confidence, which results in less consumer spending and a decrease in the amount of house built, decreasing output and increasing unemployment.
• The central bank may increase interest rates as a result of rising inflation. If the interest rate is too high, it reduces consumer spending which leads to a recession.
o Supply-side shocks are shocks which affect aggregate supply, and include:
• Natural disasters are supply-side shocks as they disrupt the production process. For example, Hurricane Katrina’s terrible effect upon the oil and gasoline industry.
• Technological advances that improve the productivity of labour. These improvements cause the quantity supplied to increase and the price to fall.