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.
As of 20th January 2017, Donald Trump was inaugurated as the 45th President of the United States of America. Along with him, he brought many new policies and vows. Of which one of his vows is to make deep tax cuts while promising to increase government expenditure. He has said that he will be cutting corporation tax from 33% to 15%. Perhaps this is a conflict of interest, and it would suit his company, but there is a reason behind this. According to the Financial Times, this would increase the national debt by $7.2 trillion (including interest costs) over the first decade and by $20.9 trillion by 2036. For most people, this would seem unintelligent. However, this is what is known as expansionary fiscal policy. Furthermore, he has said he will be increasing spending on infrastructure and the military but he will be reducing spending on other categories (apart from health and retirement programmes) by 1% each year.
So how does this work? Fiscal policy is the deliberate manipulation of government spending and taxation in order to influence the economy’s economic growth. A decrease in tax will boost income, demand and GDP. When the government decreases taxes, disposable income increases. This means that consumers will demand more and therefore result in higher production, shifting the aggregate demand curve to the right, leading to an increase in GDP. An increase in government spending will boost demand and production. This will also create more jobs which mean that unemployment will reduce. Government spending increases the potential output of the economy. Also, lower corporation taxes mean that firms can invest more, contributing to AD – as investment is a component of AD, when it increases so does AD.
Yes, Trump is right in saying that tax cuts and additional public spending will lead to faster growth and in the long-run, an improvement in the US public finances. Although, who is the cut in taxes really benefitting? It will far more benefit to high-incomers rather than the low-incomers. Those earning more than $3.7 million a year would receive a tax cut of nearly $1.1 million; however, those who don’t earn as much receive a tax cut of just $110 a year. Furthermore, this policy of his may lead to a budget deficit. This is where government expenses exceed the revenue received. In order to fix this issue, the US government may have to borrow money to finance the difference – this therefore increases national debt instead of trying to decrease it.
More than 1 billion people around the world do not have access to safe drinking water. 5000 people die every day as a result of drinking unclean water. People who live in high-density air pollution areas have 20% higher risk of dying from lung cancer. United States produces 30% of the world’s waste and uses 25% of the world’s natural resources. Almost 80% of urban waste in India is dumped in the River Ganges. Over 1 million seabirds and 100,000 sea mammals are killed every year.
So what are all these statistics related to? Pollution. Pollution is the introduction of harmful substances or products into the environment. How does this issue affect the government? Well, the government would have to set new regulations and introduce funding programmes to clean up the pollution. Also, if too many people become ill from all the pollution present in our environment, actions would need to be taken to make sure the right treatment is available therefore increasing government expenditure, creating an opportunity cost.
In 2005, the European Commission set up an Emissions Trading System (ETS) in an attempt to limit greenhouse gas emissions from heavy industry. Tradable pollution permits are an attempt to solve the problem of pollution. Its main focus is to curb carbon dioxide emissions by major polluters in the European Union.
So how does it work? Every year, the European Commission allocates a set amount of carbon dioxide permits to national governments, who then divide up the allowances among firms who are a part of the scheme. These permits are tradable, which means that firms can buy and sell between themselves thereby creating a market. Most of the pollution permits are free and have been allocated to firms depending on how much pollution they created before the scheme was introduced. However, the government are able to retain up to 10% of the permits and offer them for sale. Some of the permits are also kept as a reserve to enable new firms to enter.
Is this the most efficient way to solve the issue of pollution? The price mechanism is used to internalise the negative externalities created by pollution. Furthermore, governments are able to raise their funds by selling permits that they reserved. And by having these permits, it creates an incentive for firms to invest in clean technology and so reduce carbon emissions in the long term – resulting in a decline in pollution. If firms exceed their allowance then they face fines which will increase their costs of production. This means that they learn their lesson and do not exceed their allowance next time. However, if the European Commission issues too many permits, there is little incentive for firms to reduce pollution which means that these pollution permits are pointless. Moreover, firms may decide to pass on the cost of purchasing these permits onto consumers. This means that the prices of goods and services will increase. The government also face a cost of running this system as they have to monitor the pollution emissions from the many companies part of the ETS.
We must consider that the EU is just approximately 15% of the world and unless all countries decide to run a similar carbon monitoring scheme, then global emissions will continue to increase and have many severe effects on the environment.
With the price of houses constantly rising, consumers can find themselves facing huge deposits and mortgages that will last what seems like forever. Consumers are generally figuring out that anything less than a 10% deposit simply won’t do. George Osborne invented the Help to Buy scheme in Autumn 2013 and was described by him as a ‘landmark’ scheme that would get thousands of people on the housing ladder. Help to Buy is a government scheme which is designed to help those who are struggling to save a deposit for their first move or move up the property ladder as they have limited equity.
There were, or as of before December 31, 2016, two main elements of the Help to Buy scheme:
This part of the scheme was launched on April 1, 2013 and is available until 2020. It is open to first-time buyers and home movers; however, it is only restricted to those who are buying homes that have been newly built. If you have a 5% deposit, you can receive up to 20% government equity loan which means you will only require a 75% mortgage. A smaller mortgage means lower monthly payments which results in your home being more affordable. There are no salary cap restrictions on the scheme. The 20% equity loan is provided by the government and is interest free for 5 years. In the sixth year, you will be charged 1.75% and after that, the fee rises by inflation based on the Retail Prices Index (which is a measure of inflation measured by the ONS – the Office of National Statistics). You can pay back the equity loan when you sell your home or at the end of your mortgage period. This loan has to be paid back within 25 years or when the property is sold. If the property value has increased by the time you pay back the loan, the amount to be paid back will be proportionately higher, so the Government shares any profit.
Under the programme, borrowers were able to get a mortgage with just a 5% deposit. If those borrowers were unable to make payments, the government promised to compensate the lender.
This guarantee was available for new and old properties across the UK. However, Chancellor Philip Hammond announced the ending of the Help to Buy mortgage guarantee scheme in a letter to the governor of the Bank of England, Mark Carney, in September. He stated that the scheme was created ‘with a specific purpose’ which has ‘now been successfully achieved’.
As Mr Hammond announced the closure, the Treasury published figures revealing that more than 86,000 households had been supported by the scheme. Across all the Government’s Help to Buy schemes, a total of 185,000 were bought, 150,000 of that being first-time buyers. Although the Government says it is no longer needed as confidence has returned to the market, with more private lenders now offering similar high loan-to-value loans.
This scheme was extremely useful to first time buyers with low confidence due to the 2008 financial crisis. The Bank of England declared in September that the scheme is no longer necessary due to this. Some say that scheme only made the problem worse as it increased prices by offering cheap credit and not addressing the problem of the housing crisis. Sam Dumitriu (the head of projects at the Adam Smith Institute) said Mr Hammond made the right decision.
The single market’s main aim is to simplify trade within the European Union. Since the inauguration in 1993 it has been the backbone of the European economy and has served in many ways, but with recent reports of Theresa May looking to leave the single market, people wonder what does this mean for Britain?. The main rule is the free movement from one EU member country to another of goods, people, services and capital - in other words is known ‘four freedoms’. In addition, it also eliminates tariffs or taxes on trade. The EU creates minimum regulatory standards, and then requires all members to comply with them. If Britain does leave the single market, exporters would no longer be required to make 28 variants of their products to comply with national rules.
In recent years we see that Britain’s trade with countries outside the EU is growing. Trade with the EU has been decreasing. Trade connections between non-EU and the emerging economies have been rising steadily - however the EU remains the UK’s largest trading partner. It is said that ‘The UK will not be able to dictate exit terms to the EU because it is running a trade deficit’.If there were trade barriers between Britain and the EU put in place, the EU would lose more export earnings from Britain, than vice versa. Another advantage would be that the UK would not have to follow the rules and regulation put in place, and be able to boost trade with faster growing parts of the world. Moreover, the UK’s access to non-EU markets is to a great degree determined by its membership of the EU. The UK on its own, would have much less bargaining power than the EU.
There are alternative arrangements that can be arranged to replace the departure of the single market. If Britain withdrew from full membership of the EU, it would open up many doors in terms of trading relationship. These include membership of the EEA - if Britain joined, they would have unlimited access to the single market however Britain would have no say over EU trade policy. Another alternative would be the custom union - similar to the one Turkey has with the EU. This type of arrangement eliminates internal tariff, but requires the EU to agree common tariffs with countries outside. Another possible way is the so called ‘Swiss-style’ relationship. This is based on bilateral negotiations and agreements. A free trade agreement (FTA) could also be put in play if the UK decides to leave the single market. This would mean that trade with the EU would be tariff-free and also Britain could set its own trade policies with non-European countries. The final option would be to trade under the WTO rules. Therefore means the UK would not comply with EU regulations, but with the CET.
To conclude arrangements such as EEA, ‘Swiss-style’ relationship or a custom union would be pointless as the UK would still have to comply with the EU regulations. So if the UK was to leave the EU than the best possible option is the FTA. Whilst the exit of the UK from the single market, could trigger a second referendum for Scotland, as well as one for Northern Ireland, the economy will no doubt be harmed. Angela Merkel has also emphasised that there will be no single market for the UK if it does not allow free movement, an issue many “brexiters” thought needed attention. Britain is anxiously awaiting the president-elect Trump to sort out the US trade deal, but at the moment Theresa May seemingly attempting to create a dispute that will be of no benefit for anyone.
The 2008 financial crisis is known to be the worst economic disaster since the Great Depression of 1929. It is a world wide financial ‘fiasco’ involving terms everyone is familiar too, like subprime mortgages, collateralised debt obligations, frozen credit markets and credit default swaps. Most homeowners were affected due to this.
The financial crisis is bringing two groups of people together - homeowners and investors. With homeowners representing their mortgages which would be houses; and investors represent their money which would be huge institutions like pension funds. These two groups are brought together by the financial system - banks etc. Years backs, investors wanted to invest in something that will make them more money. This was usually done by going to the US Federal Reserve, where they buy treasury bills - safest kind of investment (AAA rating). After ‘9/11’, federal reserve chairman Alan Greenspan lowers interest rates to only 1% in order to keep the economy strong. This was bad news to investors as their returns were not very high resulting in not much profit. However this means banks can borrow money for only 1%, this causes an abundance of cheap credit, which the bank took advantage of. Banks can easily make money with this - charging borrowers more interest. Investors seeing how banks make huge profits want to do the same, and this is where it begun.
Firstly the banks started by connecting homeowners to investors, through mortgages. To put into perspective this cycle, we begin with a family wanting a house. They set a down payment and contact the mortgage broker which then connects the family to a lender who gives them a mortgage. The broker receives a commission and the family become homeowner - which is pretty advantageous as housing prices are increasing. After this the lender sells the mortgage to an investment banker, making profit. The investments banker buys many mortgages, so this means they receive monthly payments from homeowners, making huge profits. After doing some ‘financial magic’ they turn it into a collateralised debt obligation (CDO). One way to imagine a CDO is a as box into which monthly payments from multiple mortgages. It is divided into three tray, each representing different risk levels. The ‘bottom tray’ being labelled as risky and middle being ‘okay’ and top being ‘safe’. This is labelled so because the money fills from the ‘top tray’ which means that it will fill more likely than the ‘bottom tray’ - like a cascade. To compensate for the higher risk the bottom tray will get a higher return than the top and middle trays. To make the top tray even safer the banks may insure it, a credit default swap.
So the investment banker sells the ‘safe’ tray to investors who only want save investments. And sells the ‘okay’ tray to other bankers. Lastly the ‘risky’ tray to hedge funds and other risk takers. Then investment banker makes millions from doing this and pay any loans off they might have borrowed to buy the mortgages. This makes the investors satisfied as they have good returns, higher than the 1% on treasury bills. Greed takes over and the investors want more CDO slices. But here is the problem - everyone who's qualified for a mortgage already has one. They resolve this problem by giving out mortgages to people ‘less responsible’ which are called subprime mortgages. These mortgages required no down payment and no proof of income - this is the turning point. The cycle is back in play. Due to the more ‘less responsible’ homeowners the frequency of defaults started increasing which means that the banker has many houses. So they put it up for sale, which means there are many houses for sale on the market. This creates more supply than there is demand and housing prices start decreasing. People who were paying back mortgages stopped paying as the value of their house decreased from what it was when they bought it. Default rates increased significantly throughout the country. This meant than investment banker couldn't sell his his CDO to anyone as they were worthless; the investors who already had purchased CDO’s wasn't making any money from it; the mortgage lender trying to sell the mortgage couldn't sell it to the investment banker and the mortgage broker was out of work. The whole financial system froze and all people in play become bankrupt.
The 2008 financial crisis was a very important event in the world’s history, greed playing a key role in this. Millions of people were left unemployed and more than 12 trillion US dollars was lost in America - ‘the cost of the crisis’.
‘BRICS’ is a grouping acronym that refers to the countries of Brazil, Russia, India, China and South Africa - also known as the association of five emerging economies. This association was originally referred to as ‘BRIC’, after the addition of South Africa in 2011 it changed to ‘BRICS’. All five countries are part of G-20. The G-20 is an international forum for the governments and central bank governors from 20 major economies. They hold annual meetings which are more commonly referred to as summit. The first summit was held in Russia and the latest in India.
People question the importance of BRICS without knowing they play a significant role in the world. BRICS represent 3 billion people, this number put into perspective is 40% of the world population. The five countries combined GDP is a staggering Amount of US$16.039 trillion, again which is 20% of the gross world product (GWP). GWP is the combined gross national product of all the countries in the world. They also have a sum of US$4 trillion in combined foreign reserves. Foreign reserves is money or other assess held by a central bank or other monetary authority so that it can pay if need be its liabilities.
What similarities do they have? Well all five countries are developing which gives them all the same ground. All these nations belong to the ‘south block’ also known as the developing block. The main objective is they act as one to promote legitimate international system, to give an example reform of the UN Security Council. They also act as ‘bridge’ between developed and developing countries. An example of this can be identified on the liberalisation of agricultural subsidies in developed countries. One of the main objective they all share is the assistance of developing countries in trade and climate change negotiations, as well as on issues related to the export of manufacturing products. They five emerging countries also establish the BRICS Business Council. On top of all this they challenge institutions like International Monetary Fund and the World Bank.
There are many disparities with BRICS. China is the dominating country in this association. China’s political aspiration creates challenges and increases difficulty to make consensus. To boost exports china manipulates its currency, devaluation of yuan. There are many concerns about the security issues as they maintain a low profile about it. With Brazil, India and South Africa being democratic countries while Russia and China are authoritarian regimes. Also Russia, Brazil and South Africa export different commodities, while China exports manufactured goods and India exports services.
BRICS face many challenges. After the US election 2016, currency depreciation affects these countries. Due to the Chinese stock exchange crash, which data showed that China’s economy was slowing down, which triggered fear among investors and prompted sell offs. Also in recent years there has been a slowdown in global demand which has slowed down the growth of the countries. Two main initiatives taken by the BRICS is the New Development Bank (NDB) and the BRICS currency reserve arrangement (CRA). The NDB is set up for infrastructure lending and focuses on renewable energy. It has made an initial set of project loans in all five members countries. The CRA consists of $100 billion, this for members to short term liquidity to ride over external crises.
To conclude BRICS play an important role in the economy. Like Jim O’Neill’s point that the world is changing. Experts believe they will be the world’s superpower by 2050.