Different types of economies There are different types of economic system have derived from different cultures and

societies. Goods and services are produced and exchanged with other economies to stop the collapse of a state and remain competitive. The different types of economy include: Free market individuals and businesses are free to pursue their own economic interests with other free markets. This kind of activity is what has led to exchange rates for goods and services across the world. An example would be the UK who openly trade with other states and in some instances is part of a trading bloc to boast its economy. Individuals and businesses are free to invest world wide and even participate in the stock exchange. To a certain extent even open markets have some control over its economy for example when the UK government had to step in and take control of the banking system when it collapsed in 2008. Therefore, it may be seen that some open economies are actually mixed economies during significant times and events. Closed Market Goods and services are produced internally and the central government have control over the economy, including the allocation and determination of price for goods and services. Historically, although the UK is now an open economy, during World War 2 the government had to take control of the economy and force the population to ration to make sure there was enough money for war. Closed markets will have to be wholly if not entirely self-sufficient in everything to be economically viable. Black markets may also arise from this non-regulation. Imports/Exports The simple definition of imports and exports is, Goods and services purchased from foreign country and exporting is goods and services being sold to foreign countries(Groon 2007).There are different types of imports and exports. Visible exports Physical goods such as cars, furniture, gadgets are sold to foreign countries. Invisible exports Tangible goods and services such as banking and tertiary services are sold to foreign countries or suppliers. These types of exports may be used to as balance of trade in an economy. This also applies to visible and invisible imports. Comparative Advantage, Absolute Advantage and Terms of Trade Comparative advantage is derived from Riccardo (1818), where 2 producers or suppliers can work together to gain comparative advantage by being able to produce at a lower opportunity cost than another supplier. Comparative advantage usually comes about when a country has superiority in production power over another country. Absolute advantage exists in an economy if a country is able to produce goods or services using fewer resources than another country. As identified by Groon (2007) assumptions that France can produce more wine per acre than Zambia. The reason for this is because France has more natural resources than Zambia.

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Terms of Trade The terms of trade measures the rate of exchange of one good or service for another when two countries trade with each other. Countries such as the UK need consider a fall in the value in their exchange rate when trading. Export prices may fall and a rise in the cost of imports may happen, resulting in a worsening in their terms of trade. On the other hand, lower exchange rates may increase the competitiveness in terms of export demands. Lower exchange rates may see a rise in competitiveness resulting from a growth in import demands slowing down and a rising of demand from exports. In both cases, if a country such as the UK finds that export prices are rising faster than its import prices, less export transactions have been made than the volume of imports it is receiving. The terms of trade will rise. The opposite effect will happen if import prices rise, this shows that a larger amount of exports are being sold to other countries possibly to finance imported goods and services. Much depends on how countries respond to their lower exchange rates. And for countries without a diversified industrial base, the decline in earnings from each unit of exports has a damaging effect on output, investment and employment. Due to the fact the terms of trade is not always stable, it clearly shows that exchange rates may influence changes in terms of trade. It is important to country such as the UK to ensure that they are exporting instead of importing to remain competitive. The UK will need to respond quickly to a lowering of exchange rates to do this effectively. Exchange Rates The exchange rate of a country is determined by the supply and demand for the particular currency. An example would be a high demand for the Pound Sterling which would lead to the value increasing value of the pound. This could then lead to highest interest rates and Lower inflation. Higher interest rates could attract more foreign investors who will want to make a good return on their money if they switch to using the UK banking system. Savers would benefit from higher return on their investments. Lower inflation can also be determined by the exchange rate. In terms of UK residents, this would mean lower cost of living in terms of food, clothes and other everyday essentials and for the foreign investors and countries the UK would be seen as more competitive and the demand will increase causing value to increase too.

The balance of payments allows for trading countries to keep a record of financial transactions and dealings with other countries across the world. The Current account and the capital account should balance for countries. However, if there is a deficit within a countrys current account, there should be a surplus its capital account. This is what is known as Balance of Payments.

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Balance of Payments The balance of payments consists of 1. The current account (trade in goods, services, transfers and investments) 2. Capital account (Foreign investment, portfolio investments, borrowings and sales)

Surplus/Deficits A surplus in an economy occurs when the export trade is strong. Unlike deficits, surplus can occur for different reasons. Some reasons include strong growth, high levels of foreign investment. On the other hand, these economies may be seen as less competitive in the world markets. Deficits occur when more goods and services are being imported instead of exported. A short term deficit is always better than a long term deficit because long term deficits may require a country to borrow more money to service its debt and may see a fall in foreign investment which could have an effect on the capital account. On the other hand it can be seen as beneficial in terms of consumer spending. If consumers are spending less, this may help costs in terms of taxation but may also mean that government spending will increase on things such as welfare as there may be a deficit in the amount of employment available. Foreign economies may see long term deficits as a liability to them trading. If the UKs interest and exchange rates continued to raise it would make it very difficult eventually to pay for its goods and services that it is importing and cause devaluation. On the other hand, a deficit may citizens of a country in terms of internal interest rates and taxes kept at a lower rate. Long term deficits in open economies may show signs of weakened competitiveness and may lead to lower confidence in the economy. An extended period of deficit in capital may also lead to lowering and depreciation of interest rates and potentially a fall in living standards within a country. All of these issues lead to one main issue, that the economy lacks competitiveness. Wimbledons In terms of Wimbledons exporting to other countries in Europe: If the Wimbledons can produce strawberries more effectively, efficiently and at low costs, the comparative advantage for the company and the UK would mean that trade would be at an advantage. As Wimbledons is specialising in one product it is also benefiting from economies of scale, thus benefiting in terms of saving on costs further. Wimbledons and the UK trading in Europe also means producing higher volumes of strawberries for both the UK and Europe which can improve its overall position in terms of competition and employment opportunities which would benefit the company and the UK if more jobs are created as a result of trade.

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This may also lead to interest from foreign investment which may lessen the impact from other European competition. This may also lead to the quality of the product increasing through increase technology and innovation.

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Bibliography Financial Times (2012) [Online] Available from www.ft.com [Accessed: 13/4/2013] BBC News (2012) [Online] Available from http://www.bbc.co.uk/news/business [Accessed: 13/4/2013] Economics Online (2012) [Online] Available from www.economicsonline.co.uk/Global_economics [Accessed: 13/4/2013]

References Groon.E.G (2007) Barrons Macro- Economics the Easy Way. p.g 212 [Online] Barrons Educational
Series,USA Avaliable from: http://www.googlebooks.com. [Accessed: 13/4/2013]

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