YIUS Institute

Economics 2: The World Economy

HP72 48

Assessment 1

SQA Year 2 Business

Submitted To
Teacher Thi Thi Khin

Submitted By
Phone Than Sin Thwin
ID – 227082844
Date - 13/9/2022
Phone Than Sin Thwin ID - 227082844 The World Economy

Table of Contents

1. Free Trade.........................................................................................................................................3
2. Absolute and Comparative Advantages.............................................................................................3
3. Three gains from trading internationally............................................................................................3
4. Protectionism and Barriers to trade....................................................................................................4
5. The role of World Trade Organisation (WTO)..................................................................................4
6. The Role of The European Union (EU).............................................................................................4
7. The UK Balance of Payments............................................................................................................5
8. General Trends in UK........................................................................................................................6
9. Balance of Payments.........................................................................................................................7
10. Fixed Exchange Rate.......................................................................................................................8
Floating Exchange Rate.........................................................................................................................8
11. Fixed Exchange Rate Effects on Individuals and Business..............................................................9
Floating Exchange Rates Effects on Individuals and Business..............................................................9
12. Two Characteristics of Less Developed Countries (LDCs)...........................................................10
13. Issue Facing NICs and LDCs.........................................................................................................10
14. The impact of transnational firms on NICs....................................................................................10
References...........................................................................................................................................11
Phone Than Sin Thwin ID - 227082844 The World Economy

1. Free Trade

Free trade is selling and buying goods and services between countries or sub-national regions
without tariffs, quotas and other restrictions being applied. Free trade is good for the business
and government as it increases economic growth, lower government spending and increase
GDP. Free trade offers a greater choice of goods and services benefiting from lower prices
from countries that have comparative advantage.

2. Absolute and Comparative Advantages

Absolute advantage is an ability of a nation to produce goods and services more efficient than
another, using fewer sources than another country. It plays an important role. Absolute
advantage helps the country producing goods and services that would yield little to no
demand, which would lead to losses.
A comparative advantage is the ability of the business to produce goods and services for a
lower opportunity cost. Comparative advantage gives an ability to sell goods and services at
prices that are lower than the competitors, to gain stronger sales margins and greater
profitability.

By analysing the table, England need 100 labour hours to produce a unit of cloth and Portugal
need 90 labour hours to produce a unit of cloth. Thus, Portugal had an absolute advantage in
making cloth due to fewer labour hour and England had a comparative advantage due to
lower opportunity cost.

3. Three gains from trading internationally

 Increased revenues
 Disposal of surplus goods
 Access to foreign investment opportunities
Phone Than Sin Thwin ID - 227082844 The World Economy

4. Protectionism and Barriers to trade

Protectionism is a policy that protects and restricts domestic industries against foreign
competition by means of tariffs, subsidies, import quotas and other restrictions. Protectionism
is not good for the long run of the business. It makes businesses and consumers pay more.
Protectionism negatively affects the economic growth and economic welfare.

The government-imposed restraint on the flow of international goods and services is called
barriers to trade. Types of barriers to trade include, subsidies, natural barriers, tariff barriers
and non-tariff barriers. The Government either impose additional costa or limits on exports
and imports in order to protect the local industries. Governments use trade barriers due to
domestic employment. When a domestic industry struggles to compete against international
competitors, the government use tariffs to discourage consumption of import goods and
encourage consumption of domestic goods,

5. The Role of World Trade Organisation (WTO)

The World Trade Organisation (WTO) is the international organisation that deals with the
global rules of trade. The main objective of WTO is to ensure the trade flows as smoothly and
freely as possible. The role of WTO is to reduce tariffs and barriers to trade between
countries, administrate trade agreements, settle trade disputes, build the trade capacity of
developing economies and cooperate with other international organisations. WTO is
important as it brings a wide range of economic sectors of the global economy.

6. The Role of The European Union (EU)

European Union, the international organisation, governs the common economic, social and
trade policies between western countries. EU plays a vital role in the economy of the
participating countries. Eu introduce the biggest single market agreement, one of the famous
blocs in the world. According to the block, there is no barriers between the member countries,
which allow the free movement of goods and services without any limitations. This bloc
helps the economic growth of the member countries.
Phone Than Sin Thwin ID - 227082844 The World Economy

7. The UK Balance of Payments

The balance of payment allows cross-border transactions between the UK and other nations.
It also tracks the transactions that happen between two entities. The BOP covers two areas,
current account and capital account. The use of BOP is to find balance between the money
spent on import and export as it the expenditures are unbalanced it will cause a financial
deficit. TO balance this financial gap, UK needs to attract more net financial to its current
account.

By analysing the table, In quarter 1 2020, the UK account balance widened from a deficit of £
9.2 billion on Quarter 4 2019 to a deficit of £ 21.1 billion in quarter 1 2020, or 3.8% of
(GDP).
Phone Than Sin Thwin ID - 227082844 The World Economy

8. General Trends in UK

Source: Office for National Statistics, UK

In the last 30 years, UK had a persistent current account deficit. This is because of the deficit
in trade in goods and deterioration in investment incomes. By analysing the data, in Quarter 3
2019, it can be seen that UK current account fell to £ 15,9 billion or 2.8% of (GDP). As of
2019, the UK’s current account deficit was close to 4% of (GDP) at current market prices. So
that, the UK has had a persistent current account deficit in recent 30 years. This current
account deficit of UK occurred mainly of net trade deficits and primary income deficit in
wages and investment incomes.
Phone Than Sin Thwin ID - 227082844 The World Economy

9. Balance of Payments

The balance of payment and exchange rate under a floating-rate exchange system is driven by
the supply and demand of the currency of the country. A change in the balance of payments

of the country can cause fluctuations in the exchange rate with UK currencies and foreign
currencies.

By analysing the figure, when US residents purchase UK goods or invest in the UK, they
require pounds. They demand pound by selling dollars on the foreign exchange rate. In this
situation, the demand curve for pounds will slope downwards. The equilibrium exchange rate
is where the demand for pounds equal to supply. When the current exchange rate was above
the equilibrium, the supply of pound offered to the bank will exceed the demand.
Phone Than Sin Thwin ID - 227082844 The World Economy

10. Fixed Exchange Rate

Advantages
 Exchange rate stability will encourage foreigners to invest in a country.
 Fixed exchange rate can prevent depreciation of currency.
 Fixed exchange rate can prevent inflation.

Disadvantages
 A fixed exchange rate is expensive to maintain.
 A fixed exchange rate does not follow the concept of the free market.
 The stability of the domestic economy can be reduced.

Floating Exchange Rate

Advantages
 Price stability.
 Floating exchange rate can improve economic conditions.
 Floating exchange rate provides a far higher yield.

Disadvantages
 The floating exchange rate can create high expense rations.
 Floating exchange rate can create an interest rate risk.
 Floating exchange rate can create a liquidity risk.
Phone Than Sin Thwin ID - 227082844 The World Economy

11. Fixed Exchange Rate Effects on Individuals and Business

Effects on individuals
By having a fixed exchange rate, it will be easier for individuals to make price comparisons
in the market. In a fixed exchange rate, interest rate increases causing goods and services to
become more expensive. As goods become expensive to buy it will be a difficulty for
individuals. Fixed exchange rate also provides greater certainty for exporters and importers.

Effects on Business
As fixed exchange rate is difficult to maintain, the government may ignore business needs as
they are ensuring the policy. If the fixed exchange rate is set up too high, exports will become
uncompetitive. Business can benefit from the fixed exchange rate as it eliminates foreign
exchange rate.

Floating Exchange Rates Effects on Individuals and Business

Effects on individuals
Because of the floating exchange rate, essential products such as patrol price can rise too
high. Costs while changing currencies will be vary according to the floating exchange rate.
For individuals, the costs of going overseas will change as of the floating exchange rate.

Effects on Business
According to the floating exchange rate, exports will increase in price reducing the
competitiveness abroad. Floating exchange rate is likely to fluctuate and are highly volatile
by nature. The floating exchange rate is determined by the open market through demand and
supply, causing the increase in value if the demand for currency is high.
Phone Than Sin Thwin ID - 227082844 The World Economy

12. Two Characteristics of Less Developed Countries (LDCs)

One of the most defining characteristics of less developed countries is low per capita real
income. LDCs suffer from low per capita real income level, which results in low savings and
low investments. The average doesn’t earn enough money to save or invest money and it
creates a cycle of poverty. The GDP per capita of LDCs are 2.6% by 2020. Another
characteristic of LDCs is high population growth rate. The population rate of LDC s is
estimated at 2.3%, above twice the world average (1.1%). These countries either have high
population growth rate or large populations. This is because of the higher birth rates and lack
of family planning options.

13. Issue Facing NICs and LDCs

One issue that NIC’s face is environmental issues. NICs have finance development projects
and they have to use factories and industries for these projects. Toxic wastes from these
industries can immensely affect the environment of the country. China which is one of the
NICs country, is the tenth most polluted country in the world. Large powered industries are
the main source which produce 10,065 million tons of CO2 released. This subjects Chinese
residents to significant health risks which has caused 1.24 million people died of air pollution
in 2018.

The issue that LDCs countries face is unemployment rate. Unemployment rate may cause
because of the increase in population, low rates of savings and investments and labour
immobility. In Bangladesh, the unemployment rate is 3.98 percent in 1991 reaching to 5.30
percentage in 2022. According to the rate of unemployment, many educated and skilled
people are living in utter poverty.

14. The impact of transnational firms on NICs

Transnational firms have an impact on NICs. When the company earn, invest and bring
foreign currency into the country, all the remunerations come to the local economy.
Transnational firms also help NICs by bringing in the newest and latest technology into the
home country. NICs development can be potentially promoted by transnational firms through
their activities that generate economic growth. The foreign exchange and foreign direct
investment that transnational firms provide improves the economies of the NICs. For
example, many industries around the world invest in Malaysia due to low wages rate. New
technologies are brought into the country by transnational firms which is good for Malaysia.
Also, transnational firms can negatively impact the resources in the environment.
Environmental issues such as green-house emissions and global warming can occur because
Phone Than Sin Thwin ID - 227082844 The World Economy

of the transnational firms. For example, China is suffering from bad air pollution. The
carbon-intensive industries have caused environmental challenges including water scarcity
and soil contamination. Thus, transnational firms have both positive and negative impacts on
NICs.

References

1. John, S., Alison, W., Dean, G., (2015). ECONOMICS, Ninth edition.

2. Chris, P. (2020). UK current account deficit restricts policy options. OMFIF. Retrieved
From - https://www.omfif.org/2020/03/uk-trade-deficit-restricts-policy-options/