Question.3020 - Before making a decision about entering into the global market, business owners must familiarize themselves with some macro- and microeconomic concepts: ? The World Bank and International Monetary Fund ? Imports and exports as part of GDP ? Multinational corporations ? Foreign direct investment and capital flows ? Foreign exchange market and exchange rates ? Labor theory of value ? Marginal rate of transformation ? Gains from trade, comparative advantage ? Economies of scale In a paragraph each, define these terms. Then, discuss how these terms individually apply to both supply and demand and to a business owner who is contemplating expanding internationally
Answer Below:
1.The International Monetary Fund (IMF) and the World Bank were both formed at an international conference organized in Bretton Woods, New Hampshire, United States in 1944 with the aim to establish a framework for economic cooperation and development leading to a more secure and thriving global economy. Objective of IMF- The IMF encourages international monetary cooperation and offers policy advice and technical assistance to help countries build and maintain strong economies. The Fund also provides loans and technical assistance to countries to design policy programs to resolve balance of payments problems. Loans provided are short and medium term and funded by the pool of contributions provided by the members. It is managed by staff are who are economists with wide experience in macroeconomic and financial policies. Objective of World Bank: The World Bank promotes long-term economic development and poverty reduction by providing technical and financial support to help countries reform particular sectors which are important for development of any country such as building schools and health centers, providing water and electricity and protection of the environment. Loans offered are pooled in contributions by members and also through bond issuance. It is managed by sector specialists. 2. Gross Domestic Product- is the monetary conversion of all the finished goods and services produced within a country during a time period. It comprises of private and public consumption, government outlays, investments and exports less imports for a country. When a country is exporting goods, it sells them to a foreign market, that is, to consumers, businesses, or governments across the border. Exports bring money into the country, which increases the nation's GDP. When a country imports goods, it buys them from foreign producers which lead to transfer of money to another economy resulting in decrease of the importing nation's GDP. According to the needs of the nation free trade or barriers to trades are imposed because no nation wants a negative trade balance. 3. Multinational corporations are enterprises having operations in several countries but managed from home country only. In other words any company or group that draws a part of its revenue from operations across the border is considered a multinational corporation. It is registered in more than one country or s the one that has operations in more than one country. It produces and sells goods or services in various countries and can also be referred to as an international corporation. There are basically 4 types of multinational corporations: (1) decentralized corporation with main operations in home country, (2) a global, centralized corporation that enjoys cost advantage through centralized production in countries wherever cheaper resources are available, (3) an international company that thrives on the parent company’s technology or R&D, or (4) a transnational enterprise which is a combination of the above 3 approaches. 4. FDI is a company from home country making a physical investment in a production facility in foreign country. They also include investments made to acquire permanent interest in enterprises having operating outside of the economy of the home country. The FDI relationship comprises of a parent company and a foreign partner and they together form a multinational corporation (MNC) Free flow of capital is favored by economists globally, across national borders, as it helps capital seek the highest rate of return. Unlimited capital flows has other advantages to offer also such as Firstly, international flows of capital leads to reduction of risk faced by owners of capital by allowing them to diversify their lending and investment portfolio. Secondly, the cross border integration of capital markets can contribute to the spread of fittest of all practices in corporate governance, accounting rules, and legal traditions. Third, the international mobility of capital limits the ability of governments to pursue bad policies and the best practices prevail. 5. Foreign exchange market and exchange rates- is the place where exchange of currency takes place and the exchange rate is just the price of one currency in terms of another currency. The foreign currency exchange rate is the rate at which one currency can be exchanged for another. It is quoted in pairs like the INR/USD (the Indian rupee and the US Dollar). They fluctuate with change in economic factors like inflation, industrial production and geopolitical events. They influence the exchange of a currency pair. Trading in the foreign exchange market is mainly to aid international trade and investment that is the export and import of foreign goods, services and financial assets. Foreign goods are usually priced in foreign currency – Goods from Germany are priced in euros. The unit of account is the euro, the medium of exchange is the euro. If Americans want to buy goods from Germany they need euros. Also, some investors may consider a foreign currency higher in value than the home currency. So wherever exchange of currency happens it is called foreign exchange market. 6. Labor theory of value is an economic theory that states that the value of a good or service depends upon the labor used in its production. The theory was first presented by Adam Smith (1723-1790), the founder of modern economics, and also formed an important base in the philosophical ideals of Karl Marx. The theory is of the opinion that goods which take the same amount of time to produce should cost the same. According to Marx, the labour value that is included in the commodity is simple, average, human labour, or unskilled labour of average intensity and is intensified if the labour is skilled. As commodities are exchanged these different types of human labour which make the commodities, become comparable. All commodities represent a portion of society's total social labour. 7. Marginal rate of transformation- The marginal rate of transformation (MRT) is defined as the quantum of units of good x to be stop being produced in order to produce an extra unit of good y, while the use of production factors and the technology are kept constant. It is the relation between the production of different outputs by keeping the level of production factors constant. It can be determined using the following formula: It related to the production possibility frontier (PPF). The slope of the curves exhibits how a reallocation of the production factors can produce different bundle of production. Two of the most commonly used PPFs are depicted in the adjacent figure. In the first graph, the MRT changes along the curve. The second graph, shows the case of perfect substitutes output. The slope has an angle of 45º with each axis and therefore the MRT = 1. 8. Gains from trade, comparative advantage Comparative advantage in a good is attributed to the low opportunity cost producer of that good. The theory of comparative advantage can show these gains from trade: The diagrams below exhibits an example: Establishing the comparative advantage: Half of the country’s economic resources are allocated to each product; Germany is superior in production of both freezers and dishwashers than Italy. But Italy produces freezers close to that of Germany. The opportunity cost of each extra freezer for Italy is 1/4 dishwasher, whereas for Germany the opportunity cost is 1/2 of a dishwasher. Italy should therefore specialize in the production of freezers as Germany has a comparative advantage in producing freezers. The effects of specialization Specialization has led to an increase in output of both goods Gains from trade between the two countries Acceptable terms of trade between freezers and dishwashers have to establish for mutually beneficial trade to take place. Under the circumstances both countries stand to gain from an exchange of 3 freezers for 1 dishwasher. The distribution of output after trade has taken place is shown in the table above. 9. Economies of scale refer to the cost advantages that a business would enjoy if it undertakes expansion. As the scale of output is increased, certain factors cause the average cost per unit to fall. It is a long run concept and refers to reductions in unit cost of production as the size of a facility and the usage of other inputs used in production is increased. Whereas diseconomies of scale is just the opposite. The common factors that lead to economies of scale are bulk buying of raw materials through long-term contracts, able to obtain lower-interest based funds from banks, increasing the specialization of managers, taking advantage of technological up gradation. Each of these factors helps in reducing the long run average costs of production by shifting the short- run average total cost curve down and to the right. References: The IMF and the World Bank, March 41, 2013, retrieved on July 16, 2103 http://www.imf.org/external/np/exr/facts/imfwb.htm GDP and the Players Three: Imports and Exports | Infoplease.com, retrieved on July 16, 2103 http://www.infoplease.com/cig/economics/imports-exports.html#ixzz2ZCRVRrVw Multinational Corporation, retrieved on July 16, 2103 http://www.businessdictionary.com/definition/multinational-corporation-MNC.html FDI, retrieved on July 16, 2103 http://www.princeton.edu/~dixitak/Teaching/InternationalTrade/Slides/ECO352_19.pdf When is FDI a Capital Flow? By Dalia Marin & Monika Schnitzer, June 2006 http://www.sfbtr15.de/uploads/media/126.pdf Exchange Rates and the Foreign Exchange Market, retrieved on July 16, 2103 http://economics.about.com/cs/money/l/aa022703a.htm Marx’s Labor Theory of Value, retrieved on July 16, 2103 http://www.public.iastate.edu/~soc.401/marx%28feb03%29.pdf Economy of Scale, retrieved on July 16, 2103 http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Economy_of_scale.htmlMore Articles From Economics
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