In economic literature it is considered that trade increases the welfare of a country through better allocations of domestic resources. Development theory states that higher growth of exports and imports lead to higher economic growth. This implies that trade liberalization should lead to an improved allocation of domestic resources due to increased competition. Neiss (2001) in a study gave empirical evidence that greater openness tends to reduce inflation in OECD countries. Greater openness may lead to a reduction in the pricing powers of firms and also indirectly influence policy-makers to undertake policies that are less inflationary and more prudent. In the case of import restrictions of any kind it will cause an anti-export bias by …show more content…
(ii) better allocation of resources, (iii) improved capacity utilization and (iv) openness may induce higher foreign investment and take pressure off the price level. The degree of integration of the domestic economy with the global economy may influence the domestic price level. There may be a downward pressure on prices on commodities that are sold at a lower price in international markets and an upward pressure on the price of commodities which are sold at a higher price than in the international markets compared to domestic markets. Therefore the net effect on the domestic aggregate price level will depend on the interactions of the various prices of the commodities.
Inflation is most often understood as a monetary phenomenon. It can be traced back to 10th century China, at a time when fiat money eclipsed coins as a medium of exchange. The government of the Song dynasty issued more notes to pay its bills and experienced the world’s first case of runaway inflation . The effect of increases in the money supply on the economy is theoretically understood to be through higher prices, i.e. there is a proportionate rise in prices without any effect on output. Economists agree that a relationship between inflation and money growth exists based on the demand and supply of ‘money’. A general definition of money in an economy may be given as the total number of notes and deposits in financial intermediaries used in exchange which may also include other units of
A lot of literatures have already studied about the inflation and inflation prediction and in this paper literature review will be discussed from the theoretical aspect and empirical aspect. The researches of the inflation, which are studied, by a lot of scholars in the field of economics have been conducted for a long time especially during the 1970s and it is the heyday when people would like to pay more attention to research the inflation. The inflation has become a hot topic among the economic life and social life since 1987. However, no matter whether it is in the western economic field or in the Chinese economic field, people have different definitions on the inflation and so far there is no unified opinion and conclusion can be accepted generally by everyone. For example, Wyplosz and Burda (1997), Blanchard (2000), and Barro (1997) define that inflation is a sustained rising in the overall price level of products and services in an economy throughout the time period. By contrast, Zha and Zhong (2016) define that inflation is considerable as the mechanism to improve economic growth. In general, the common definition of the inflation is that the inflation is a continuous rising process in the aspect of price. In other words, the value of the currency decreases continually.
I) Inflation will ensue rapidly because eventually, the money supply will grow faster than the economy. When there is that much high inflation, people might not “trust” money because it no longer acts as a store of value since it continually loses value, and it is no longer effective as a unit of account since prices increase all the time.
Those economically disadvantaged (poor) within a country generally gain from a loose trade. A loose trade is generally a strong positive contributor to poverty reduction. This allows people to exploit their productive potential, assists economic growth, restrains illogical policy interventions and helps to insulate against shocks. This corresponds with a new World Bank study which, used data from 80 countries over four decades, confirmed that openness boosts economic growth and that the incomes of the poor rose one-for-one with overall growth.
What is the Economic Argument for Trade? What Factors can Enforce Fair Trade? What Factors also hinder it?
The level of economic openness in European countries is high. The average openness is approximately 40% in EU member states (Mongelli, 2002), and there is an increasing trend in openness level over time (Table 1). This result shows that, in general, the import and export growth rate exceed the growth rate of GDP in EU12 countries during these years. It should be mentioned that, in Table 2, the intra-regional trade in the EU plays a significant role, it accounts for about 60% of the international trade (Laabas & Limam, 2002).
Free trade is beneficial and grows economies due to the theory of Comparative advantage. This theory states that countries should specialize and produce the goods and services in which they are most efficient. This converts a theory in which people see free trade as zero sum game into a positive sum game in which all gain. David Ricardo was the first most to come out with the theory of comparative advantage and he did so almost 200 years ago. His theory was the basis for latter theories to come and it was based on the fact that countries should specialize in goods, which they are the best in producing and his model only accounted for labor as a factor of production (Feenstra, 2011). The Ricardian models basis is that instead of factor endowments trade is affected by the growth in technology and it says a country has a comparative advantage in producing a good when the country’s opportunity cost of producing the good is lower than the opportunity cost of producing the good in another county. This pattern of trade between countries is determined by comparative advantage. This means that even countries with poor technologies can export the goods in which they have a comparative advantage (Feenstra, 2011). This is good in the sense because countries that are less developed have a chance to export products that they are good at and boost the economy and GDP. They do not have to compete and make products in which they have poor technologies; these countries can simply import those
Because inflation is one of the most crucial indexes for citizens and government to evaluate the overall performance of a country’s economy, it has been widely examined and analyzed by economists throughout history. Back in the 18th century, though the term “inflation” was not adopted by writers focusing on the science of economics yet, two influential thinkers in Europe already included their view about the cause and subsequent effect of a general rise in price for goods in their works. During the period when gold and silver were still the major types of money in circulation, David Hume and Adam Smith both described the ensuing effect in the society of an increase in the money supply: prices would be relatively higher and inflation would occur. While Hume writes mostly on the intermediate situation between the increase of money supply and the rise of price level, Smith focuses on the effect that inflation has on creditors and borrowers. The authors explain the process and effect of inflation in two different ways and hold dissimilar attitude toward inflation. Although they both agree on the increase of species as the cause of inflation, Hume concentrates his investigation on the labor market and claims that inflation benefits the whole society in the short run while Smith considers price inflation from the perspective of finance and maintains that it leads to unfair redistribution of wealth.
Globalization has generally been viewed as a positive aspect. Although it’s viewed as a positive thing, it also has its negative aspects that people usually choose to over-see and ignore. The most positive aspect of it was importing and exporting goods for other merchandise that may be needed more than what you have or in which crowded places it was not self-sufficient. In Pomeranz and Topik 2.7 Trade, Disorder, and Progress: Creating Shanghai, 1840-1930 really grasps the positive areas of the impact globalization has had on trade. 3.4 The Brew of Business: Coffee’s Life Story in Pomeranz and Topik as well as 2.7 focuses more on the positive that it does on the negative. It isn’t until 5.6 The Violent Birth of Corporations in Pomeranz and Topik that negative aspects start being brought up. Violence against native people is almost the only negative part about it due to the fact that no one should be tortured, used, or harmed in this process since it is normally used for good. Some of the good things that came from this is the fact that if you need something you don’t have, you know you can rely on trading something you do have for what you don’t, the way coffee grew, and the connections it built were all positive. Some of the disadvantages of trade were increased jobs outsourcing, theft of intellectual property, crowd out domestic industries, poor working conditions, degradation of natural
At the point when connected to paper cash, fiat money alludes to the startling thought that our dollar has esteem simply because the administration says it does. Preceding the coming of national banks and fiat monetary standards, which exist in each nation around the globe today, governments would make cash by setting their official stamp on little pieces of valuable metal, generally gold and silver, which came to be called coinage (McCauley, McGuire, & Sushko, 2015). Since gold and silver could simply be liquefied down to its centre metal substance, individuals didn't stress that their cash would turn out to be in a split second futile if the legislature collapsed. The monetary force wielded by a country was measured by the amount of gold and silver it had socked away in the national treasury. As overall stupidity beat the hundreds of years, political pioneers started to wander far abroad from this fiscal framework, aggregately alluded to as the "highest quality level," as paper cash started to show itself. Before long, somebody thought of the splendid thought of expanding the paper cash supply without putting any more gold or silver in the national treasury and inflation was
Inflation is one of the most powerful driving forces in today’s market. Excessive inflation can make a nation’s currency worthless while destroying public savings, Putting it in a state of financial ruin. Even more inflation, known as hyperinflation, results in shops having to change prices several times a day and trillion dollar notes, as in the case in Zimbabwe in the mid 2000s, whereas the other extreme, deflation, can ruin businesses and leave many unemployed. Because both can be highly destructive, much care must be taken to balance them both out so as to keep the economy healthy.
Inflation has been a problem for all of the world economies for many years causing a great deal of damage to stakeholders. Inflation is an increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service. As a result of inflation, the purchasing power of a unit of currency falls. For example, if the inflation rate is 2%, then a soft drink that costs $1 in a given year will cost $1.02 the next year. As goods and services require more money to purchase, the implicit value of that money falls. (Investopedia)
Monetary instability leads to large and unpredictable changes in the money supply whereby central banks attempt to monetize the debt through increasing interest rates which result in higher inflation. Inflation is the logical outcome of an expansion of the money supply in excess of real output growth. It also reflects erosion in the purchasing power of money – a loss of real value in the internal medium of
Domestic prices of goods and services and the general economic welfare of a country are affected by the openness of the economy. For example, when cheap goods and services are
The international trade of goods across the world accounts for approximately 60% of the world Gross Domestic Product (The World Bank, 2014). A great proportion of goods transactions occur every second. The primary question is whether international trade benefits a country as an entirety, and, if so, why would a country implement protective trade policies to restrict particular exports? To address this question, this essay aims to explore the impact of trade on various economic stakeholders, including consumers, producers, labour and government and, furthermore, will compare models and theories with reality to ascertain the true winner/ loser in the international trade market.
A number of frameworks have been introduced by the economists regarding the concept of Quantity Theory of Money. Ajuzie Immanuel, et.al. (2008) opines as “The concept of the Quantity Theory of Money (QTM) was introduced in the economic theory in the 16th century. Jean Boldin in his book reprinted in 1924 argued that the reasons for the rise in French prices were abundance of gold and silver, monopolies, scarcity, the pleasure of princes, and devaluation of the currency. He asserted that prices had increased higher than they were fifty years back in France. He was primarily interested in determining the causes of the price rise in France. According to Boldin, gold and silver were used as currency in France and due to the over use of such items prices had increased. It was one of the first statements that linked price movement to movements in money stock (Klein, 1970). He noted that the increase in the supply of gold and silver used as money caused an increase in demand for French goods, resulting in the increase of prices at home abroad. In the 1690s, John Locke developed monetary theory and elaborated the discussion by examining the effects of money on trade, the role of the demand for money, and the importance of interest rate on the economy. He believed that money is a medium of exchange in trade (Klein, 1970) and that the amount needed depended on the “quickness of circulation”, which we today refer to as “velocity” of