Monetary and Fiscal policy
Monetary and fiscal policies are policies of the central bank and the government. The policies are utilized by the two organs for maintaining economic stability in the country through maintenance of low inflation and positive economic growth. The monetary and fiscal policies are used to reduce cyclical fluctuations that affect the economy. At mot times, the policies target at maintaining low inflation in the economy.
According to Hall and Lieberman, the government implements the fiscal policy through the change of government expenditures and taxation regulations (325). Through these changes, the government budget position is shifted. A fiscal policy can be either expansionary or contractionary. An expansionary fiscal policy involves an increase in the expenditures made by the state and the reduction in taxes.
Monetary policy on the contrary involves the changes in the fluctuations in the supply and demand of money. The main tool the central bank utilizes in meeting the objectives of the monetary policy is the interest rate. A fiscal policy can be designed and implemented to affect the economy positively leading to economic growth. This is possible through increased government expenditure and reduction in the taxes charged on individuals and business. An expansionary fiscal policy is not always pursued because of the intended objectives. Instead, a contractionary fiscal policy could be used.
It is possible to conduct international trade because of the availability of exchange rates. The rates necessitate the switching form one currency to another hence swapping of goods. There are various exchange rate regimes. The exchange rate determines the level of international trade, investment, capital flow and the level of economic growth in an economy. A floating exchange rate is the one that is left to fluctuate freely based on the forces of supply and demand of currencies. On the contrary, the fixed exchange rate is usually fixed by the central bank (Hall, Robert and Lieberman 328).
Both monetary and fiscal policies are applied in any exchange regime. However, the outcome may differ. In spite of the differences, the objectives still hold. The application of an expansionary monetary policy under a floating exchange rate such as an increase in money supply leads to an increase in the real exchange rate hence an increase in the GNP. A contractionary monetary policy on the contrary would result in reduced GNP, exchange rates and a decrease in the current account.
The use of a fiscal policy in a floating exchange rate regime leads to an increase in the GNP of a country and an increase in the real interest rates hence an increase in the capital inflow. A fiscal policy would increase the disposable income and a decline in the current account. On the contrary, a contractionary fiscal policy would cause an increase in exchange rate and reduced GNP.
The application of an expansionary monetary policy to a fixed exchange rate regime would result in no change. This is because the exchange rate will not be affected and there would be no effect on the GNP. The economy returns to the original equilibrium hence lack if changes on the current account. Similarly, a contractionary fiscal policy will not have any impact on the economy and exchanges rate. The application of an expansionary fiscal policy in a pegged regime could lead to various results that may include a rise in the GNP realized by an economy. in the short term, the exchange rate is not affected because it is fixed.
An expansionary fiscal policy caused by increased expenditure can lead to reduced current account balance. On the contrary, a contractionary fiscal policy in a fixed regime results in reduced GNP with exchange rates remaining the same. Given these two exchange rate regimes, a floating exchange rate regime is favorable since it leads to increased interest rates, exchange rates and capital mobility. Therefore, the regime is favorable for international trade. In addition, the regime provides an enabling environment suit well the application of a monetary policy hence its utilization by many countries. The monetary policy is more productive in the regime than in the fiscal regime.
The business environment experiences cycles. The cycles occur in different periods. Some of the cycles include the boom, recession, depression and lastly growth. A recession is a cycle that occurs immediately after a boom. It is characterized by negative economic growth. Various financial crises have occurred in different period in history. The latest crisis was the 2008 global financial crisis that began in the U.S. the crisis began by the mortgage market experiencing issues. The mortgage sector realized a boom and increased house prices. The prices of houses began to increase sometimes back and gradually developed into a bubble (Kolb 26).
The profitability in the real sector led to increased borrowing from banks. Commercial banks that were characterized by poor credit policies could not limit giving loans to borrowers. After the bursting of the bubble in the real sector, the borrowers could not obtain funds for repaying the loans. The banks could also not secure a repayment of their loans. They ran out of credit that could be used to lend to other borrowers hence the credit crunch. Given the situation, depositors feared depositing in banks due to future uncertainties. Banks ran out of credit leading to their insolvency. Investment activities reduced due to lack of credit and uncertainties. The overall effect is reduced economic activities and negative economic growth (Kolb 35).
The global financial crisis led to the integration of international capital markets because there was increased borrowing in many developed countries. Some oil exporting countries realized current account surpluses. The central banks came in to aid bankrupt banks while some banks went insolvent. Thus, economic activities in many countries such as Ireland, South East Asia and Mexico required external help to deal with the crisis.
Any developing country cannot overcome the above donations. This is because most of the developing economies are financed by developed economies. The credit policies of developing economies are based on the credit policies of developed economies. Developed economies act as role models for developing countries. Therefore, almost everything is almost similar to developed countries. Given that developed can succumb to the crisis it is therefore possible that developing countries will suffer worse than developed countries. Therefore, developing nations are not able to overcome the current crisis or any similar crisis in future (59).
In order to overcome global financial crises, developing countries need to undertake credit policy reforms of the commercial banks and financial markets. Tight credit policies for banks will serve to scrutinize the credibility of borrowers before lending them capital. For financial markets, there is need for their scrutiny and supervision rather than leaving them to operate freely on their own.
U.S Export Subsidies
International trade is the trade that occurs between different countries on the world. International trade has been increasing especially in the modern global economy due to advanced technology. International trade is necessary due to the scarcity of economic resources. According to Deardorff & Robert, different countries are endowed with different resources (51). The theory of comparative advantage is the basis for international trade (Dee and Hanslow 72). The theory postulates that countries engage in international trade because of the comparative advantage caused by opportunity cost.
International trade enables countries to sustain their economies since they are not able to do so independently. In spite of the ability of the benefits accrued from international trade, the trade can negatively affect an economy. For instance, some countries could export cheap substandard products leading to undermining of another country’s exports. Due to this, trade barriers are put in place to restrict trade and protect the domestic export industry.
The U.S is one of the many countries that have utilized trade restriction to protect its domestic export industry. Restriction can be informed of tariffs, quotas, subsidies and embargoes. The U.S has applied subsidies in its agricultural sector to encourage domestic exports. One of the major destinations of the U.S agricultural exports is in the EU. The high exports of the U.S agricultural sector are met with more protectionist measures from the EU.
According to Dee and Hanslow, the EU has many policies that restrict free trade between EU and other countries in the world. The global economic recession led to many countries tightening their import protection measures. The EU has several measures including tariffs and quotas in place. As the U.S encourages domestic agricultural production, the EU is protecting the domestic agricultural industry through increased protection. The strategy employed by the U.S raises many questions since it the country is forced to export less agricultural exports to EU than before.
The U.S has imposed more import barriers on steel and tire imports. According to Deardorff and Stern, the president determines the import barriers (103). The endorsement of the import barriers on steel and tires and a further possibility of imposing more barriers to Chinese imports could lead to issues to the U.S exports. Dee and Hanslow note that the protection policies endorsed by the Bush administration in 2001-2002 sparked increased protectionism across the globe (211). He notes that if the Obama administration endorses these import barriers today, the U.S will suffer since the strategy will fail.
The strategy would fail because the U.S utilizes subsidies to encourage exporters and increase exports. Protectionism would spark global reactions through increased import barriers from other countries in the world. Since its exports are high, the country would lack an export destination and most of the products could end up in the U.S markets. A further endorsement of barriers on Chinese imports would worsen the situation. Therefore, this strategy will not work perfectly for the U.S because it would be against its policy of free trade, hence leading to increased protectionism.
Resource mobility is an important engine for the success of globalization concept. Resource mobility is the possibility of shifting labor or capital from one nation or firm to another. With the increasing globalization, there is desire to move labor and capital resources from one geographical region to another. Resources may be shifted from one region where their production might not bring impressive results to regions where they can be more productive.
From an economic point of view, capital is considered as less mobile than labor (Krugman 78). This is because capital investments may involve venturing in heavy capital equipments that may not be easy to move from one geographical region to another. However, this does not mean the capital is immobile since less developing nations have depended on capital equipments and other goods to facilitate their production of goods and services.
The capital mobility has helped many nations extricate themselves from the poverty strings since the capital finances help in establishment of development projects that are income generating especially in less developing nations.
When it comes to labor mobility, there has been increased movement of labor force from one region to another. This has been enhanced by the international human resource that provides an avenue for the movement of personnel all over the world without any restrictions. Labor mobility has facilitated the transfer of knowledge and expertise among several nations of the world (Smith 278). People as long as they are qualified may work everywhere and this has been enhanced by the removal of restrictions of movement of people. Some countries like Canada have come up with relocation policies that can allow people willing to work in the country to relocate even with their own families and secure a permanent residency.
Despite the importance attached to the labor and capital mobility in enhancing the international development and integration, there are obstructions that are rendering their efficiencies. The process of labor mobility has not been fair enough to give all nations equal opportunities to enjoy the benefits. An example of group of countries that have formed an association to enjoy the labor mobility is Gulf Cooperation Council (GCC) in Asia.
This GCC comprises of six countries that have established common laws governing the treatment of employees working in the particular region while establishing other policies that are somehow discriminating the expatriates working in the region. The resource mobility is not being utilized properly in an international scope since all the countries should be subject to common labor laws (Krugman 114) through this one way. The other obstruction that is facing the resource mobility is the restrictions being imposed by some countries especially advanced nations against their counterparts in developing nations concerning the formal qualifications before they move to such countries and work there.
Russia is the eleventh largest economy in the world. Its economic strength can be attributed to huge mineral reserves including natural gas and oil (Krugman 101). The country is also a major exporter of ammunitions to many countries of the world. These two have made the country prosper in pursue of economic development and progress. In addition, the country has been successful in agricultural activities together with fishing and other economic activities. Despite the substantial progress, the nation’s future economic status maybe compromised by some forces and changes that are taking place in the modern world.
In the past, Russia has relied much on export of ammunitions and weapons to boost its economic stability. These exports contribute very much in the country’s GDP thus making the nation’s economy one of the largest in the world. The demand for weapons and ammunitions has been declining to large extend. This is due to improved international peace and harmonization of international relations thus reducing the international conflicts (Smith 225).
The other major reason for the decline of such items is the increased fight against terrorism and fights against establishment of nuclear plants for instance the recent attacks of Iraq that had been a major customer for RUSSIA. These weapons are no longer in high demand since peace is being advocated all over the world.
The other major economic boost is oil and natural gas. It is anticipated that one time in future, these resources are likely to be depleted and the oil producing countries like RUSSIA might be in dilemma. This might be a major economic shock for the country since the country’s present wealth is attributed to its oil reserves thus forming the country’s major exports. Oil has made the nation one of the most powerful nations in the world and therefore despite the future expected decline in economic performance, the country’s power influence might be at stake. Considering that the current world depends on country’s power strength, its future instability might be an advantage to the emerging nations of the world (Krugman 101).
Even without the depletion of the oil reserves, the oil exporting nations are facing a very dangerous threat due to fluctuating oil prices. The prices of oils are unpredictable as they keep on moving up and down. When the prices are low, the oil exporting nations suffer to a large extend and it amounts to loss to the nations involved.
The improvement in technology has created substitutes for the oils and natural gas (Krugman 57). Some nations like Brazil have come up with technologies that enable them to produce energy that was initially being produced using oil. In addition, they are in the process of manufacturing vehicles that are no longer requiring oil to operate. If this continued trend is going to become a success, it is expected that the demand for oil may diminish in the next few years that posing a severe risk to those economies that rely on oil as the main exports.
The trouble for oil demand is being created all over the world since even the developing nations are coming up with alternative energy resources for example establishment of geothermal power stations that are capable of producing huge number of megawatts at a given time. This will not only threaten the economic stability of China but also other oil dependent nations (Smith 94). The future situation of Russia will have adverse effects on consumers, government and investors.
The government will be faced with problems of getting alternative funds to finance RUSSIA’s huge budget. This may not be possible considering that RUSSIA has few alternative sources of funds rather than funds from oil and weapons exports. The investors will be affected since the investment costs may be higher due to oil shortages.
Globalization is the escalating unification of the global economic order through elimination of possible barriers that may hinder international trade such as tariffs, import quotas and any other trade restrictions (Smith 67). Globalization describes a comprehensive process through which national economies and societies undergo integration through modern and advanced infrastructure such as transport and communication.
Globalization is driven by numerous forces and factors including but not limited to social, technological, economical and environmental factors (Stiglitz 123). In the recent past, globalization has had a substantial impact on those countries, which have adopted the concept and utilized the opportunities coming along with it. The concept can still be linked to economic integration. The integration of regional economies into a single global economy through business activities, capital flows, migration and improved technology. Through globalization, countries are able to conduct trading activities across the globe without any restrictions and there is creation of efficiencies in the manner in which these businesses are carried out.
Globalization has triggered many economic and business aspects for instance competition. Due to reduction of restrictions with regard to trade, many countries are able extend their business activities to regions where there are potential trading prospects. That means that the strong nations in terms of trade are able to exploit the opportunities in other countries that are unable to utilize their resources in their home countries.
There is flow of knowledge and expertise among the nations thereby disseminating the crucial ingredients that can propel the economic growth and development. The impacts of globalization are so numerous. Viewed from an industrial perspective, globalization has led to the emergence of global production markets that facilitate the production of goods that some countries are not able to produce due to comparative advantage and thus the less deficiency nations have the access to such goods (Stiglitz 125). International trade too has led to the movement of goods and in particular capital goods from the advanced nations to the developing countries.
Viewed from a financial perspective, the international financial markets have developed that facilitates the movement of capital and development funds from one nation to another. This has too led to the creation of some special economic blocs by nations that have adopted common currencies to harmonize their trading activities.
The nations that are likely to benefit from the globalization are those ones that have put in place institutional frameworks that may provide an avenue conducive for foreign investors to carry out business activities in the specific nations (Smith 94). The countries’ foreign relations with other nations are also a determinant of the prosperity of globalization and those nations with desirable foreign relations are likely to benefit.
However, globalization seems to be favoring advanced nations due to the possession of adequate resources and in particular financial resources. They are in a position to invest immensely in the countries where there are investment opportunities. In the next 25 years, the advanced nations are the ones that are likely to have gone far because of globalization. They are in possession of a lot and valuable information that is very crucial for the utilization of the concept. In addition, these countries’ policies are designed to enrich themselves at the expense of the poor even when international integration has been advocated.
Deardorff, Alan and Stern Robert. Measurement of Nontariff Barriers. Michigan: University of Michigan Press. 1989.
Dee, Philippa and Hanslow Kevin. Multilateral Liberalization of Services Trade, in Stern Robert M. (ed.), Services in the International Economy, Michigan: University of Michigan Press. 2000.
Hall, Robert and Lieberman Marc. Macroeconomics: principles and Applications. Florence, KY: Cengage Learning. 2007.
Kolb, Robert. Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future. New York, NY: John Willey & Sons. 2010.
Krugman, Paul. International economics. NewYork, NY: Prentice Hall, 2011.
Smith, Charles. International trade and globalization, 3rd edition. Stocksfield: Anforme, 2007.
Stiglitz, Joseph. Making Globalization Work. New York: W.W. Norton, 2006.