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Economics example exam paper answears: World Exports have increased over 2 1/2 times since 1985. Discuss with reference to questions 1 to 4.

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Introduction

World Exports have increased over 2 1/2 times since 1985. a) How might this increase in world trade be explained? (40marks) Trade is where people exchange products, either directly through a barrier or indirectly through the medium of money, in hope of achieving mutual advantage (Comparative advantage which in turn leads to opportunity cost) Trade therefore allows a country to consume beyond its PPF. The greater the gradient of it's trading line,the greater the gains from trade to the countries concerned. Another way to emphasize the significance of trade is to show the welfare gain of going from no trade to free trade. This diagram shows no external trade allowed. DH and DS represent domestic demand and supply curves respectively. The price will initially stay at P1 and equilibrium quantity at Q1. Suppose that trade becomes possible and the good can be imported at the world price PW. There will be a gain of consumer surplus in areas A+B+C and a loss of producer surplus of A, implying a net welfare gain of area B+C. The fact that gains are made proves an incentive for world trade to take place, therefore globalization grows from strength to strength. The process of trade allows the specialization of function, the division of labour and economies of scale to increase output per unit of input and expand that variety of consumer products. ...read more.

Middle

This is also due to technological advances. In respect to technological advances, capital markets are an example of globalization. The significant decline of information and communication costs has been increasingly important to financial services. It is due to the 'technology boom' that capital flows have been widely liberalized. Cheap flights is an example of a technological advance and increased competition between competing airline companies. This increases the incentive for domestic home owners to travel abroad and take advantage of these cheap flights. The fact that forgeign airline companies are based within the UK, for example, is a form of international competitiveness/globalization. With people's disposable income ever increasing as well as living standards, people can now afford to take more holidays, hence increasing tourism and world awareness hence international trade/competitiveness increases in the airline industry. This is also useful as business' can afford to send workers abroad to make business deals or conquer new markets. This makes the process of becoming a multinational easier as communication is not impaired. In conclusion, the main factors which have lead to this increase since 1985 is the reduction in protectionism, trade barriers and the increase in trading blocs and technological advances. However, this may cause problems for third world countries to enter this market as they may not have the technology or the infrastructure to deal with this buoyant yet rough market where competition is extremely fierce. ...read more.

Conclusion

There will be both direct and indirect impact on financial markets. Actual as well as anticipated changes in economic activity, corporate earnings, inflation, and monetary policy following the oil price increases will affect equity and bond valuations, and currency exchange rates. Finally, depending on expected duration of price increases, the change in relative prices creates incentives for suppliers of energy to increase production (to the extent that there is scope for doing so) and investment, and for oil consumers to economize. However, the impact is somewhat larger for industrial countries than for developing countries as a group, particularly as regards domestic demand, largely due to terms-of-trade effects (as many developing countries are net oil exporters). However, the significant diversity across developing countries, in particular the mixture of oil exporters and importers, means that the impact on individual developing countries is often large. However, within these assumptions there are flaws. Firstly, one does not know the impact of higher oil prices on the other energy products, such as gas, which is a particularly important source of energy in the transition countries. Secondly, the impact of the rise in oil prices may be amplified if they exacerbate existing macroeconomic imbalances or lead to inappropriate policy responses, particularly in oil importing countries. Finally, depending on the culture within each country changes in consumer demand will differ, therefore it is difficult to make clear assumptions and predictions as to what may happen on an international scale. Rishika Lulla ...read more.

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