Running head: INTERNATIONAL ECONOMICS 1

INTERNATIONAL ECONOMICS 2

International Economics. Part 2

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International Economics. Part 2

Regional trading agreement is a treaty through which member countries accord preferred remedies to another country in respect to the trading blocks or grouping of member countries formed by same objective of reducing barriers to the trade between member countries. They have many effects on the international trade leaving many countries to move forwards in the trade freely at their own risk and benefits. Regional trading agreements have both trade creation and trade diversion effects. For example, trade creation by regional trading agreements favors more efficient country producer of the product than less efficient country producer thereby raising returns to the capital of that economy. Trade diversion is diverted from a more efficient supplier outside the regional trading countries, towards a less efficient supplier within the regional trading agreements. Most regional trading agreements weaken the opponents of trade liberalization promoting multilateral trade liberalization. Increased regionalism is dangerous as it leads to the inter block trade wars and domination of small countries by bigger partners in the multilateral trade regime. Most preferential regional agreements result to lack of transparency in the global trading system and trade discrimination in trading systems.

The role of major international trade is international trades promotion of peaceful position among states due to increasing interactions among traders and consumers. It promotes a sense of international community that reduces member countries conflicts and tensions. It promotes goods and services surplus to the less productive member country in exchange of goods and services. International trade promotes economic growth through revenue generation as member countrys trade in goods and services. It also increases quality of goods and services produced because of increased international competition. International trade promotes innovation and industrialization as both traders and consumers learn from more developed countries. It promotes division of labor as many employees work at their talents to suit them.

International trade promotes an opportunity for the goods and services to reach the national markets buyers and sellers via barter trade. Producers and consumers can sell and buy goods produced not only in their local markets but can also strive to compete in the markets situated in other countries of the world. International trade assists the buyers and sellers to import goods and services produced in the other country as a way of increasing the choice and variety of goods and services beyond what is locally produced.

International financial institutions are formal international agencies that operate across the countries boundaries. They help to increase entrepreneurship and foster trade within international markets. They create the largest sources of funding to the developing countries to increase economic growth and facilitate development. For example, the International Monetary Fund and The World Trade Organization aim to foster global monetary cooperation to their one hundred and eighty-seven countries members to promote international trade. It maintains business stability by giving member countries long and short term debts. It also promotes high employment rate to reduce poverty among citizens of member states and sustainable economic growth. Another example is commercial banks that offer loans to the firms that they use to buy goods and services and expand business operations. It also serves as payment agents within a country and between states to promote international trade to increase revenue formation.

The multinational firm has definite kinds of merits that differentiate it from purely domestic firms. These are firms of the most prevalent types of firms in the world economy. Multinational firms are the ones with assets or employees in more than one country. They own most of the technology in the world. They are becoming more important, according to the global economy size, three times as important today as twenty years ago. Managing multinational enterprises requires a skilled set of conceptual equipment than in the case of purely local firms. In particular, it is important to oversee the economic factors affecting the strategic management of multinational firms.

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For example, a firm may experience unexpected high labor and raw material cost due to inflation in a foreign country. High labor cost affects an enormous capital of a business. Also, production of goods and services in a foreign market may be undesirable in the presence of protectionist barriers, such as high transportation costs of raw materials and products in the market. Also, unfavorable currency exchange rate that shifts now and then making selling of products and services from the home country unfeasible or unprofitable. Firms may also face an economic stress due to possession of intangible assets, such as brands and other firms specific skills that make licensing an insecure option because the licensee might misappropriate, damage or misuse the firms assets. Decision is to make the firms follow each other to international locations once one of them makes the first move that results to a permanent loss in competitors. Firms may suffer from complicated foreign tax credit regime, resulting from international taxes paid on the same income.

Exchange rates refer to the rate, at which one good, service or currency is exchanged for another. It is determined in the foreign exchange market through supply and demand curves. Exchange rate is derived from intersection of supply and demand curve with commodity, service or currency. These markets are open to a variety of buyers and sellers, where currency, goods and services are continuously traded for twenty-four hours a day except weekends. Buyers and sellers are free to buy without government intervention. Buyers and sellers use terms, such as spot exchange rate to mean current exchange rate. Forward exchange rate means an exchange rate that is rated and used in the market through payments on a specific future date.

There are three types of exchange rate mechanisms. The first one is the floating exchange rate, where buyers and sellers trade freely without intervention by governments or central banks. Also, exchange rate changes from time to time due to the market supply and demand curve and currency value fluctuates according to the foreign exchange markets prevailing conditions. Second is the fixed exchange rate that was used from early 1900 to 1970. Officials used it to keep the exchange rate constant even if the rate was not the equilibrium rate. Value of a currency was fixed to another fixed amount of commodity or currency using gold. The last one is the managed exchange rate that solves shortcomings for floating and fixed exchange rate mechanisms. Central bank places influence on the exchange rate that would otherwise be freely floating.

Foreign exchange markets refer to buying and selling of money from one country to another. They comprise of the buyers and sellers who buy and sell currencies from different countries. Foreign exchange markets have the following roles: they affect transfer of purchasing power between countries through conversion of one currency to another; for example, conversion of one currency to another for payment of export and import goods and services. Foreign exchange rate facilitates international payments by clearing debts in both countries and analogous to domestic clearings. Foreign exchange market provides credits to individuals or firms to facilitate for international trade. Lastly, foreign exchange rate furnishes facilities for hedging foreign exchange risks. Fluctuation of one currency over the other could lead to gain or loss, when huge amounts of net claims are to be met in foreign currency.

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