1. If current trends continue, China may emerge as the world's largest economy by 2020.

Discuss the possible implications of such a development for

(1) The world trading system.

(2) The world monetary system.

(3)The business strategy of today's European and U.S. based global corporations.

(4)Global commodity prices

Answer:

The world trading system would clearly be affected by such a development. Currently China enjoys a somewhat privileged status within the World Trade Organization as a ―developing country. Such a rise to eminence, however, would clearly force it to become a full and equal member, with all the rights and responsibilities. China would also be in a position to actively affect the terms of trade between many countries. On the monetary front, one would expect that China would have to have fully convertible and trading currency, and it could become one of the ―benchmark currencies of the world. From the perspective of Western global firms, China would represent both a huge market, and potentially the home base of some very capable competitors. Finally, commodity prices would probably fall.

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2. The world’s poorest countries are at a competitive disadvantage in every sector of their economies. They have little to export. They have no capital; their land is of poor quality; they often have too many people given available work opportunities; and they are poorly educated. Free trade cannot possibly be in the interests of such nations! Discuss.

Poor countries have no. of barriers for their national growth. Surrounding conditions make them more dependable upon other countries for their common needs.

Characteristics of Poor Countries

Low capital: Industries are not developed. Less investor is available. Source of income of citizens of poor countries are limited. They have less manufacturing units. Resources of country are underdeveloped or no developed: Roads, Electricity, transports, etc. are not developed. That’s why setting up organization or doing investment is risky factors. Literacy Rate is low: Less people are educated thus we found less skilled labors. But at present stage both skilled and unskilled labor are necessary for using good technology and production.

Raw Materials Unavailability: Raw materials are less available or unavailable. It may be gathered from distance sources that incur high expenses. Poor infrastructure for production of product & services: Due to undeveloped mode of every sector , Production infrastructure is not suitable. Markets are not available: Market for products are not available. People want low cost product because they have less sources of income. Customers are less available for good products: High quality products are costly. They are not beared by customers because their purchasing power is low. More dependent families: Less people earn and more people want to consume. It means more people are dependent upon income generating members. Lands are not suitable for agriculture: Lands are mostly barren due to poor irrigation system, mismanagement of water, unavailability of modern agriculture methods application and tools, etc. People depend upon still upon ancient irrigation system. Cheap labors are available: Labors are easily available at low costs but they are mostly unskilled. So they are useless in technical works or in high rated projects.

Poor Technological Development: Due to poor infrastructure of R&D and unskilled employees, technological innovations may not possible and even tuff task. Natural Disaster are bane: In the time of flood, earthquake, Tsunami, Draught, etc. People are becoming helpless. Because they have not good rescue system and disaster control systems available. Industries are also feeling insecure due to heavy losses. Poor Health sector: well in case of infection or viral desease they have no good health services available so the infection of deseases are become high. Death rates increase. E.g. African countries are badly affected with such cases. Most of the time they depend upon UNO, WHO or other countries for help. Dirty Political structure & corruption rate is high: Mostly in these countries, Rich persons dominate the politics. They exploit poor for their own interests. For every work bribes are required Cross cultural

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Barriers: Due to different language and culture, Business adaptability in these countries are tuff. Less persons know international languages. Economic development is low: It leads nation growth is low. GDP and per capita income are also low. Also the value of currency in these countries is low. Judiciary or Legal procedures are so complex: Industries feel so uncomfortable due to lengthy legal procedures and sanctions. Export are less : Due to low production exports are less found but in other hand imports are more because they are more depend upon neighbor countries for their needs.

Free trade is not possible: Custom duties, taxes and other charges are main source of income for country. They import products from different countries and impose heavy duties upon them. That’s why free trade is not possible. Complex international trade procedures: These countries make complex their procedures and documentation to charge more duties from foreign countries. That is not favorable for liberalization and globalization for international trade. Product costs are high: Due to heavy custom duties, unavailability of raw materials and poor resources condition like transport add extra expense. Thus final price of product become so high. That is not affordable for majority of customers. HDI is low and poverty index is high: On that case. We found that Human development index of these countries are so low and poverty index are high.

Findings : Poor countries have no. of barriers for their national growth. Surrounding conditions make them more dependable upon other countries for their common needs. I have tried to adjudge through the characteristics and circumstances of these poor countries. Their conditions are more critical in the time of natural disasters or epidemics. All the time they are depending upon international blocks like UNO, WHO, World Bank, etc. These countries national debts are so high and value of currency is so low. It has been gained that free trade is not possible in these countries due to these countries interest and legal difficulties generated by these countries for their own profits. These circumstances make their life more critical because people are unable to fulfill their needs due to high prices of products. That’s why we found death rates are high in these countries and living conditions of people are so low standard. That’s why high price products like cars, lifts, etc. are less sold in these countries.

Conclusion : Poor countries are still live in the old periods we can say due to their problems. Their ways and concepts are old for business. They have no choices of free trade that’s why they impose heavy duties upon imports of products. But their impacts are vice-versa upon these countries people. Because that make more inability of persons while purchasing products due to high prices. Human resources have been exploited or treated unfairly by giving low compensations and facilities. It is the matter of discontentment among employees. Peoples have been exploited by bureaucrats, politicians and wealthy persons of these countries. Criime rate is high and legal system is not much accountable. That leads to insecurity of firms, warehouses, offices and other properties and goods of organization. Outdated products are still in emerging stages in these countries. So this is a good factor in case of import in these countries. Due to less market presence and less customers availabiity for their products and services. Due to Poor resources, low infrastructure, not favorable business environment and high custom duties & complexities of procedures in these countries, foreign firms and investors are not willing to expand their trade and doing investment in these countries.

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Q3. Compare and contrast these explanations of horizontal FDI: the market imperfections approach, Vernon’s product life cycle theory, and Knickerbocker’s theory of FDI. Which theory do you think offers the best explanation of the historical pattern of horizontal FDI? Why?

Internalization theory seeks to explain why firms often prefer foreign direct investment to licensing as a strategy for entering foreign markets. According to internationalization theory, licensing has three major drawbacks as a strategy for exploiting foreign market opportunities: licensing may result in a firm giving away proprietary technology, licensing does not permit a firm to maintain tight control over its activities, and licensing is not appropriate when a firm’s competitive advantage is based not so much on its products as on the management, marketing, and manufacturing capabilities that produce those products. Vernon’s product life cycle theory argues that firms undertake FDI at particular stages in the life cycle of a product they have pioneered. They invest in other advanced countries when local demand in those countries grows large enough to support local production. They subsequently shift production to developing countries when product standardization and market saturation give rise to price competition and cost pressures. Investment in developing countries, where labor costs are lower, is seen as the best way to reduce costs.

Finally, Knickerbocker’s theory of FDI suggests that firms follow their domestic competitors overseas. This theory had been developed with regard to oligopolistic industries. Imitative behavior can take many forms in an oligopoly, including FDI

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Q4. Suppose that AFTA(ASEAN free trade area) is expanded to include China. This will increase both Malaysian imports of land-intensive and labor-intensive China’s products and China’s imports of capital-intensive Malaysian products. Discuss the short-run and long-run effects this would have on land rents, wages, and payments to capital in Malaysia.

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Q5. What forces determine whether a country can maintain its debt/GDP ratio at some sustainable level? How would a rise in real interest rates affect a country’s international debt and its debt/GDP ratio? What would a nation have to do to maintain its debt/GDP ratio under these conditions? Use the Iceland case study to illustrate your answers.

Americans may remember that at the start of the 2008 financial crisis, Iceland literally went bankrupt. The reasons were mentioned only in passing, and since then, this little-known member of the European Union fell back into oblivion.”

In 2003 Iceland’s debt was equal to 200 times its GNP, but in 2007, it was 900 percent. The 2008 world financial crisis was the coup de grace. To set this straight, Iceland’s debt (as in The Central Bank) was equal to 57% of the GDP in 2003 and fell to 43% of the GDP in 2007, according to World Bank [and DataMarket] statistics. In 2009, that percentage reached 104%. Now, if by Iceland the author meant Iceland’s banks, then it’s true that the banks’ debt was pretty big—astronomical really—and by 2007, Iceland’s banks did in fact reach 9 times the GDP, though that’s GDP not GNP.

Then there’s this: “The three main Icelandic banks, Landbanki, Kapthing and Glitnir, went belly up and were nationalized, while the Kroner lost 85% of its value with respect to the Euro. At the end of the year Iceland declared bankruptcy.” Again the statement, “At the end of the year Iceland declared bankruptcy” is wrong. And the Icelandic krónur lost more like 50% of its value compared to the Euro any way you look at it. “Contrary to what could be expected, the crisis resulted in Icelanders recovering their sovereign rights, through a process of direct participatory democracy that eventually led to a new Constitution. But only after much pain.”

Then it says: “Geir Haarde, the Prime Minister of a Social Democratic coalition government, negotiated a two million one hundred thousand dollar loan, to which the Nordic countries added another two and a half million. But the foreign financial community pressured Iceland to impose drastic measures. The FMI and the European Union wanted to take over its debt, claiming this was the only way for the country to pay back Holland and Great Britain, who had promised to reimburse their citizens.”

The constituent’s meetings are streamed on-line, and citizens can send their comments and suggestions, witnessing the document as it takes shape. The constitution that eventually emerges from this participatory democratic process will be submitted to parliament for approval after the next elections.”

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Refusing to bow to foreign interests, that small country stated loud and clear that the people are sovereign.”

First of all, it’s naive to think that Iceland was able to stand up to the IMF. With the IMF providing emergency currency support, it has had influence in diverting Icelandic resources back toward the financial sector. If Iceland had refused to share the IMF's worldview, it could have been denied funds necessary to implement capital controls and stop the Krona's tailspin. Failure to adhere to the IMF's demands could have also caused Iceland's sovereign credit rating to drop significantly, which could have isolated Iceland from international capital markets (despite the fact that credit ratings agencies, in the wake of 2008, are in need of urgent reform).”

Whether or not influenced by the IMF, one might note that two of the three banks that Iceland “let fail” because it couldn’t bail them out (they were nine times the country’s GDP), have been re-privatised and there is currently a debate about privatising the third. Not to mention, there’s the case of HS Orka, in which 98 percent of a publically owned geothermal energy company was sold to Canadian company Magma Energy (now called ‘Alterra Power’), giving it access to geothermal energy in the Reykjanesbær peninsula for 65 years with a renewal option for another 65. Furthermore, while Iceland may seem like a symbol of sticking it to the financial institutions that brought about the financial collapse, the people really haven’t escaped the burden. According to an OECD report Iceland has put more money into its failed financial institutions than any other country except Ireland. So in this way Iceland is not a model—the people in Spain need not wave Icelandic flags.In some places Iceland is held up as being a model of how to survive an economic crisis and rebuild society. For most Icelanders this seems totally wrong.

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Q6. The global economic crisis has shattered two articles of faith in standard economic theory: that human beings usually make rational decisions and that the market’s invisible hand serves as a trustworthy corrective to imbalance.

Do we need to replace these and other assumptions and adopt a new approach?Provide some examples from the market place. Refer to the case study on the “End of Rational Economics”.

Q7. Although the global market system generates enormous benefit to the world population, the benefits of growth will not be evenly spread across countries or within countries, and collateral damage to the environment will be significant. Scarce resources will be consumed, and the world’s climate will continue to change. How should we view these challenges? Can they be dealt with through standard operating procedures, or do they represent potentially major threats to continued global growth or even to market capitalism itself?

Q8. Discuss the product cycle theory as an explanation for why comparative advantage in knowledge-intensive products shifts rapidly.

THE PRODUCT LIFE CYCLE THEORY

A) Raymond Vernon initially proposed the product life-cycle theory in the mid-1960s. According to the theory as products mature both the location of sales and the optimal production location will change affecting the flow and direction of trade.

B) According to Vernon, early in the life cycle of a typical new product, while demand is starting to grow in the United States, demand in other advanced countries is limited to high-income groups. The limited initial demand in other advanced countries does not make it worthwhile for firms in those countries to start producing the new product, but it does necessitate some exports from the United States to those countries. Over time, however, demand for the new product starts to grow in other advanced countries. As it does, it becomes beneficial for foreign producers to being producing for their home markets. In addition, U.S. firms might set up production facilities in those advanced countries where demand is growing. Consequently, production within other advanced countries begins to limit the potential for exports from the United States.

C) As the market in the United States and other advanced nations matures, the product becomes more standardized, and price becomes the main competitive weapon. One result is that producers based in advanced countries where labor costs are lower than the United States might now be able to export to the United States.

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D) If cost pressures become intense, the process might not stop there. The cycle by which the United States lost its advantage to other advanced countries might be repeated once more as developing countries begin to acquire a production advantage over advanced countries.

E) The consequences of these trends for the pattern of world trade is that the United States switches from being an exporter of the product to an importer of the product as production becomes more concentrated in lower-cost foreign locations.

Evaluating the Product Life Cycle Theory

F) While the product life cycle theory accurately explains what has happened for products like photocopiers and a number of other high technology products developed in the United States in the 1960s and 1970s, the increasing globalization and integration of the world economy has made this theory less valid in today's world.

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