Wednesday, 19 October 2011

Economics note: International trade VI: Trading situation

To access the document version of this chapter of notes click the "Notes Corner" above.

Trading situation
1)       Globalization
Under economic aspect, globalization is the phenomenon of increasing international trade, goods and money flow among countries, due to the expansion of production line over countries (multinational corporations). Economical globalization is driven by:
-          Free trade policy, which attracts lots of investment.
-          Economic reform, especially changing from planned economy (closed/communist) to market economy (open/capitalism), which creates a large amount of job opportunities. The rapid economic growth attracts lots of foreign investment.
-          Advancement in transportation and communication technology reduces transport and transaction cost, diversifies the market, and promotes global sourcing.
As the international trades are mutually beneficial, international trade increases and different countries become more interdependent. At the same time, increased adoption of free trade policy promotes higher degree of globalization.
However, globalization also lead to several negative effects, including closing of some firms which can't compete with foreign goods (and creating unemployed labour force), and the exploitation of labour (income inequality), and exhausting natural resources much faster.
2)       Trading pattern of Hong Kong
Hong Kong relies on importing since Hong Kong lacks natural resources. External trades are important to Hong Kong, and the total traded value is even larger than the GDP. By external trade, foreign currencies can be earned and for further investment or reserve assets.
Trading patterns: the largest trading partner is mainland China; raw materials and capital goods are imported and re-exported. Hong Kong has been an important port for China. Hong Kong exports several goods especially in the light industry like textile, machinery, etc. Comparing with goods exported, services exported are more important, including merchandising, transportation service, travel services and financial services. Besides China, US, Japan and Taiwan are also major trading partners of Hong Kong.
Challenges faced by Hong Kong including the low negotiation power against trade barriers, trade performance linked to mainland's domestic export, competition from other countries including quality of services and rising production cost, etc. Trade and Industry Department, Oversea Hong Kong Economic and Trade Offices and Hong Kong Trade Development Council (HKTDC) supports the trading in Hong Kong.
3)       Economic growth VS Economic development
Economic growth can be easily measured by per capita real GDP, but economic development includes more consideration like income equality and literacy rate, etc.
per capita GDP measures the productivity per person in the economy, but the cost of living or price level is not taken into account. Then Purchasing power parity (PPP) can be used to compare the living quality between countries.
PPP exchange rate = domestic price of a given basket of goods and services in domestic currency / price of the same basket of goods and services in foreign currency. If the PPP exchange rate < official exchange rate, then it implies that every unit of domestic currency should trade for more foreign currency than the official one, then the domestic currency is undervalued. Oppositely it's called as overvalued. It can measure the living quality/economic growth in a better way as it takes the cost of living into accounts.
The economic development (the living standard/economic welfare) can be measured by Human Development Index (HDI), including the following criteria:
-          per capita GNP(PPP) as it's more suitable for international comparison of national income.
-          Life expectancy at birth reflects a population's health conditions/health care services.
-          Educational attainment (mean/expected years of schooling) since higher education level generally implies higher productivity and hence higher level of economic development.
Economic growth can be promoted by:
-          Increasing investment, including sacrificing current consumption for saving (deposited and banks can used them to invest), foreign investment/aids/loans.
-          Promoting free trade/free competitions that under competition, the quality rises.
-          Improving human capital, protecting property rights and upholding rule of law
-          Develop R&D; specialize in several industries (industrial policy).
4)       Cost of economic development
- Lost in current consumption due to increase in investment
- Pollution and environmental damage; exhaustion of natural resources
- Unemployment and uneven income distribution (capital accumulation)
- Economic instability leads to income instability, worsen the problem of unemployment, and hence the redistributive effect is larger, than the income inequality is worsen.
- Loss in political autonomy due to dependence on trading with foreign countries
Sustainable development is the development that satisfies the current needs without compromising the needs in the next generations, is a way to develop the economy in a better way, including:
- Producing environmentally products
- 4Rs (renew, reuse, refuse, recycle)
- Donating to environmental groups for researches
- Government: law enforcement on related field
5)       Economic growth in different region and economic corporations
-          Developing countries develops slower due to the law of diminishing marginal return, while developing countries has higher growth rate; economy in transition (from command to market economy) has instable growth.
-          Economical integration occurs across countries like ASEAN Free Trade Area in Asia, and EU economic union.
-          There are several international organizations promoting free trade and economic growth, like UN (and WTO), IMF, World Bank and APEC, PECC in Asia.

Yeahhhhhh Economics is finished! >w<

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