Role of Economics in Global Business Management: Submitted by

[Type the document title]
Role of Economics in Global Business Management

Submitted By:
Vivek Chaware - 23 Atul Gosavi -04 Nitin Jain-70 Aditya Pachpor-68 Nikita Madaan-36 Deepika Deshmukh-40 Akash Parande-57
MIT SCHOOL OF MANAGEMENT
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Introduction:
An economy consists of the economic system of a country or other area; the labour, capital and land resources; and the manufacturing, trade,
distribution, and consumption of goods and services of that area. An economy may also be described as a spatially limited and social network according a medium of
where goods and services are to demand and supply between
exchanged participants by barter or
exchange with a credit or debit value accepted within the network. A given economy is the end result of a process that involves its technological evolution, history and social organization, as well as its geography, natural resource endowment, and ecology, as main factors. These factors give context, content, and set the conditions and parameters in which an economy functions.
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Objectives:
1. To study what is economics 2. To study global business management 3. To study role of economics in global business management 4. To study how economics help in managing Global Business
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Contents:
1. What is economics? 2. How economy ruled different Eras 3. What is Global Business Management 4. Role of economics in GBM 5. GBM and Economics 6. Conclusion 7. Bibliography
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What is Economy?
The world economy, or global economy, generally refers to the economy, which is based on economies of all of the world'scountries, national economies. Also global economy can be seen as the economy of global society and national economies as economies of local societies, making the global one. It can be evaluated in various kind of ways. For instance, depending on the model used, the valuation that is arrived at can be represented in a certain currency, such as 2006 US dollars or 2005 Euros. It is inseparable from the geography and ecology of Earth, and is therefore somewhat of a misnomer, since, while definitions and representations of the "world economy" vary widely, they must at a minimum exclude any consideration of resources or value based outside of the Earth. For example, while attempts could be made to calculate the value of currently unexploited mining opportunities in unclaimed territory in Antarctica, the same
opportunities on Mars would not be considered a part of the world economy even if currently exploited in some wayand could be considered of latent value only in the same way as uncreated intellectual property, such as a previously unconceived invention. Beyond the minimum standard of concerning value in production, use, and exchange on the planet Earth, definitions, representations, models, and valuations of the world economy vary widely. It is common to limit questions of the world economy exclusively to human economic activity, and the world economy is typically judged in monetary terms, even in cases in which there is no efficient market to help valuate certain goods or services, or in cases in which a lack of independent research or
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government cooperation makes establishing figures difficult. Typical examples are illegal drugs and other black market goods, which by any standard are a part of the world economy, but for which there is by definition no legal market of any kind. However, even in cases in which there is a clear and efficient market to establish a monetary value, economists do not typically use the current or official exchange rate to translate the monetary units of this market into a single unit for the world economy, since exchange rates typically do not closely reflect worldwide value, for example in cases where the volume or price of transactions is closely regulated by the government.
How Economy Ruled the Different Eras:

1980 1990 - United States and Japan lead expansion At exchange rates, the economic output of 112 markets expanded by $10.7 trillion from 1980 to 1990. The economic output of 34 markets contracted by $276.9 billion from 1980 to 1990. The five largest contributors to global output contraction are Argentina at 24%, Saudi Arabia at 17%, Nigeria at
11%, Venezuela at 8%, and Vietnam at 8%. At purchasing power parity, the economic output of 145 markets expanded by $12.1 trillion from 1980 to 1990. The economic output of 2 markets contracted by $3.5 billion from 1980 to 1990. The two contributors to global output contraction are Lebanon at 70% and Libya at 30%. The following two tables are lists of twenty largest economies by incremental GDP from 1980 to 1990 by International Monetary Fund.
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[Type the document title] 1990 2000 - United States dominates expansion
At exchange rates, the economic output of 122 markets expanded by $10.7 trillion from 1990 to 2000. The economic output of 29 markets contracted by $94.2 billion from 1990 to 2000. The five largest contributors to global output contraction are Italy at 37%, Finland at 18%, Bulgaria at 9%, Algeria at 8%, and the Democratic Republic of Congo at 5%. At purchasing power parity, the economic output of 148 markets expanded by $16.9 trillion from 1990 to 2000. The economic output of 3 markets contracted by $17.8 billion from 1990 to 2000. The three contributors to global output contraction are Bulgaria at 64%, the Democratic Republic of Congo at 29% and Sierra Leone at 7%.
2000 2006 United States still leads, but China is catching up

At exchange rates, the economic output of 176 markets expanded by $17.4 trillion from 2000 to 2006. The five largest contributors to global output expansion are the United States at 20%, China at 9%, Germany at 6%, the United Kingdom at 6%, and France at 5%. The economic output of 4 markets contracted by $94.2 billion from 2000 to 2006. The three largest contributors to global output contraction are Japan at 80%, Argentina at 19%, and the Uruguay at 1%. At purchasing power parity, the economic output of 180 markets expanded by $19.2 trillion from 2000 to 2006. The five largest contributors to global output expansion are the United States at 18%, China at 17%, India at 6%, Japan at 5%, and Russia at 4%.
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[Type the document title] 2007 China leads expansion

The economic output by nominal GDP of 183 markets expanded by $6.4 trillion during 2007. China accounted for 12% while the United States accounted for 10%, Germany accounted for 6%, and the United Kingdom accounted for 6% of the global output expansion.
2008 credit crisis begins

The economic output of 171 markets expanded by $5.8 trillion during 2008. China accounted for one-sixth of the global output expansion. The economic output of 11 markets contracted by $267 billion during 2008. The United Kingdom accounted for one-half while South Korea accounted for two-fifth of the global output contraction. Though the crisis first affected most countries in 2008, it was not yet deep enough to reverse growth.
2009 Credit crisis spreads

At exchange rates, the economic output of 127 markets contracted by $4.1 trillion during 2009. The United Kingdom was the largest victim accounting for 12% while Russia accounted for 11% and Germany accounted for 8% of the global output contraction. The economic output of 56 markets expanded by $767.1 billion during 2009. China accounted for 61% while Japan accounted for 20% and Indonesia accounted for 4% of the global output expansion. At purchasing power parity, the economic output of 79 markets contracted by $1.4 trillion during 2009. The United States was the largest victim accounting for 18% while Japan accounted for 17% and Russia accounted for 10% of the global output contraction. The economic output of 104 markets expanded by $1.5 trillion during 2009. China accounted for 56% while India accounted for 17% and Indonesia accounted for 3% of the global output expansion.
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[Type the document title] 2010 recovery:

At exchange rates, the economic output of 148 markets expanded by $5.3 trillion during 2010. The five largest contributors to global output expansion are China at 17%, the United States at 10%, Brazil at 9%, Japan at 8%, and India at 5%. The economic output of 35 markets contracted by $338.5 billion during 2010. The five largest contributors to global output contraction are France at 22%, Italy at 18%, Spain at 17%, Venezuela at 10%,
and Germany at 7%. At purchasing power parity, the economic output of 169 markets expanded by $4.2 trillion during 2010. The five largest contributors to global output expansion are China at 25%, theUnited States at 13%, India at 10%, Japan at 5%, and Brazil at 4%. The economic output of 14 markets contracted by $17.8 billion during 2010. The five largest contributors to global output contraction are Greece at 67%, Venezuela at 19%, Romania at 5%, Haiti at 3%,
and Croatia at 2%. IMF's economic outlook for 2010 noted that banks faced a "wall" of maturing debt, which presents important risks for the normalization of credit conditions. There has been little progress in lengthening the maturity of their funding and, as a result, over $4 trillion in debt is due to be refinanced in the next 2 years. ` The following two tables are lists of twenty largest economies by incremental GDP from 2000 to 2010 by International Monetary Fund.
2010 2016 The BRICs lead economic growth.

At exchange rates, the economic output of the world is expected to expand by US$28.7 trillion, 20 trillion from 2010 to 2016.[11] At purchasing power parity, the economic output of 183 markets is expected to expand by US$29.1 trillion, 25 trillion from 2010 to 2016. The following two tables are predictive lists of
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forty largest economies by incremental GDP from 2010 to 2016 by International Monetary Fund.
Statistical indicators
Economy
GDP (GWP) (gross world product): (purchasing power parity exchange rates) $59.38 trillion (2005 est.), $51.48 trillion (2004), $23 trillion (2002) GDP (GWP) (gross world product):[15] (market exchange rates) $60.69 trillion (2008) GDP real growth rate: 3.2% (2008), 3.1% p.a. (200007), 2.4% p.a. (1990 99), 3.1% p.a. (198089) GDP per capita: purchasing power parity $9,300, 7,500 (2005 est.), $8,200, 6,800 (92) (2003), $7,900, 5,000 (2002) World median income: purchasing power parity $1,041, 950 (1993)[16] GDP composition by sector: agriculture: 4%; industry: 32%; services: 64% (2004 est.)
Inflation rate
(consumer
prices): developed
countries 1%
to
4%
typically; developing countries 5% to 60% typically; national inflation rates vary widely in individual cases, from declining prices
in Japan to hyperinflation in several Third World countries (2003)
Derivatives outstanding notional amount: $273 trillion, 200 trillion (end of June 2004), $84 trillion, DM 75 trillion (end-June 1998) ([12]) Global debt issuance: $5.187 trillion, 3 trillion (2004), $4.938 trillion, 3.98 trillion (2003), $3.938 trillion (2002) (Thomson Financial League Tables)
Global equity issuance: $505 billion, 450 billion (2004), $388 billion. 320 billion (2003), $319 billion, 250 trillion (2002) (Thomson Financial League Tables)
Employment
World GDP per capita between 15002003
GDP increase, 19901998 and 19902006, in major countries.
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Unemployment rate: 8.7% (2009 est.). 30% (2007 est.) combined unemployment and underemployment in many non-industrialized countries; developed countries typically 4%12% unemployment.
Industrial production growth rate: 3% (2002 est.
Energy
Yearly electricity production: 15,850,000 GWh (2003 est.), 14,850,000 GWh (2001 est.) Yearly electricity consumption: 14,280,000 GWh (2003 est.), 13,930,000 GWh (2001 est.) Oil production: 79,650,000 bbl/d (12,663,000 m3/d) (2003 est.), 75,460,000 barrels per day (11,997,000 m3/d) (2001) Oil consumption: 80,100,000 bbl/d (12,730,000 m3/d) (2003 est.), 76,210,000 barrels per day (12,116,000 m3/d) (2001) Oil proved reserves: 1.025 trillion barrel (163 km) (2001 est.) Natural gas production: 2,569 km (2001 est.) Natural gas consumption: 2,556 km (2001 est.) Natural gas proved reserves: 161,200 km (1 January 2002)
Cross-border

Yearly exports: $12.4 trillion, 8.75 trillion (2009 est.) Exports commodities: the whole range of industrial and agricultural goods and services Exports partners: US 12.7%, Germany 7.1%, China 6.2%, France 4.4%, Japan 4.2%, UK 4.1% (2008)

Yearly imports: $12.29 trillion, 9 trillion (2009 est.) Imports commodities: the whole range of industrial and agricultural goods and services Imports partners: China 10.3%, Germany 8.6%, US 8.1%, Japan 5% (2008) Debt external: $56.9 trillion, 40 trillion (31 December 2009 est.)
Gift economy
Yearly economic aid recipient: Official Development Assistance (ODA) $50 billion, 39.5 billion
Communications
Telephones main lines in use: 843,923,500 (2007) 4,263,367,600 (2008)

Telephones mobile cellular: 3,300,000,000 (Nov. 2007)[17] Internet Service Providers (ISPs): 10,350 (2000 est.) Internet users: 1,311,050,595 (January 18, 2008 [13] est.), 1,091,730,861 (December 30, 2006 [14] est.), 604,111,719 (2002 est.)
Transport
Transportation infrastructure worldwide includes:
Airports
Total: 49,973 (2004)
Roadways (in kilometres)


Total: 32,345,165 km Paved: 19,403,061 km Unpaved: 12,942,104 km (2002)
Railways
Total: 1,122,650 km includes about 190,000 to 195,000 km of electrified routes of which 147,760 km are in Europe, 24,509 km in the Far East, 11,050 km in Africa, 4,223 km in South America, and 4,160 km in North America.
Military expenditures dollar figure: aggregate real expenditure on arms worldwide in 1999 remained at approximately the 1998 level, about $750 billion, about 1/2 of which was the United States (1999)
Global Business
Ever wonder why food costs rise when gas prices spike? Ever question why U.S. politicians worry when other countries talk of going bankrupt? Ever wonder why you cant get a good interest rate on your savings account? All of these phenomena can be explained through economics. Economics is the study of the production and consumption of goods and the transfer of wealth to produce and obtain those goods. Economics explains how people interact within markets to get what they want or accomplish certain goals. Since economics is a driving force of human interaction, studying it often reveals why people and governments behave in particular ways. There are two main types of economics: macroeconomics and microeconomics. Microeconomics focuses on the actions of individuals and industries, like the dynamics between buyers and sellers, borrowers and lenders. Macroeconomics, on the other hand, takes a much broader view by analyzing the economic activity of an entire country or the international marketplace.

A study of economics can describe all aspects of a countrys economy, such as how a country uses its resources, how much time labourers devote to work and leisure, the outcome of investing in industries or financial products, the effect of taxes on a population, and why businesses succeed or fail. Global business or International business is a term used to collectively describe all commercial transactions (private and governmental, sales, investments, logistics,and transportation) that take place between two or more regions, countries and nations beyond their political boundary. Usually, private companies undertake such transactions for profit; governments undertake them for profit and for political reasons.[1] It refers to all those business activities which involves cross border transactions of goods, services, resources between two or more nations. Transaction of economic resources include capital, skills, people etc. for international production of physical goods and services such as finance, banking, insurance, construction etc. A multinational enterprise (MNE) is a company that has a worldwide approach to markets and production or one with operations in more than a country. An MNE is often called multinational corporation (MNC) or transnational company (TNC). Well known MNCs include fast food companies such as McDonald's and Yum Brands, vehicle manufacturers such as General Motors, Ford Motor Company and Toyota, consumer electronics companies like Samsung, LG and Sony, and energy companies such as ExxonMobil, Shell and BP. Most of the largest corporations operate in multiple national markets. Areas of study within this topic include differences in legal systems, political systems, economic policy, language, accounting standards, labor standards, living standards, environmental standards, local culture, corporate

culture, foreign exchange market, tariffs, import and export regulations, trade agreements, climate, education and many more topics. Each of these factors requires significant changes in how individual business units operate from one country to the next. The conduct of international operations depends on companies' objectives and the means with which they carry them out. The operations affect and are affected by the physical and societal factors and the competitive environment.
Operations
Objectives: sales expansion, resource acquisition, risk minimization
Means
Modes: importing and exporting, tourism and transportation, licensing and fr anchising, turnkey operations, management contracts, direct investment and portfolio investments.
Functions: marketing, global manufacturing and supply chain management, accounting, finance, human resources
Overlaying alternatives: choice of countries, organization and control mechanisms
Physical and societal factors

Political policies and legal practices Cultural factors Economic forces Geographical influences
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Competitive factors

Major advantage in price, marketing, innovation, or other factors. Number and comparative capabilities of competitors Competitive differences by country
There has been growth in globalization in recent decades due to the following eight factors:

Technology is expanding, especially in transportation and communications. Governments are removing international business restrictions. Institutions provide services to ease the conduct of international business. Consumers know about and want foreign goods and services. Competition has become more global. Political relationships have improved among some major economic powers. Countries cooperate more on transnational issues. Cross-national cooperation and agreements.
Studying international business is important because:
Most companies are either international or compete with international companies.
Modes of operation may differ from those used domestically. The best way of conducting business may differ by country. An understanding helps you make better career decisions. An understanding helps you decide what governmental policies to support.
Managers in international business must understand social science disciplines and how they affect all functional business fields.
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Tom Travis, the managing partner of Sandler, Travis & Rosenberg, PA. and international trade and customs consultant, uses the Six Tenets when giving advice on how to globalize one's business. The Six Tenets are as follows:
1. Take advantage of trade agreements: think outside the border

Familiarize yourself with preference programs and trade agreements. Read the fine print. Participate in the process. Seize opportunities when they arise.
2. Protect your brand at all costs

You and your brand are inseparable. You must be vigilant in protecting your intellectual property both at home and abroad.
You must be vigilant in enforcing your IP rights. Protect your worldwide reputation by strict adherence to labor and human rights standards.
3. Maintain high ethical standards

Strong ethics translate into good business. Forge ethical strategic partnerships. Understand corporate accountability laws. Become involved with the international business self-regulation movement.
Develop compliance protocols for import and export operations. Memorialize your company's code of ethics and compliance practices in writing.
Appoint a leader.
4. Stay secure in an insecure world

Security requires transparency throughout the supply chain. Participate in trade-government partnerships. Make the most of new security measures. Secure your data. Keep your personnel secure.
5. Expect the Unexpected

The unexpected will happen. Do your research now. Address your particular circumstances.
6. All global business is personal

Go to the source. Keep communications open. Keep the home office operational. Fly the flag at your overseas locations. Relate to offshore associates on a personal level. Be available to overseas clients and customers 24/7.
According to C.K. Prahalad & S. Hart,2002, The fortune at the bottom of the pyramid, Strategy & Business, 26: 54-67, and S.Hart, 2005, Capitalism at the Crossroads (p. 111), Philadelphia: Wharton School Publishing. Top Tier: Per capita GDP/GNI > $20,000 Approximately one billion people Second Tier: Per capita GDP/GNI $2,000-$20,000 Approximately one billion people Base of the Pyramid Per capita GDP/GNI < $2,000 Approximately four billion people.
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International Economy
International economics is concerned with the effects upon economic activity of international differences in productive resources and consumer preferences and the institutions that affect them. It seeks to explain the patterns and consequences of transactions and interactions between the inhabitants of different countries, including trade, investment and migration.economies of scale are benefits from bulk buying
International trade studies goods-and-services flows across international boundaries from supply-and-demand factors, economic
integration, international factor movements, and policy variables such as tariff rates and trade quotas.
International finance studies the flow of capital across international financial markets, and the effects of these movements on exchange rates.
International monetary economics and macroeconomics studies money and macro flows across countries.
International trade Scope and methodology

The economic theory of international trade differs from the remainder of economic theory mainly because of the comparatively limited international

mobility of the capital and labour. In that respect, it would appear to differ in degree rather than in principle from the trade between remote regions in one country. Thus the methodology of international trade economics differs little from that of the remainder of economics. However, the direction of academic research on the subject has been influenced by the fact that governments have often sought to impose restrictions upon international trade, and the motive for the development of trade theory has often been a wish to determine the consequences of such restrictions. The branch of trade theory which is conventionally categorized as "classical" consists mainly of the application of deductive logic, originating with Ricardos Theory of Comparative Advantage and developing into a range of theorems that depend for their practical value upon the realism of their postulates. "Modern" trade theory, on the other hand, depends mainly upon empirical analysis.
Classical theory
The law of comparative advantage provides a logical explanation of international trade as the rational consequence of the comparative advantages that arise from inter-regional differences - regardless of how those differences arise. Since its exposition by John Stuart Mill[5] the techniques of neo-classical economics have been applied to it to model the patterns of trade that would result from various postulated sources of comparative advantage. However, extremely restrictive (and often unrealistic) assumptions have had to be adopted in order to make the problem amenable to theoretical analysis. The best-known of the resulting models, the Heckscher-Ohlin theorem (HO) depends upon the assumptions of no international differences of technology, productivity, or consumer preferences; no obstacles to pure competition or free trade and no scale economies. On those assumptions, it derives a model of the trade patterns that would arise solely from international differences in the

relative abundance of labour and capital (referred to as factor endowments). The resulting theorem states that, on those assumptions, a country with a relative abundance of capital would export capital-intensive products and import labourintensive products. The theorem proved to be of very limited predictive value, as was demonstrated by what came to be known as the "Leontief Paradox" (the discovery that, despite its capital-rich factor endowment, America was exporting labour-intensive products and importing capital-intensive products) Nevertheless the theoretical techniques (and many of the assumptions) used in deriving the H-O model were subsequently used to derive further theorems. The Stolper-Samuelson theorem, which is often described as a corollary of the H-O theorem, was an early example. In its most general form it states that if the price of a good rises (falls) then the price of the factor used intensively in that industry will also rise (fall) while the price of the other factor will fall (rise). In the international trade context for which it was devised it means that trade lowers the real wage of the scarce factor of production, and protection from trade raises it. Another corollary of the H-O theorem is Samuelson's factor price equalisation theorem which states that as trade between countries tends to equalise their product prices, it tends also to equalise the prices paid to their factors of production. Those theories have sometimes been taken to mean that trade between an industrialised country and a developing country would lower the wages of the unskilled in the industrialised country. (But, as noted below, that conclusion depends upon the unlikely assumption that productivity is the same in the two countries). Large numbers of learned papers have been produced in attempts to elaborate on the H-O and Stolper-Samuelson theorems, and while many of them are considered to provide valuable insights, they have seldom proved to be directly applicable to the task of explaining trade (See also the Rybczynski theorem
Modern theory:
Modern trade theory moves away from the restrictive assumptions of the H-O theorem and explores the effects upon trade of a range of factors, including technology and scale economies. It makes extensive use of econometrics to identify from the available statistics, the contribution of particular factors among the many different factors that affect trade. The contribution of differences of technology have been evaluated in several such studies. The temporary advantage arising from a countrys development of a new technology is seen as contributory factor in one study. Other researchers have found research and development expenditure, patents issued, and the availability of skilled labour, to be indicators of the technological leadership that enables some countries to produce a flow of such technological innovations and have found that technology leaders tend to export hi-tech products to others and receive imports of more standard products from them. Another econometric study also established a correlation between country size and the share of exports made up of goods in the production of which there are scale economies. It is further suggested in that study that internationallytraded goods fall into three categories, each with a different type of comparative advantage:
goods that are produced by the extraction and routine processing of available natural resources such as coal, oil and wheat, for which developing countries often have an advantage compared with other types of production which might be referred to as "Ricardo goods";
low-technology goods, such as textiles and steel, that tend to migrate to countries with appropriate factor endowments - which might be referred to as "Heckscher-Ohlin goods"; and,
high-technology goods and high scale-economy goods, such as computers and aeroplanes, for which the comparative advantage arises from the availability of R&D resources and specific skills and the proximity to large sophisticated markets.
The effects of trade

Gains from trade
There is a strong presumption that any exchange that is freely undertaken will benefit both parties, but that does not exclude the possibility that it may be harmful to others. However (on assumptions that included constant returns and competitive conditions) Paul Samuelson has proved that it will always be possible for the gainers from international trade to compensate the losers. Moreover, in that proof, Samuelson did not take account of the gains to others resulting from wider consumer choice, from the international specialisation of productive activities - and consequent economies of scale, and from the transmission of the benefits of technological innovation. An OECD study has suggested that there are further dynamic gains resulting from better resource allocation, deepening specialisation, increasing returns to R&D, and technology spill over. The authors found the evidence concerning growth rates to be mixed, but that there is strong evidence that a 1 per cent increase in openness to trade increases the level of GDP per capita by between 0.9 per cent and 2.0 per cent. They suggested that much of the gain arises from the growth of the most productive firms at the expense of the less productive. Those findings and others have contributed to a broad consensus among economists that trade confers very substantial net benefits, and that government restrictions upon trade are generally damaging.
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Factor price equalisation

Nevertheless there have been widespread misgivings about the effects of international trade upon wage earners in developed countries. Samuelsons factor price equalisation theorem indicates that, if productivity were the same in both countries, the effect of trade would be to bring about equality in wage rates. As noted above, that theorem is sometimes taken to mean that trade between an industrialised country and a developing country would lower the wages of the unskilled in the industrialised country. However, it is unreasonable to assume that productivity would be the same in a low-wage developing country as in a high-wage developed country. A 1999 study has found international differences in wage rates to be approximately matched by corresponding differences in productivity. (Such discrepancies that remained were probably the result of over-valuation or under-valuation of exchange rates, or of inflexibilities in labour markets.) It has been argued that, although there may sometimes be short-term pressures on wage rates in the developed countries, competition between employers in developing countries can be expected eventually to bring wages into line with their employees' marginal products. Any remaining international wage differences would then be the result of productivity differences, so that there would be no difference between unit labour costs in developing and developed countries, and no downward pressure on wages in the developed countries.
Terms of trade
There has also been concern that international trade could operate against the interests of developing countries. Influential studies published in 1950 by the Argentine economist Raul Prebisch and the British economist Hans

Singer suggested that there is a tendency for the prices of agricultural products to fall relative to the prices of manufactured goods; turning the terms of trade against the developing countries and producing an unintended transfer of wealth from them to the developed countries. Their findings have been confirmed by a number of subsequent studies, although it has been suggested that the effect may be due to quality bias in the index numbers used or to the possession of market power by manufacturers. The Prebisch/Singer findings remain controversial, but they were used at the time - and have been used subsequently - to suggest that the developing countries should erect barriers against manufactured imports in order to nurture their own infant industries and so reduce their need to export agricultural products. The arguments for and against such a policy are similar to those concerning the protection of infant industries in general.
Infant industries
The term "infant industry" is used to denote a new industry which has prospects of becoming profitable in the long-term, but which would be unable to survive in the face of competition from imported goods. That is a situation that can occur because time is needed either to achieve potential economies of scale, or to acquire potential learning
curve economies. Successful identification of such a situation followed by the temporary imposition of a barrier against imports can, in principle, produce substantial benefits to the country that applies it a policy known as import substitution industrialization. Whether such policies succeed depends upon governments skills in picking winners, and there might reasonably be expected to be both successes and failures. It has been claimed that South Koreas automobile industry owes its existence to initial protection against imports,[23] but a study of infant industry protection in

Turkey reveals the absence of any association between productivity gains and degree of protection, such as might be expected of a successful import substitution policy. . Another study provides descriptive evidence suggesting that attempts at import substitution industrialisation since the 1970s have usually failed, but the empirical evidence on the question has been contradictory and inconclusive. It has been argued that the case against import substitution industrialisation is not that it is bound to fail, but that subsidies and tax incentives do the job better. It has also been pointed out that, in any case, trade restrictions could not be expected to correct the domestic market imperfections that often hamper the development of infant industries
Trade policies
Economists findings about the benefits of trade have often been rejected by government policy-makers, who have frequently sought to protect domestic industries against foreign competition by erecting barriers, such
as tariffs and quotas, against imports. Average tariff levels of around 15 per cent in the late 19th century rose to about 30 percent in the 1930s, following the passage in the United States of the Smoot-Hawley Act. Mainly as the result of international agreements under the auspices of the General Agreement on Tariffs and Trade (GATT) and subsequently the World Trade Organisation (WTO), average tariff levels were progressively reduced to about 7 per cent during the second half of the 20th century, and some other trade restrictions were also removed. The restrictions that remain are nevertheless of major economic importance: among other estimates the World Bank estimated in 2004 that the removal of all trade restrictions would yield benefits of over $500 billion a year by 2015.
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The largest of the remaining trade-distorting policies are those concerning agriculture. In the OECD countries government payments account for 30 per cent of farmers receipts and tariffs of over 100 per cent are common. OECD economists estimate that cutting all agricultural tariffs and subsidies by 50% would set off a chain reaction in realignments of production and consumption patterns that would add an extra $26 billion to annual world income. Quotas prompt foreign suppliers to raise their prices toward the domestic level of the importing country. That relieves some of the competitive pressure on domestic suppliers, and both they and the foreign suppliers gain at the expense of a loss to consumers, and to the domestic economy, in addition to which there is a deadweight loss to the world economy. When quotas were banned under the rules of the General Agreement on Tariffs and Trade (GATT), the United States, Britain and the European Union made use of equivalent arrangements known as voluntary restraint agreements (VRAs) or voluntary export restraints (VERs) which were negotiated with the governments of exporting countries (mainly Japan) - until they too were banned. Tariffs have been considered to be less harmful than quotas, although it can be shown that their welfare effects differ only when there are significant upward or downward trends in imports. Governments also impose a wide range of non-tariff barriers that are similar in effect to quotas, some of which are subject to WTO agreements. A recent example has been the application of the precautionary principle to exclude innovatory products
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International finance
Scope and methodology The economics of international finance do not differ in principle from the economics of international trade but there are significant differences of emphasis. The practice of international finance tends to involve greater uncertainties and risks because the assets that are traded are claims to flows of returns that often extend many years into the future. Markets in financial assets tend to be more volatile than markets in goods and services because decisions are more often revised and more rapidly put into effect. There is the share presumption that a transaction that is freely undertaken will benefit both parties, but there is a much greater danger that it will be harmful to others. For example, mismanagement of mortgage lending in the United States led in 2008 to banking failures and credit shortages in other developed countries, and sudden reversals of international flows of capital have often led to damaging financial crises in developing countries. And, because of the incidence of rapid change, the methodology of comparative staticshas fewer applications than in the theory of international trade, and empirical analysis is more widely employed. Also, the consensus among economists concerning its principal issues is narrower and more open to controversy than is the consensus about international trade. Given by Mahendra
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Exchange rates and capital mobility

A major change in the organisation of international finance occurred in the latter years of the twentieth century, and economists are still debating its implications. At the end of the second world war the national signatories to the Bretton Woods Agreement had agreed to maintain their currencies each at a fixed exchange rate with the United States dollar, and the United States government had undertaken to buy gold on demand at a fixed rate of $35 per ounce. In support of those commitments, most signatory nations had maintained strict control over their nationals use of foreign exchange and upon their dealings in international financial assets. But in 1971 the United States government announced that it was suspending the convertibility of the dollar, and there followed a progressive transition to the current regime of floating exchange rates in which most governments no longer attempt to control their exchange rates or to impose controls upon access to foreign currencies or upon access to international financial markets. The behaviour of the international financial system was transformed. Exchange rates became very volatile and there was an extended series of damaging financial crises. One study estimated that by the end of the twentieth century there had been 112 banking crises in 93 countries another that there had been 26 banking crises, 86 currency crises and 27 mixed banking and currency crises- many times more than in the previous post-war years. The outcome was not what had been expected. In making an influential case for flexible exchange rates in the 1950s, Milton Friedman had claimed that if there were any resulting instability, it would mainly be the consequence of macroeconomic instability,[40] but an empirical analysis in 1999 found no apparent connection. Economists began to wonder whether the expected
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advantages of freeing financial markets from government intervention were in fact being realised. Neoclassical theory had led them to expect capital to flow from the capitalrich developed economies to the capital-poor developing countries - because the returns to capital there would be higher. Flows of financial capital would tend to increase the level of investment in the developing countries by reducing their costs of capital, and the direct investment of physical capital would tend to promote specialisation and the transfer of skills and technology. However, theoretical considerations alone cannot determine the balance between those benefits and the costs of volatility, and the question has had to be tackled by empirical analysis. A 2006 International Monetary Fund working paper offers a summary of the empirical evidence. The authors found little evidence either of the benefits of the liberalisation of capital movements, or of claims that it is responsible for the spate of financial crises. They suggest that net benefits can be achieved by countries that are able to meet threshold conditions of financial competence but that for others, the benefits are likely to be delayed, and vulnerability to interruptions of capital flows is likely to be increased.
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Globalization
The term globalization has acquired a variety of meanings, but in economic terms it refers to the move that is taking place in the direction of complete mobility of capital and labour and their products, so that the world's economies are on the way to becoming totally integrated. The driving forces of the process are reductions in politically-imposed barriers and in the costs of transport and communication (although, even if those barriers and costs were eliminated, the process would be limited by inter-country differences in social capital). It is a process which has ancient origins, which has gathered pace in the last fifty years, but which is very far from complete. In its concluding stages, interest rates, wage rates and corporate and income tax rates would become the same everywhere, driven to equality by competition, as investors, wage earners and corporate and personal taxpayers threatened to migrate in search of better terms. In fact, there are few signs of international convergence of interest rates, wage rates or tax rates. Although the world is more integrated in some respects, it is possible to argue that on the whole it is now less integrated than it was before the first world war., and that many middle-east countries are less globalised than they were 25 years ago. Of the moves toward integration that have occurred, the strongest has been in financial markets, in which globalisation is estimated to have tripled since the mid-1970s. Recent research has shown that it has improved risk-sharing, but only in developed countries, and that in the developing countries it has increased macroeconomic volatility. It is estimated to have resulted in net welfare gains worldwide, but with losers as well as gainers. . Increased globalisation has also made it easier for recessions to spread from country to country. A reduction in economic activity in one country can lead to a reduction in activity in its trading partners as a result of its consequent

reduction in demand for their exports, which is one of the mechanisms by which the business cycle is transmitted from country to country. Empirical research confirms that the greater the trade linkage between countries the more coordinated are their business cycles. Globalisation can also have a significant influence upon the conduct of macroeconomic policy. The Mundell-Fleming model and its extensions are often used to analyse the role of capital mobility (and it was also used by Paul Krugman to give a simple account of the Asian financial crisis). Part of the increase in income inequality that has taken place within countries is attributable - in some cases - to globalisation. A recent IMF report demonstrates that the increase in inequality in the developing countries in the period 1981 to 2004 was due entirely to technological change, with globalisation making a partially offsetting negative contribution, and that in the developed countries globalisation and technological change were equally responsible.
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BIBLIOGRAPHY: - www.google.com - www.wikipedia.com - www.allbusiness.com - www.economywatch.com
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