Unit VI Scholarly Activity
Complete all three parts of this assignment and submit as a single document.
Using at least your textbook and a minimum of three additional sources answer the following questions.
1. The bilateral agreement has enabled China and South Korea an increase in trade and an increase in trade deficit for the United States, what are the advantages and disadvantages of the United States to continue this relationships with the bi-lateral agreements
Trade Balance NX = EX – IM
If EX IM in a certain year ? Trade Surplus
If EX IM in a certain year ? Trade Deficit
• Trade Volume contributes to the economic growth of the Unites States
• Trade deficits in the Unites States at a point of time can be compensated by trade surpluses in future
• High import of goods and services from China and South Korea can lead to product diversification and efficiency (lower prices) in the U.S market that satisfy the U.S consumers
• The integration improves political and economical relations between the U.S and China and South Korea.
• Remain the U.S impact on these two countries.
• Force the U.S producers to increase their efficiency, innovation, and reduce cost to compete with Chinese and Korean producers.
• Increase trade deficits and balance of payment deficits, which reduce the country’s reserves of USD.
• The trade deficits lead to the appreciation of the USD against the Yuan and the Korean currency (won) in the Unites States. This may cause the U.S export price to increase ? reduce competitiveness.
• Increase the national Debts.
2. With regards to the various agreements/treaties discussed: EU, WTO, NAFTA, CARICOM, APEC, MERCOSUR and ASEAN:
• Discuss any pending applications, candidate countries or associate members
a. The case of European Union(EU)
Turkey has a long-standing application with the EU, but their negotiations are expected to take until at least 2023.[11
There are five recognised candidates for membership (sorted by accession application date):
• Turkey (applied in 1987)
• Macedonia (applied in 2004)
• Montenegro (applied in 2008)
• Albania (applied in 2009)
• Serbia (applied in 2009)
All candidate countries except Albania and Macedonia have started accession negotiations. Kosovo*, whose independence is not recognised by five EU member states, and Bosnia and Herzegovina are recognised as potential candidates for membership by the EU. Bosnia-Herzegovina has signed a Stabilisation and Association Agreement (SAA) with the EU which is undergoing ratification, which generally precede the lodging of membership applications, while Kosovo has completed negotiations on their SAA.
According to an Eastern Partnership strategy paper issued in 2010, the EU is unlikely to invite any of its post-Soviet neighbors to join the bloc in the next 10 years; however it notes that Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine could one day become EU members. In late 2014, Ukrainian president Petro Poroshenko announced 2020 as a target for a Ukrainian EU membership application.
Determine the GDP and GNP of those pending countries.
• Turkey (applied in 1987)
• Macedonia (applied in 2004)
• Montenegro (applied in 2008)
• Albania (applied in 2009)
• Serbia 2009
• Ukraine 2014
(? Search GDP and GNP on google.com)
b. The case of NAFTA (North American Free Trade Agreement)
The North American Free Trade Agreement Includes Canada, the United States, and Mexico. Went into effect on January 1, 1994. Involves free trade in goods, services, and investment. Is a large trading bloc but includes countries of different sizes and wealth. NAFTA rationale: • U.S.•Canadian trade is the largest bilateral trade in the world. • The United States is Mexico's and Canada's largest trading partner. NAFTA calls for the elimination of tariff and nontariff barriers, the harmonization of trade rules, the liberalization of restrictions on services and foreign investment, the enforcement of intellectual property rights, an'd a dispute settlement process. NAFTA is a good example of trade diversion; some U.S. trade with and investmem in
Asia have been diverted to Mexico. Trade and Investment for U.s. and Canadian companies to establish manufacturing facilities. For example, IBM is making computer parts in Mexico that were formerly made in Singapore. In five years, IBM boosted exports from Mexico to the United. States from $350 million to $2 billion. Had the subassemblies not been made in and exported from Mexico, they would have been made in Singapore and other Asian locations and exported to the .United States. Non-NAFTA companies are also investing in Mexico to take advantage of the FTA with Canada and the United States. Sony has huge manufacturing facilities in Mexico, especially in Tijuana, just over the border from Southern California. In 2009, Sony closed five factories worldwide-one in Pittsburgh, Pennsylvania, and another in Mexicali, Mexico, which was manufacturing LCD televisions. However, Sony expanded its workforce in Tijuana to take up the slack by adding 1,500 new jobs.24 Sony is able to take advantage of NAFTA free trade provisions to ship product to the United States and save.
However recently, the Trump administration’s recent proposal to insert a sunset clause into the North American Free Trade Agreement shocked just about everyone in the trade world. Under the plan, the three countries would have to renew the agreement every five years—or else it would be terminated. Canadian and Mexican negotiators immediately rejected the idea, arguing that it would create uncertainty for businesses and potentially spell the end for NAFTA. “If every marriage had a five-year sunset clause,” Canada’s ambassador to the U.S said, “I think our divorce rate would be a heck of a lot higher.-
What are the advantages/implications for trade within the trading group and the United States
Integration among the trading group may lead to static and dynamic effects: growth in markets and economies of scale.
Static and Dynamic Effects NAFTA provides the static and dynamic effects of economic integration discussed earlier in this chapter. For example, Canadian and U.S. consumers benefit from lower-cost agricultural products from Mexico, a static effect of economic liberalization. U.s. producers also benefit from the large and growing Mexican market, which has a huge appetite for U.S. products-a dynamic effect.
Trade Diversion .In addition, NAFTA is a good example of trade diversion. Prior to NAFTA, many U.S. and Canadian companies had established manufacturing facilities in Asia to take advantage of cheap labor. After NAFTA, Mexico became a good option
Information about accessing the Blackboard Grading Rubric for this assignment is provided below
Based upon your assessment do you think these countries should become full members of the FTA’s they have applied to? Why or why not?
They should become full members of FTA or the European Union in order to enjoy the benefits of free trade in international economic cooperation.
Part two: You company is deciding to expand to the following countries and you and two other managers will have to visit these countries to set up operations. You have $1,500.00 to convert in each currency. Copy and paste these tables Into your document and compute the following
Exchange rate and currency converting
The exchange rate is the rate at which two currencies can be exchanged for each other (Daniels, Radebaugh, & Sullivan, 2014). Given the current exchange rates, we can convert $1,500 into equivalent amounts of JPY, Euro and GBP in the table 1 as follows:
Currency USD value/rate (as of 08/14) Equivalent Amount
1 2 3
JPY $0.0091 JPY164,835.17
Euro $1.1764 Euro1,250.07
GBP $1.34 GBP1,119.40
Table 1 Exchange rates and currency converting
In the table 1, values in column (3) are calculated by taking $1,500 divided by values in column (2).
Utilizing the same exchange rate, while you are visiting each of these countries, you have to buy supplies/equipment for your operations, you want to determine what it is costing you in U.S. dollars, please compute the following:
Goods in different countries are normally measured in domestic prices. Given the exchange rates, we can express the prices of those goods in terms of USD as in the table 2 follows:
Currency Goods and domestic prices USD currency Equivalent
1 2 3
JPY Computer (¥167,000.00) $1,519.7
Euro Desks/chairs (€1,125.00) $1,323.45
GBP Printer (£575.00) $770.50
Table 2: Price of goods expressed in terms of USD
In the table 2, values in column (3) are received by taking values in column (2) of table 2 multiplied by the values in column (2) of table 1.
Respond to the following questions.
1. Within the past decade, the IMF has provided financial assistance (bailout) to Greece (2010, 1st quarter), Iceland (2008, 4th quarter), Ukraine (2014, 2nd quarter), and Hungary (2008, 4th quarter). Describe the recovery process on each country as a result of this assistance. Also determine whether or not there was an increase/decrease in:
Your paper should be at least three pages in length excluding title and reference page.
IMF and Its Financial Assistance to Greece (2010)
The slowing down of economic performance in Greece has been recognized since 2008 after a period of strong growth. The country entered into the recession period from 2008 and had no signal of recovery in 2009 and 2010. GDP value from 354.61 billion USD in 2008 reduced down to 329.8 billion in 2009 and continuously reduced to 299.6 billion USD in 2010 (table 3). The public debt was very high as of 146% to GDP. In addition, Greece has not shown any technological progress to increase the labor and capital productivity in various sectors of the economy.
To help Greece as a country member, on May 09, 2010, the International Monetary Fund (IMF) has passed a concessional three-year-loan of 30 billion Euro in the hope to help the country recovery its economy, reduce the public debt, push up technological progress and increase its competitiveness. This bailout was a part of the IMF’s financial package of 110 billion Euros to help Greece (IMF, 2010).
However, data in the table 3 have shown that the IMF’s financial assistance has not been successful as they expected. The economy did not recover after the assistance as the recession kept going up to the present time. Value of GDP has reduced even after the IMF’s assistance in 2010. Compared to that of 2010, the GDP value in 2014 has reduced by 20%, which was a shock. The standard of living became worse after 2010. The unemployment increased more than double in the period between 2010 (12.7%) and 2014 (26.6%). The public debt as percentage to GDP continued to increase and reached to 177% last year. The country also started the problem of deflation since 2013, which told us that there was a sharp decrease of the aggregate demand of the country. The only improvement was the reduction in the trade balance.
Greece has not used the IMF’s financial assistance effectively. The country’s poor macroeconomic fiscal, monetary, investment policies, the heavy burden of the public sector, inefficient production processes might be the possible causes of the problems. Even in 2014, Greece faced poor liquidity in the financial market, shortage of credit availability available for households and the corporate sector, and budget expenditure increases (Bastian, 2014).
Greece has also been on the brink of bankruptcy in the mid of July, 2015 when it failed to pay he overdue debts to the creditors and considered to leave the European Union. The IMF’s financial assistance in 2010 has proved to be unsuccessful in the case of Greece as they could reach the set objectives when providing the loans.
Although the Euro-zone ministers have agreed a third loan of 86 billion Euros on August 14, 2015 to help Greece avoid the bankruptcy and recover the economy, the country needs a precise economic reform programs, both in short term and long term, that require trade-off and great efforts from the government and its citizens.
No Indicators 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
1 GDP (bill.USD) 318.68 354.61 329.8 299.6 288.8 249.5 242 238
2 Inflation (%) annual 3 4 3 5.2 2.2 0.3 -1.8 -2.5
3 Unemployment (%) annual na na Na 12.7 17.9 24.6 27.5 26.6
4 Public Debt (% to GDP) na na Na 146 171 157 175 177
5 Trade Balance (EUR billion) na na Na -29.8 -24.3 -19.8 -15.8 -17.3
Table 3 Macroeconomic Indicators of Greece (FocuseEconomics, 2015);
IMF and Its Financial Assistance to Iceland (2008)
Contrary to the Greece, Iceland has been considered as a successful story of a country that used effectively the IMF’s financial assistance to recover and grow the economy since the 2008-crisis.
Facing the economic crisis in 2008, a sharp reduction of GDP value from 21.5 billion USD in 2007 down to only 17.6 billion in 2008 (reduced by 20%, see table 4), Iceland needed financial assistance of the IMF. In December, 2008, the IMF has approved a loan of 2.1 billion USD to help the country recover the economy, restore the confidence in its banking system, and stabilize its currency.
There was a remarkable strong economic performance of this country since the IMF’s assistance in 2008. Firstly, the GDP value has started to increase since 2010 and eventually reached the level before the crisis in 2014 (table 4) . There was impressive performance in the tourism and fisheries industries that contributes its economic success. Iceland was said to be the one of the top economic performer in Europe. Secondly, the public debt ratio as percentage to GDP has fallen down which proved the government effective fiscal policies of Iceland. And thirdly, the unemployment rate is on the improving path when it reduced down to only 3,6% in 2014 compared to that of 8.1% in 2010. In addition the country has the inflation rate kept to be low to protect the citizen’s purchasing power, a stable exchange rate and a rather good balance of payment state.
There could be some reasons that may lead to the Iceland’s success. The country has effectively exploited its natural resources to push up the fishery industry. In the service sector, there was an impressive increase in the tourism industry contributing to the country’s GDP. The recovery of the domestic banking system and domestic debt restructuring are also some other reasons for the country’s budget surpluses and Iceland’s improved competitiveness (Mingels, 2014).
However, although the economy has recovered Iceland should be aware of possible risks that may negatively the economy in future such as: high public and external debt, ineffective capital controls, slow demand, deflation and uncertain external environment (Hammar, 2015).
No Indicators 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
1 GDP (bill.USD) 16.8 17.1 21.5 17.6 12.83 13.26 14.67 14.23 15.39 17.07
2 Inflation (%) annual 4.0 9.0 4.0 11 8.0 5.4 4.0 5.2 3.9 2.1
3 Unemployment (%) annual na na na na na 8.1 7.4 5.8 4.4 3.6
4 Public Debt (% to GDP) na na na na na 88.1 95 92.5 85.3 80.8
5 Trade Balance (USD billion) na na na na na 0.7 0.5 0.3 0.0 -0.3
Table 4 Iceland’s Macroeconomic Indicators (FocuseEconomics, 2015)
IMF and Its Financial Assistance to Hungary (2008)
After a strong economy growth in 2007 and 2008, Hungary entered into recession from 2008 and needed the IMF’s financial supports. According to the table 5, the nominal GDP value has increased by 21% in 2007 and 13% in 2008. But in 2009, it reduced sharply. The country disclosed its ineffective fiscal policies and poor financial system activities.
In November, 2008 the IMF has passed an amount of $15.7 billion loan for Hungary to help the country solve its recession problems. Granting the loan, the IMF expected Hungary to address two important things: a substantial fiscal adjustment to reduce the government debt and an improvement of the financial system effectiveness (IMF, 2008).
So far, the effect of the IMF’s financial assistance is not clear with the up-and-down fluctuation of nominal GDP value from 2009 to 2014 (table 5). Perhaps the impressive success of the country is reduction of the unemployment rate from 11.2% in 2010 down to 7.7% in 2014. And the country remains its positive trade balances through the years. The public debts as percentage to GDP reduced not much and remained at high levels.
No Indicators 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
1 GDP (bill.USD) 111.9 114.2 138.5 156.6 129.3 129.6 139.4 126.8 133.4 137.1
2 Inflation (%) annual 2 4 5 5 4 2 2 3 0.5 0.6
3 Unemployment (%) annual na na na na na 11.2 11.1 11 10.1 7.7
4 Public Debt (% to GDP) na na na na na 80.9 81 78.5 77.3 76.9
5 Trade Balance (USD billion) na na na na na 7.3 9.8 8.5 8.7 8.5
Table 5 Macroeconomic Indicators of Hungary (FocusEconomics, 2015 )
IMF and Its Financial Assistance to Ukraine (2014)
Ukraine has experienced economic growth from 2010 to 2013 with a positive performance in macroeconomic policies (table 6): GDP per capita kept increasing, unemployment continuously reduced; inflation reduced; public debts as percentage of GDP were kept around 40%. However all thing have changed in 2014 when many economic indicators went to the opposite side (table 6): nominal GDP value reduced by nearly 28%; inflation increased to two digits of 12.1%; unemployment increased sharply to 9.1% as compared to 7.4% of 2013. Public debt increased sharply to 70.21% percentage of GDP. Ukraine was in need of financial help from the IMF to recover its economy. The big losses of the state-owned gas company Naftogaz and tension between Ukraine and Russia have also negatively affected the economic performance of the whole country.
On April 30, 2014, the IFM has approved a loan of $17.1 billion USD for Ukraine to support the country implement the total program of economic reforms. The objectives of the IFM’s bailout are of several: to help Ukraine to stabilize the macroeconomic environment; to support sustainable growth; to strengthen the economic governance; and increase the transparency of business as well administrative activities. In addition, part of the financial assistance addresses the international investment improvement and restoration of the confidence of private investors in the country (IMFSurvey, 2014).
It is still early to evaluate the effectiveness of the IMF:s financial assistance to Ukraine now. However, Ukraine should pay more attention to factors that may cause vulnerability to the macroeconomic environment of the country such as the effect of expansionary fiscal policies which may lead to increase in the public debts and large budget deficits, the overvalue of the exchange rate and the decrease in the country’s foreign reserves (Miller, 2015).
No Indicators 2010 2011 2012 2013 2014 2015 2016
1 GDP (bill.USD) 136 163.2 175.8 183 132
2 Inflation (%) annual 9.4 8.0 0.6 -0.3 12.1
3 Unemployment (%) annual 8.1 7.9 7.8 7.4 9.3
4 Public Debt (% to GDP) 40.1 36.4 36.7 40.7 71.2
5 Trade Balance (USD billion) -9.6 -1.8 -21.9 -22.1 -7.7
Table 6 Macroeconomic Indicators of Ukraine (FocusEconomics,2015)
In conclusion, we can learn some lessons from the stories of IMF’s Financial Assistance to Greece, Iceland, Hungary, and Ukraine. The success of economic programs in various countries depends not only on how much of the financial assistance but also on how effectively each country uses the assistance money to adjust and recover its economy. We should be aware that there are always trade-offs in choosing the top objective priorities for the economic growth strategies.
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