Global economy: contradictory economic conditions around the world Essay

Global economy: contradictory economic conditions around the world

Introduction

An economy is an existent social structure of manufacturing, trade, supply, and use of goods and service in a specific geographical area. This can be in the form of local economy meaning it exists in a small locality or area, national economy (Caillat, 2000), which exists throughout a country and international economy, which exists throughout the world consisting of an interconnection of national economies. Economics is concerned with the allocation of limited resources among competing requirements and is divided into micro and macro economics (Kelly, 2006). Microeconomics is focused on how individual entities make sane decisions about production and pricing in different market and situations while macro economics is focused on the overall financial situation such as consumption and production of a nation or group of nation

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The economy is split into four levels of activity which include: Primary sector of the economy, that involves the acquisition and production of raw materials, secondary sector of the economy that involves the transformation of raw materials into finished goods, tertiary sector that involves the provision of services to customers and businesses and quaternary sector that involves the study and development needed to produce products from natural resources.

Market economy

            The market is an association of activities involving trade, distribution and purchasing. A market is enabled or brought about by human actions and choices. The market process is the modification or change of the certain actions of the various members of the market society as per acceptable standards. A market economy is a system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country’s citizens and businesses and there is little government intervention or central planning. This is contrary to centrally designed financial system, in which decisions drive most aspects of a country’s economic activity; it can also be known as a free market (Sachs, 2006).
Developed nations have mixed economies; they have a combination of a free market economy and a government regulated economy. Mixed economies means that the government will have some role in developing policies to regulate the market, but all other activity will be driven by the choices of buyers and sellers.

Factors contributing to economic prosperity

            An emerging market is an economy with low to middle  income, such countries constitute approximately most of the global population,  they have embarked on economic development and reform programs and thus  opening up their markets and emerge onto the global scene, they are always fast growing they are thus new entrants into economic prosperity(Young, 2007). A new entrant will also reform its exchange rate system because a stable local currency builds confidence in an economy, especially when foreigners are considering investing. Good reforms aimed at reforming the Exchange sector reduce the desire for local investors to send their capital abroad.

 A new entrant is also most likely receiving aid and guidance from large donor countries and/or world organizations such as the World Bank and International Monetary Fund.  New entrants lead to growth in investment in a country this indicates that the country has been able to build confidence in the local economy. Foreign investment is a signal that the world has begun to take notice of the emerging market, and when international capital flows are directed toward an EME, the injection of foreign currency into the local economy adds volume to the country’s stock market and long-term investment to the infrastructure. New entrants provide much needed expansion bases for investors, this leads to  employment levels rise, advanced labor and managerial skills, the new entrant is able to acquire new technology and thus the new entrants overall production levels  rises, increasing its product, ultimately reducing the gap between already prospered countries

The government of the day can work to ensure that families and businesses alike are capacitated to confidently plan for their future, by way of enacting favorable policies at governmental level; this can be achieved by setting definite tax margins, without arbitrarily changing the same as situations may warrant from time to time. This goes a long way in facilitating the making of long-term decisions, all the way down from the household level.

            Deliberate efforts can be taken to ensure that all and sundry receive not only affordable, but also adequate and readily accessible health care. For example, costs of health insurance for employers in the United States have been steadily rising since the start of the millennium, having the butterfly effect of there being fewer workers on regular payroll. By extension, many homes are forced to go without health insurance, and this shift in priority accorded to the pursuit of individual ends could prove to be a major hindrance to prosperity, unless steps are taken to arrest this situation, for instance, the creation of Health Savings Accounts that serve to enable employees to buy affordable health plans that are deductible, thus facilitating savings for other expenses and/ or rainy days.

                        Also, prosperity is synonymous with the availability of necessary amenities, chiefly reliable energy supply. Problems of frequent power outages, hikes in price of power or even regular rationing only succeed in prompting business owners to lay off some of their workers or even invest in new ventures. Therefore, the government of the day should work towards the upgrading of existing power grids, with renewed emphasis on efficiency and security of energy, and an increase in the domestic production, all within the tenets of environmental conservation.

Economic Friction and decline;

            The world is yet to come out of the economic recession that has reared its ugly head over the recent past. This economic recession has seen oil prices drop so low to $38 dollars a barrel and also major currencies performing dismally in global stock markets. Just to show how bad the economy is, the President of the United States has proposed a budget of $3.5 trillion dollars to be sent to the congress for an approval. The budget, besides having a deficit of $1.75 trillion dollars and placing the government in eminent debt, it has proposed increases in taxes in many sectors of the economy. The view of various experts about the budget are seconded here in that the proposed increase in taxation for those families that earn $250,000 and above annually would hurt small businesses, lead to loss of jobs, further aggravate the ongoing recession and raise the national debt. The budget appears to lean on spending, taxation and borrowing instead of exporting and saving. From a microeconomic point of view, raising taxes during a recession is not recommendable and it is advisable that during such a period, taxes should be cut as a way of boosting aggregate demand.

            During a visit to Asia over the recent past, the United States secretary of state expressed the need for the western countries particularly the US, to work together with Asia to save the world from the current recession. She seemed to hail the Asian countries for not being affected by the current recession. However what she forgot to acknowledge is that China is facing economic problems of her own despite the country recently announcing that it had become in 2007, the 3rd largest economy after the US and Japan and a reported 6 to 8% in growth this year. The country’s economy now hangs in the balance after a reported 20million people mostly rural immigrants having been rendered jobless. Besides, the country is also facing a housing crisis, a fall in her exports and imports as well as an FDI slump. Other economic powerhouses of Asia are also facing economic woes of their own with Japan experiencing her steepest fall in GDP over the past 35 years with Malaysia, Taiwan, Singapore and South Korea not doing any better in terms of economic growth (Hill, 2009).

Even as measures are put in place to correct the worsening financial crisis emanating from America and the European nations, there is little hope in sight that the “credit crunch” – as it has infamously come to be known – will subside any time soon. Optimistic analysts predicate that this economical decline will eventually melt away by the second half of the year 2009, given that efforts put in place to stabilize the international financial front will have borne fruit by then. However, the current situation provides a grim view of the reality. Economic growth for emergent regions is expected to fall below the 5% mark, as influenced by the susceptibility of such regions to the effects of financial stress.

            On the global front, world trade is expected to fall to a figure as low as 2%, reminiscent of the year 1982, attributable to the inability of developing nations to make any significant financial headway while exporting commodities, a market that is plagued by stagnating prices that have been linked with inflation across the globe, thus further pushing the poverty line higher in many under-developed and developing countries.

            Economists are usually quick on the draw to pinpoint economic factors as the root causes of economic decline and friction, such as the inadequacy of economic incentives, whereas in the actual sense, there also exist some social considerations that come into play, including the overall failure of an organization, or a situation referred to as ‘redlining’, exemplified by the socio-economic failure of the American firms to adapt their managerial strategies towards the proper handling of mortgages in urban areas.

In the same light, one of the major causes of economic friction is governmental interference in trade matters and transactions, albeit this is usually done with good intention. From an economist’s point of view, the government-of-the-day should make efforts to formulate and subsequently implement such policies that aim at fostering the achievement of national goals and objectives with minimum adverse effects on the operations of the international trading market, for instance, in the agricultural sector, options at the disposal of the government include either giving direct supplementary income to the farmers, which may consequently be viewed as an unacceptable monetary handout, or going on to support set prices or provide subsidies to facilitate the raising of the farm incomes in question.

A consequence of the declining global economy is that there has now emerged a heightened level of uncertainty, especially as regards the issue of new entrants in the trading arena.

Recommendations

            Governments should on the forefront of developing workable policies that enhance international competitiveness and promote economic innovation. This can be attained by the governments investing in scientific research and commercialization, both key components in the confection of prosperity. Closely related to this point of view, is the evolution of a modernistic theory, known as the “extended panda’s thumb approach”, which requires the financial bodies in the world, such as the International Monetary Fund, to play a more active role in the management of the global financial structures. This can be done enabling a greater financial autonomy or leeway to different countries, which will have the spillover effect of providing a more stable base of regional cooperation, thus facilitating the formation of a definite financial-architectural framework, such as that in the Asian continent after the grueling financial crisis in the recent past.

            Besides, there is the need for radical changes in the current financial and/ or monetary system, although the main problem here is the exact way in which to go about carrying out these changes. Some economists are of the opinion that certain institutions should be put in place and charged with the responsibility of management of the speculative flows of money. Other economists are of the view that all forms of intervention should not be allowed to dictate the workings of the financial markets, so as not to disrupt growth of economies.

            Last but not least, there is the undoubted need for a complete restructuring of the financial system; this can be accomplished sequentially by way of the companies selling of marginal businesses, before proceeding to improve on their financial structures. This can be done by primarily reducing their debt levels, and sourcing for stabilized funds with which to increase their cumulative operating cash flows (Young, 2007).

Executive Summary;

The current economic crisis that is affecting the world economy has elicited debates among various professionals and non professionals alike on how to adequately address this crisis. However, despite the numerous suggestions and desperate attempts by various parties to salvage the situation, not much has been achieved. This paper has sought to address this ongoing recession and how various economies around the world are affected. The paper also addresses economic prosperity and factors that contribute to economic prosperity such as reduced taxes, affordable healthcare and increased employment. In addressing the current recession, the paper demonstrates how the crisis is currently threatening the very existence of mankind. Economies the world over have dissipated into thin air, and the standards of living continue to decline at an increasing rate, mostly due to failed economic policies instituted by various governments. This situation can also be attributed to the failure on the part of international financial institutions such as the International Monetary Fund and the World Bank to play an active role in the formulation of a stable, well-drafted, and economically-feasible architectural framework within which all fiscal operations and/or workings ought to be based.

            Not only does this paper delve into matters regarding how the global monetary system ended up in disarray, but it also goes a step further to recommend various courses of action that may be put in motion to correct the prevailing catastrophe, including the revamping of policy frameworks to preside over the money markets.

References;

Caillat, J. (2000). The Money Theory: Growth and Inflation in the Global Economy. New York: McGraw Hill.

Hill, C. (2009). Global business today: Global Monetary System.  New York: McGraw Hill. Part    Four.

Kelly, E. (2006). Powerful times: Rising to the challenge of our uncertain world. Upper Saddle River, NJ: Warton School Publishing.

Meghnad, E. (2003). The Ethics and Economics of the New World Order in Global Governance. New York: W.W Norton and Co.

Sachs, R. (2006). The East Asian Financial Crisis and its Origins. London: Pinter Publications.

Young, A. (2007). International Monetary System: the need for Reform and Restructuring. Montreal: PPC Press.

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