Economics

1. What was the Global Financial Crisis, how did it come about and where were its major effects. The Global Financial Crisis of 2007 was triggered by liquidity shortfall in the United States Banking system which soon spread to affect the global economy. This has resulted in the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world. In various ways, the housing market had also suffered substantially, resulting in numerous evictions and prolong vacancies. It began in the following months of August 2007 with the subprime crisis which were brought on by low interest rates. Global financial markets experienced periods of extraordinary uncertainty. Low interests made money cheap, allowing financial institutions to lend to home buyers who have bad credit history. These types of loans had low interest rates for the first few years and then a much higher variable interest rate for the rest of the loan. The amount of American housing that was mortgaged accumulated considerably, and when the interest rates began to raise, the demand for these American housing had slowed. This led to the borrowers being unable to make their loan repayments resulting in significant losses to American banks and international banks, which then gradually affected the global financial market. What had caused the wide-spread of the financial crisis was the difficulty in identifying just which investments carried what level of risk. Credit rating agencies had not evaluated the risks of these products accurately causing a global credit crisis as lenders became unwillingly to lend for any purpose that carried even the slightest level of risk. Interest rates increased and various major financial institutions collapsed because they could not renew the loans needed to run their business. As financial sentiment depreciated manifestly, access to credit globally became increasingly difficult and expensive, causing consumer and business confidence to collapse. As spending and investment fell worldwide, economic growth contracted sharply and by 2009, the global economy was in recession. In 2010, the instability caused by the global financial crisis continued to persist in European economies – mainly because of over indebtedness among European Banks and Governments. Many European countries felt the full impact of the financial crisis, and are expected to continue for some time as several countries financials systems are so central to the workings of the modern global economy. 2. Explain what the Doha round of negotiations were and why are they viewed as important. The Doha Round, named after the city in the Middle of East nation of Qatar, is the current trade negotiation round of the WTO which commenced in November 2001. Its main objective was to lower trade barriers around the global economy, which allows countries to increase global trade. These negotiations were important because they would have reduced subsidies for developed countries agricultural industries, allowing developing countries to compete in agricultural exports. Several items that were to be concentrated by the Doha Round included; reducing agricultural protection, lowering tariffs on manufactured goods and reducing restrictions on trade in services. If executed effectively, the World Bank estimated that the resulting increase in global trade would increase global economic activity by $520 billion by 2014 and lift over 140 million people out of poverty in the developing world. However, the future of the Doha Round and its potential to lift millions of people out from poverty in developing nations is in jeopardy after negotiations had broken down in 2008. This breakdown occurred after many years of difficult negotiations between member nations, as they were unable to resolve their differences and agree on a plan to implement the Doha Round’s ambitious objectives. Nevertheless, enough progress had been achieved before the breakdown, resulting in the WTO not abandoning the Doha Round completely. 3. Take as an example the IMF, G20 or the WTO. Before WTO, the GATT (General Agreement on Tariffs and Trade) was responsible for developing trade agreements. Trade negotiations were regularly conducted, however the GATT process had one weakness which was its inability to effectively enforce the trade agreements and as a result many nations only implement parts of the GATT agreement. This was a major factor behind the decision in the final round of GATT negotiations between 1986 and 1993, known as the Uruguay Round, which led to the WTO. The WTO (World trade organization) is an international organization of 153 members. Established in 1995, its main function is to ensure that trade flows as smoothly, predictably and freely as possible. It provides a framework for negotiating and formalizing trade agreements as well as monitoring and implementing rules governing global trade. However one of its most important roles in the economy is dispute resolution, which is too maintain peace, equality, prevent exploitation and ill-treatment, and relieves conflict between nations. They have proved to be effective in resolving disputes between smaller countries, although the same cannot be said between the two largest forces in the global economy – The US and the EU. The WTO’s major focus in recent years has been the Doha Round of trade liberalization talks that were launched in 2001. By lowering global economic trade barriers, its potential would enable the enhancement of equitable participation of poorer countries which, undeniably, represents majority of the global economy. If executed effectively, the World Bank estimated that the resulting increase in global trade would increase global economic activity by $520 billion by 2014 and lift over 140 million people out of poverty in the developing world. However, the future of the Doha Round and its potential to lift millions of people out from poverty in developing nations is in jeopardy after negotiations had broken down in 2008. Nevertheless, enough progress had been achieved before the breakdown, resulting in the WTO not abandoning the Doha Round completely. 4. Outline your opinion on the concept of free trade. Free trade is a system of trade policy that allows traders to act and/or transact without interference from government or any so called “artificial barriers”. This is judged through the comparative advantage of a country over another which is measured through opportunity cost. There are several advantages of free trade as it allows countries to specialize in the production of goods and services. With specialization also leads to economies of scale, which will decrease average costs of production and increase efficiency and productivity. It also encourages the efficient allocation of resources, international competitiveness and eventually leads to higher living standards. However there are disadvantages with free trade as there is no protection involved. This may be difficult to establish new businesses, increase both short term unemployment and “dumping”. In my opinion, free trade has more efficient advantages than disadvantages, and that it is highly required to reach optimum levels in the global economy.