Essays on Economic Stability and Its Impact on International Business Case Study

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The paper 'Economic Stability and Its Impact on International Business' is a wonderful example of a Macro and Microeconomics Case Study. Fluctuations form a common part of an economy. An economy with fewer or lesser fluctuations is said to be economically stable. A stable economy is characterized by constant or small changes in its output growth and also has a low and stable inflation rate prevailing in its economy whereas when an economy exhibits characteristics like high or variable inflation rates, frequent economic and financial crisis, pruned to larger recessions and unstable business cycles, that economy is often referred to as unstable economy.

This paper evaluates the manner in which economic stability is important and compares China and India to find out which is a preferable option for FDI. Economic Stability Countries all around the globe desire for a stable economy as it helps them to become a developed country. The monetary and financial policy helps in controlling inflation in an economy and lays down a path for a stable economy. Financial stability is of prime importance to achieve economic stability since most transactions in the real-world are routed through the financial system of the economy.

Sound financial stability ensures better development of the economy by the deployment of funds in profitable businesses, price stability, and the proper balance of payments (Bologna, 2011). Further, strong financial stability absorbs the shocks of adverse and unforeseeable situations and provides a corrective measure to prevent the same from damaging the financial condition of the economy. Inflation i. e. rising prices with low productivity and a decrease in the purchasing power of currency is also considered as a key factor in achieving a stable economy.

Inflation if not controlled may lead to large recessions and financial crises. Framing of adequate monetary policies helps in controlling inflation to a considerable extent. Thus, to achieve economic stability, inflation and financial stability play a major role besides other factors such as political, economical, social, technological, and legal factors that contributes equally (Blinder, Ehrmann, Fratzscher, De Haan and Jansen, 2008). Economic Stability in International Business With globalization reaching its zenith, there has been a sharp increase in international trade. Countries all around the globe enter into different contracts and treaties with each other to promote international trade.

Economic stability affects international businesses and international trade to a considerable extent which has been discussed as under. Whenever doing business in a different country it is of prime importance to check the economic stability of that country. If inflation in the country in which business is to be transacted is on a higher front or varies constantly it may not be feasible to invest in such a country since it will be a situation where prices of raw materials or products will be higher without an equal rise in its productivity showing signs of considerable losses and economic instability.

Another factor that needs to be considered primarily is the international exchange rates prevailing at the time of business being transacted. In cases of economic instability exchange rates due to unsound financial system keeps on fluctuating at an excessive rate which might incur profits or losses accordingly, bringing exchange rate risks in business apart from other business risks that prevail during a normal business transaction (Čihá k, 2006).

This could be well understood by means of the following example. Suppose, if the exchange rate of the currency in which transaction is to be enacted appreciates i. e. local currency devaluates in comparison to that currency then it would be profitable to produce goods in domestic country and then exporting it to the other country making international trade profitable. However, vice versa of the same would prove to be unprofitable or may incur losses in entering into such international trade. Thus, lack of economic stability has further added the risk of exchange rate fluctuations to further control these exchange rate fluctuations an International Monetary Fund was established to bring some stability in the economy globally (Garcia & Rio, 2005).

References

Blinder, S., Ehrmann, M., Fratzscher, M., De Haan, J., and Jansen, D. 2008. Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence. Journal of Economic Literature, 46 (4), 910–945.

Bologna, P. 2011. Is There a Role for Funding in Explaining Recent U.S. Banks’ Failures? IMF Working Paper No. 11/180 (Washington: International Monetary Fund).

Born, B., Ehrmann, M. and Fratzscher, M. 2011. Central Bank Communication on Financial Stability. ECB Working Paper No. 1332 (Frankfurt: European Central Bank).

Čihák, M. 2006. How Do Central Banks Write on Financial Stability? IMF Working Paper No. 06/163 (Washington: International Monetary Fund).

Garcia, A., Rio, P. 2005. Financial Stability and the Design of Monetary Policy. Banco de España Working Paper, No. 0315 (Madrid: Banco de España).

Goodhart, C. and Rochet, J. 2011. Evaluation of the Riksbank’s Monetary Policy and Work with Financial Stability 2005–2010, Reports from the Riksdag 2010/11: RFR5, The Committee on Finance.

Haldane, A., Hall, S. and Pezzini, S. 2007. A New Approach to Assessing Risks to Financial Stability Bank of England Financial Stability Paper No. 2 (London: Bank of England).

Kaminsky, L., and Reinhart, C. 2009. The Twin Crises: The Causes of Banking and Balance-of-Payments Problem. American Economic Review, 89 (3), 473–500

Neogi, S. 2013. FDI is now looking beyond China, to India. The Financial Express. Retrieved on April 3, 2013 from http://www.financialexpress.com/news/fdi-is-now-looking-beyond-china-to-india/1059879

Nier, E. 2005. Bank stability and transparency. Journal of Financial Stability, 2, 342–54

Oosterloo, S., Haan, J. and Jong-A-Pin, R. 2007. Financial Stability Reviews: A First Empirical Analysis. Journal of Financial Stability, 2, 337–355

Wang, A. & Edwards, N. 2013. China’s January FDI falls, reflects global firms’ caution, cheaper rivals. Reuters. Retrieved on April 3, 2013 from http://uk.reuters.com/article/2013/02/20/uk-china-economy-fdi-idUKBRE91J04420130220

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