Role Played By Exchange Rates in European Business - Assignment Example

European Business Frame Work Table of Contents Task 3 Importance of International Trade to an Open Economy Such As the UK 3 Comparative Advantage, Absolute Advantage, and Terms of Trade and Exchange Rate 4 Comparative Advantage 4 Absolute Advantage 4 Terms of Trade and Exchange Rate 4 Balance of Payments 5 Surplus and Deficit in an Economy 5 Significance of Long-Term Deficits to Open Economies 6 Task 2 7 Role Played By Exchange Rates in European Business 7 Advantages Attributed To the Adoption of a Single European Currency 7 Free Trade and Protectionism and the Role Played By Tariffs, Quotas, and Deregulation within the EU 8 Free Trade and Protectionism 8 Tariffs, Quotas, and Deregulation 8 The Importance of Geographic and Occupational Mobility in Wealth Creation for EU Member Countries 9 Task 3 10 UK Government and EU Institutions 10 Fictitious Directive 267/14 11 EU Funding Streams 11 Task 4 12 EU as a Trading Bloc 12 Significance of Linguistics, Cultural, Logistical and Environment 12 EU funding streams for France 13 New Venture 13 References 14 Task 1 Importance of International Trade to an Open Economy Such As the UK Globalisation in the economic environment has significantly led nations to trade among each other’s with minimal amount of restrictions. In the current scenario, international trade is of significance for greater economic upsurge. Similarly, the economic condition of nations due to trade and open economy is bound to affect other nations’ economy. Contextually, with the act of globalisation people are able to sell their commodity in the global market while consumers also have access over wider range of products and services. Additionally, with the high reliance of the economy over the others such as rapid expansion, advancement in the means of transport, and industrialisation, the concept of international trading is correspondingly expanding. The concept of international trade is highly significant for the UK economy, in order to strengthen the economic position and process as the competitive global economy. Moreover, international trading allows the UK economy to effectually utilise the economic resources, import the products and services that are not produced in the nation, as well as provide wider ranges of choices to the inhabitants. Furthermore, the other key benefits of the international trading are that it allows the UK economy to induce, enhance the competitive position of the domestic economy by taking advantages of international technologies. This aspect enhances the market potentials, increase the national revenue, provide access of global market, mitigate the economic issues and reduce high dependency in the existing market among others1. Comparative Advantage, Absolute Advantage, and Terms of Trade and Exchange Rate Comparative Advantage David Ricardo has proposed the concept of competitive advantage, which affirms the ability of the nation, firms, or an individual producing goods and services at a comparatively lower marginal and opportunity cost as others. Moreover, comparative advantage allows them to trade the goods and services at the lower cost than the competitors and comprehend high sales margin2. Absolute Advantage The concept of absolute advantage is quite similar to the completive advantage, which affirms an individual, firm, or nation to produce the goods and services at a lower cost per unit using smaller quantity of inputs compared to other competing entity(s). For instance, the Malaysian multinational corporation Sime Darby is having the advantage of producing palm oil3,4. Terms of Trade and Exchange Rate Terms of trade are relatively the value of exported goods in relation to import or in other words ratio of export value to the import value. Additionally, the relative improvement in terms of trade allows the nation to import at higher value for any level of export. Besides, the terms of trade is highly dependent on the rate of exchange because fluctuation in the exchange rate between the domestic and foreign nation will significantly affect the value of the commodities in the international market. The terms of trade have been calculated using the forma5. Terms of trade = Value of imports/ Value of exports Balance of Payments Visible trade balance = Value of visible export – Value of visible import = £ (400 – 500) = £ 100 Current balance = Export – Import + Unilateral Transfer Income – Unilateral Transfer Income = £ (400 – 500 + 200 -150) = £ 50 Balance for official financing = Export (visible and invisible) – Import (visible and invisible) + Capital Inflow – Capital Outflow = £ (400 - 500 + 200 -150 - 45) = £ 95 Surplus and Deficit in an Economy Surplus and deficit are to different state of trading position of the economy in which surplus arises when the nation value of export is higher than the value of import. On other hand, deficit arises when the value of import is greater than the overall value of exports. The surplus in trade signifies the net inflow of the national domestic currency from the international market and vice versa in the case of deficit6. Significance of Long-Term Deficits to Open Economies The long-term deficits arise when the revenue earned by the exports of the goods exceeds the value of overall spending of the nation consequently on the year-on-year basis. Besides, the long-term deficits reflected that the economy is not able to utilise its key resources in an efficient manner and highly rely on the other nations’. Besides, the issue is highly significant because the growing level of deficit is anticipated to distract the economic stability of the nation with the increased level of unemployment due to high level of outsourcing jobs. Moreover, with the high level of import by the citizens will lower the demand of domestic products. Consequently, the domestic business will be hampered significantly in terms of its financial development7. Task 2 Role Played By Exchange Rates in European Business Exchange rate plays an integral role in determining the value trade not only for the traders undertaking the export and import but also for the economy at large. The fluctuation in exchange rate is the key determinate that reveals the performance of European businesses. For instance, the deprecation in the exchange rate is likely to make the export cheaper and appreciation in the exchange rate to reduce the competitive position of most of the European exporting businesses. Furthermore, depreciation in the European currency will allow the international consumers to buy cheaper British goods and service and vice versa. Thus, the concept of exchange rate drives the market efficiency of European business8. Advantages Attributed To the Adoption of a Single European Currency In the European Union’s nation, Euro is the single dominated currency that has been shared by the 19 member states. The adaptation of Euro, as the single currency was introduced during the year 1999, however, in the current scenario, around 337.5 million EU inhabitants adopted and used the currency with its significant benefits. The major advantage of adopting the single European currency is that the inhabitants can easily travel and transfer funds without any harassment to conversion of currency across the borders. Besides, the business enterprises do not need to bear any heading cost to secure itself from the fluctuation in the currency. Additionally, there will be possibility of having lower rates of interest, as the members of EU have been looking into the regime of German monetary credibility. Nevertheless, the regime of having the single European currency lowers the possibility of volatility in the currency among the participating member nations9. Free Trade and Protectionism and the Role Played By Tariffs, Quotas, and Deregulation within the EU Free Trade and Protectionism Free trade is the regime that significantly allows the nation to trade with the other nation without the interference of the government through restricting the trading process with tariffs, quotas, and subsides among others. Additionally, having the competitive advantage in the production of some goods and services trading becomes the integral part for the overall economic reform of the nation. Besides, the free trading highly differs from protectionism trading, which refers as restriction in the trading activities in the form of policies, system, rules and regulations in order to protect the nation through engaging in the unfair trade practices. Similarly, it also plays an integral role in safeguarding the interest of domestic market from the cheaper foreign products10. Tariffs, Quotas, and Deregulation In the context of EU, tariffs are the rate of taxes that has been imparted in the goods and services imported in the EU zone. Besides, it is key form of raising the government revenues but on the other hand, it raises the price of the products in the hand of consumers as well as foreign suppliers. Additionally, quote is the form of protectionist trade practice that restricts or limits the quantity of good that the nation can import. Besides, in the hand of the domestic producers, quotas plays a prior role, which allow them to compete with the foreign goods, as the quotas sometimes make the imported products expensive than domestic. Furthermore, deregulation in the trading activity refers to the elimination of government involvement in the industry. Moreover, deregulation in trading allows the industries to create more competition in the market place11. The Importance of Geographic and Occupational Mobility in Wealth Creation for EU Member Countries The article 39 of the EU treaty enables free movement of workers in the EU zones having the lower level of restriction but the EU still had very tight restrictions on the employment of the labour and their movement from outside the EU. The act of geographic movement is highly important because it allow the labour to move any were around the EU zone where they find the opportunity for job. On the other hand, occupational mobility provides ease in the changing the job from one industry to other. Furthermore, the provision of geographical and occupational mobility highly assist the EU members countries in wealth creation, as it allow the member states to mitigate the issues such as shortage of labours and productivity. Besides, it will also allow the member nations’ nascent industry to reform in growing the overall economic condition with high-level of industrialisation. Furthermore, the geographical and occupational mobility also allows the members to deal with various social issues including unemployment, poverty, and rationalism among others12. Task 3 UK Government and EU Institutions ‘The European Council’, ‘The Council of the European Union’, ‘The European Parliament’, and ‘The European Commission’ are the four major EU institutes that play an integral role in determination and legitimizing the EU policy of the member nations. ‘The European Council’ defines the political direction as well as the priorities of EU, The Council of the European Union’ provides necessary impetus for the development priorities. ‘The European Parliament’ works for the fulltime functioning in the member nations’, and ‘The European Commission’ works as the executive of EU for providing legislation, decision making and day to day running of the union. The augment that the UK has considerably relinquish its high amount of powers to the EU institutions is highly been highlighted with the statement of David Cameron, British prime minister who publicly expressed his view regarding separation of the membership of UK from the EU within five years. In this regard conservative party of the UK holding view that the UK is an independent nation and has not adopted the single currency regime as other EU nations. Due to the non-adaption of currency, the UK is no more liable for the benefits provided by the EU constitutions. However, the UK as the member of EU did not adopt Euro as its common currency. Furthermore, it has been argued that having the single currency regime the UK will move towards banking union as well as centralised political union that would not be beneficial for the UK economy. Moreover, it will also highly influence the overall foreign investment and develop uncertainty in the economy13. Fictitious Directive 267/14 UK government may possibly breach fictitious directive 267/14 that has been developed by the EU during 2014 because the UK government perceived themselves as an independent nation. Furthermore, if the UK government ignores fictitious directive then it will likely disregard the other EU to object the involvement of the UK. EU Funding Streams Pooling funding streams and East of England European Regional Development Fund Competitiveness Programme (ERDF) are the two main funding streams under the EU. The main purpose of ERDF is to encourage innovation as well as knowledge in order to increase the overall productivity through the allocation of £250 million. Besides, the main purpose of the pooling funding streams was to enhance interactive modernism in the agriculture industry14,15. Task 4 EU as a Trading Bloc EU as the single market is globally the largest trading bloc with having around 500 million citizen and 21 million companies that generates around £11 trillion economic activities. EU as a trading bloc within the European zone protects EU nations from the imports of the non-member nations. Moreover, the key significant importance for the member state is to have high market access, maintaining economy of scale, high opportunity through creating more jobs in the economy, and high level of protection16,17. Significance of Linguistics, Cultural, Logistical and Environment Linguistics, cultural, logistical and environment are the key factors of trading environment especially in the EU zone. Linguistics will enable the member nations to mitigate the issues that mainly caused due to language barriers. Cultural, logistical as well as e environmental factors enables the members to determine the trading regimes of the member nations. These factors are the key barrier while formulating the national budget in the EU nations because this factors determines the buying behaviour of the inhabitants of the nation18. EU funding streams for France A ‘2 Seas Programme’ is one of the key EU funding stream that has been developed for the 4 EU members nations’ including France in order to introduce innovative knowledge and high research based environment. Additionally, the ‘2 Seas’ stream has been developed to protect the national resources of sea and promote the green economy19. New Venture EU zone is one of the key deriving economy over worldwide with the high potentiality of growth for the foreign companies like Wonga. Besides, it has been equally important to scan the internal as well as external forces prior to putting investment venture in EU. Contextually, in order to invest in the EU, Wonga should possibly analyse the environment and growth potential for the future. In this regard, it can be comprehended that analysing the EU market and environmental forces is highly essential for deriving the business opportunities accordingly and undertake business operations20. 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