Business Management Report: Free Trade, Global Markets, and Policies

This report provides a comprehensive analysis of free trade within the context of business management. It begins by defining free trade and exploring its mechanisms, including the concept of comparative advantage and how specialization and economies of scale contribute to economic growth. The report then examines the benefits of free trade, such as increased prosperity, competitiveness, and access to goods, services, and resources. It also discusses the role of international cooperation. However, the report also acknowledges the arguments against free trade, particularly the potential disadvantages for developing countries and the impact of protectionist policies like tariffs and quotas. The report covers both sides of the debate by providing a detailed discussion of the negative implications of free trade and the implementation of protectionist policies. Overall, the report offers a balanced perspective on the complexities of free trade in the global economy, highlighting both its advantages and disadvantages for different stakeholders.

Running head: BUSINESS MANAGEMENT
Business Management
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer to Question 1.................................................................................................................2
Part 1......................................................................................................................................2
Part 2......................................................................................................................................4
Part 3......................................................................................................................................5
Part 4......................................................................................................................................6
Part 5......................................................................................................................................7
Part 6......................................................................................................................................8
Answer to Question 2.................................................................................................................9
Part 1......................................................................................................................................9
Part 2....................................................................................................................................10
Part 3....................................................................................................................................11
Part 4....................................................................................................................................11
Part 5....................................................................................................................................13
Part 6....................................................................................................................................13
References................................................................................................................................15

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Answer to Question 1
Part 1
The concept of “Free Trade” in economics, refers to the free market policy which is
often adopted by different economies, in the international scenario, where there exists no
barrier or hurdle in exporting the commodities or services produced in one economy to its
trading partners and importing the goods and services from the trading partner countries. This
type of policy infrastructure, adopted by different countries are also known as “laissez-faire”
or “trade liberalization” policy (Erikson, 2014). In the contemporary global scenario, with
increased mobilization of resources and greater connectivity of the international economies,
many of the countries across the global have established Free Trade Agreements with
different countries for the purpose of efficient development of their economies and an overall
greater economic welfare of their residents, the logic behind the same being discussed in the
following section (Anderson & Yotov, 2016).
Working of Free Trade Policies
The basic economic notion behind the working of free trade is that the existence of
free trade between two particular economies help in experiencing efficiency in production of
commodities and services, by establishing specialization and economies of scale in the
production, thereby helping both the economies to experience faster economic growth in the
long run (Dragusanu, Giovannucci & Nunn, 2014). The basic working notion behind the
same lies in the economic assumptions of scarcity of resources required for production and
the need for the producers to allocate these scarce resources efficiently so as to maximise the
production of goods and services. Taking queue to these assumptions, the economists in
favour of free trade puts forward the argument that not all resources are present equally in all
the economies of the world and the ratio of usage of different resources of production are also
not same for the different commodities and services which are consumed across the world
(Rios, McConnell and Brue, 2013).
In the absence of free trade, however, the countries need to produce all the goods and
services which their residents require, irrespective of how much efficiency they can maintain
in resource allocation and production. In the presence of free trade, however, the countries
can concentrate on producing those goods and services which require the resources which are
abundant in their economy and then exchange the same with those commodities or services
the production of which require the resources which are not abundantly present with them.
There have been many arguments put forward by the economists over the years, in
favour of facilitation of free trade among different countries. The most popular of these
arguments is the argument of the “Comparative Advantage” in trade, as had been put forward
by David Ricardo. The term comparative advantage, refers to the ability of a nation to
produce a commodity or service at a lower opportunity cost than another nation (Costinot &
Donaldson, 2012). The term opportunity cost of production of one commodity, refers to the
amount of other commodities which needs to be sacrificed for the production of one unit of
the former commodity. According to Ricardo, if the countries concentrate in producing those
commodities only in which they have lesser opportunity cost then they can produce the same
much more cost efficiently, thereby being able to sell the same at prices much lower in the
countries where the opportunity cost of production of the same commodity is high
(Schumacher, 2013). This one hand increases the economic abundance of the concerned
country due to increased production and sales of their product and on the other hand help the

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same to buy those commodities from other countries, whose opportunity cost of production is
high in the concerned economy. This also leads to increase in the diversity of products in the
countries and increase in the knowledge and skills of the workers, by encouraging
specialization as well as division of labour in the country (Villareal & Fergusson, 2017).
However, for the countries to enjoy this productive efficiency and higher economic
abundance, as well as specialization in the labour force, it is important to facilitate free trade
between the country and different other countries, who can be potential importers of their
goods and services and exporters of the commodities which they need.
Thus, from the above discussion, it can be asserted that free trade works in the global
economic scenario, by facilitating increased and efficient production of goods and services in
different countries, thereby increasing the economic welfare of the nations as a whole and
also contributing in building more skilled labour force and specialization in the economy by
promoting division of labour. The global productive efficiency as well as global output of
goods and services also increase under the domain of free trade. Free trade agreements also
facilitate greater mobility of not only goods and services but also greater mobility of
productive resources and technological innovations across the globe.
Barriers to free trade due to protectionist policies
Although there remain substantial arguments in favour of free trade across countries,
however, not all nations encourage complete free trade policies in their domains. There
remains logical reasoning behind such policies also. One of the primary argument against that
of the implementation of free trade policies is that free trade often hampers the growth of the
domestic industries. In the presence free trade, the foreign bigger companies, already
experiencing cost efficiency and economies of scale in their production processes, infiltrate
the economies with their lower priced products, which gain higher share of markets and
clienteles abruptly. This in turn hampers the growth of the domestic companies operating in
the same industry as they face immense competition (Irwin,2015). The halt in the growth of
the domestic industries hamper the long run economic growth and welfare of the population
by reducing job creation, production and income of the people in general.
To avoid such conditions, many economies implement protectionist policies in their
domain of international relations. These protectionist policies include imposition of tariffs or
tax on imports of the commodities from other countries. This, by increasing the price of the
foreign products, increases the demand for the domestic commodities. The protectionist
policies also include imposition of quotas on imports, thereby restricting the quantity of
import of goods and services from other countries and benefiting the domestic counterparts
by increasing their potential market and clientele (Francois & Manchin, 2013).
These policies taken by the economies in the global scenario, with the objective of
providing the domestic industries a fair ground to increase their production and economies of
scale, act as primary hurdles in the aspects of facilitation of free trade across the countries,
which have mixed implications on the economy of the country in the long run. On one hand,
imposing hurdle on free trade may help in developing the domestic industries and on the
other hand prevents the country from achieving the fruits of free trade which include
specialization, division of labour and inflow of technological innovations and other factors of
production and a diversified basket of goods and services in the countries concerned
(Patterson, 2015).

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Part 2
As has been discussed in the above sections, the phenomenon of Free Trade has
gained immense importance over the years, with the increase in the integration and
inclusiveness of the global economic scenario and with the increase in connectivity between
the nations across the world. The nations, in the contemporary global economic framework
are far more interlinked and dependent on each other considerably in socio-political,
economic and technological aspects. This also indicates towards the importance and
significance of free trade in the global economic scenario. There have been various
arguments put forward by the economists across the globe, supporting the needs and positive
implications of free trade in the countries. The primary arguments, in this aspects are
discussed as follows:
a) Establishment of Specialization- One of the primary arguments in favour of free trade in
the countries, is that the imposition of free trade policies in different countries help the
concerned countries in specializing in the production of those commodities and services in
which the country enjoys comparative advantage and lower opportunity costs compared to its
trading partners. This leads to increase in the division of labour in the production activities
across countries, thereby helping the labours to specialize in specific productive activities
(Mingst & Arreguín-Toft, 2013). This increase in the specialization and skill of the labours in
the countries help in optimum and more efficient usage of the productive resources in the
country, thereby helping the country to experience economies of scale in production.
b) Increased all round prosperity- The presence of unrestricted trade among the economies
across the globe, increases the efficiency and specialization of the labours of the countries in
producing different commodities and services in large scale, owing to economies of scale
which the countries enjoy due to the increased global markets and production. The prices of
the commodities also fall due to productive efficiencies enjoyed by the trading countries and
increase in the global output amount of different commodities produced. All these factors
together contribute in increasing the standard of living of the people across the globe. Thus,
by increasing production, consumption and economic prosperity of the global population, the
free trade policies help considerably in increasing the all-round global prosperity (Birol,
2012).
c) Increase in competitiveness- The implementation of free trade in the economy, contributes
in increasing the competition in the production activities in different economies. Under the
threat of intense foreign competition from the big multinationals under free trade, the
domestic producers constantly work on increasing their productive efficiency, which is also
facilitated by the inflow of global technological innovations. The presence of free trade also
prevents domestic monopolies to crop up, thereby helping the customers by decreasing the
exploitative powers of the domestic producers and increasing the varieties and options in the
hands of the customers in a country.
d) Inflow and greater access to goods and services as well as resources- The presence of
free trade, enables the countries to get the goods and services, which the countries cannot
produce efficiently, thereby increasing the access of the customers to a diversified
commodity bundles and services (Yang & Martinez-Zarzoso, 2014). It also helps in the
inflow of technological innovations and also productive resources from different parts of the
world, thereby increasing the overall accessibility and benefits of not only the consumers but
also producers in a country.
e) Increased international cooperation- Free trade categorically helps in improving not only
the economic and commercial ties among different nations across the globe but also

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contributes in building up robust socio-political and overall ties among the trading partners,
thereby increasing the cooperation of the economies in the international scenario, which not
only contributes in economic progress but also helps in increasing the political stability and
social integration among the countries.
Thus, from the above discussion it can be asserted that there remains considerable
reasons and arguments in favour of implementation of free trade in the economies.
Part 3
The presence of different assertions regarding the positive implications of free trade,
are countered by several arguments, which talk against the imposition of free trade policies in
the countries. The main arguments which exist in the contemporary global economic and
commercial scenario, regarding the negative implications of free trade policies are discussed
as follows:
a) Disadvantages of the developing countries- One of the primary and most widely
acknowledged arguments against free trade is that the same can be advantageous for the
already developed countries with efficiencies in the production of goods and services, the
same may not be always true for the backward or the low developing countries. With unequal
distribution of powers, efficiencies and advantages enjoyed by the developed and the
developing countries, the imposition of free trade relationships between them often result in
exploitation of the human and non-human resources of the developing countries by the
developed countries, which increases the already existing miseries of the poor populations of
the low developed countries. One of the primary examples of such exploitation due to the
imposition of colonial and imperialistic rules of the United Kingdom is the situation which
India faced for two centuries prior to 1947 (Hutchins, 2015).
b) Destruction of the domestic industries- The most economically viable argument against
that of free trade is that in many instances the imposition of such policies hinders the growth
of the domestic industries by forcing them to face unfair global competitors. With the
imposition of free trade policies, the big foreign producers of goods and services infiltrate in
the economies, with their cost efficient productive activities and low priced high quality
products, which help them in attracting more customers of the domestic economy (Siles-
Brügge, 2014). This in turn creates unfair competition for the domestic producers of the same
goods and services, especially those who do not enjoy economies of scale. These companies,
by facing stiff competition and price war often leave markets, thereby destroying the
domestic economic growth.
c) Perpetual Inefficiencies- Due to the imposition of free trade policies across the countries,
the industries in which the countries enjoy comparative advantages, develop significantly
thereby leading to specialization of labour and the development of skills in these
commodities or services. This in turn, leads to the development of those industries only, often
at the cost of development of other industries. This industry specific development, in turn,
hampers all round development in the economy as the initially inefficient industries, which
may have scopes of future expansion and economies of scale, remain perpetually neglected.
Thus, the imposition of free trade often rules out the possibility of overall development of the
economy as a whole, by facilitating sector specific development.
d) Over dependence on trading partners- The imposition of free trade policies across
different economies in the global scenario, may facilitate in improving the international
cooperation and tie ups between these economies. However, the free trade scenario also leads

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to constant integration of the economies which in turn often leads to overdependence of the
economies on one another. This in turn makes these partner economies more vulnerable to
one another’s economic as well as socio-political fluctuations. In an increasingly integrated
environment, when one of the partner economies experiences economic depression,
recession, political instability and other tensions, then the economy as well as its productive
as well as commercial activities are hampered significantly, which considerably affects the
trading relations of the country with other countries, thereby affecting the economies of the
trading countries too (Jaffee, 2014). One of the most prominent examples in this aspect is the
Great Depression of the 1930s as well as the Sub-Prime Mortgage Crisis of 2008, both of
which originating in the economy of the USA had considerable negative and long term
impacts on almost all the economies across the globe, thereby indicating towards the negative
implications of presence of free trade across different countries.
Thus, from the above discussion it can be seen that there exits considerable number of
vital arguments against the implementation of free trade policies in the countries in the global
economic scenario, especially those in those countries which are developing or are at lower
developed state.
Part 4
The global economic scenario, over the last few decades, has experienced
considerable dynamics and integration as well as inclusiveness, owing to the international
phenomena like Globalization and trade liberalisations. With time more and more countries
have started implementing free trade policies coming out of their inhibitions regarding the
drawbacks of free trade policy infrastructure. With the benefits of free trade environment,
which includes greater competitiveness, greater productive efficiencies, better utilization of
scarce productive resources and inflow of technological innovations and productive
resources, along with that of varieties of commodities and services, increasing the options as
well as economic abundance of the customers as well as the producers.
In this context, various international authorities, bodies and global regimes have been
established over the years, who primarily work in the domain of facilitating free trade across
the globe as a whole and member nations in particular and also try to rule out any kind of
practices or phenomena existing in these countries, which act as hurdles in the way of
facilitation of free trade (Cohn, 2017). The most important global regimes in these aspects are
as follows:
a) GATT- The General Agreement on Tariff and Trade, signed in Geneva on 30th October,
1947, though not being a proper regime working to promote free trade, is still significant as
one of the foremost of its kind of legal agreement, signed by so many nations across the globe
with the objectives of eliminating trade barriers across the member countries in order to
facilitate free trade. Though with time the GATT was substituted by the WTO, the original
text of GATT (1947) is still into existence and has been modified considerably in GATT
(1994) (Rausser, 2012).
b) World Trade Organization- One of the most important global regimes in the aspect of
promotion of free trade across the globe is the World Trade Organization. The regime
officially came into existence on January 1, 1995, with 123 member countries across the
globe. The organization came as a successor of the previously signed international trade
agreement GATT (General Agreement on Tariffs and Trade) and is currently the largest
global economic organization. The primary function of the World Trade Organization is to

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regulate and facilitate international trade and commercial activities between the different
member countries (Wilkinson, 2013). The functions of the WTO include the following:
 Regulation of the trading activities of different member countries in the global
framework
 Regulation of flow of goods and services as well as intellectual properties among the
member countries
 Facilitating the creation of an environment for easy negotiation of trade agreements
and for the member countries to solve any kind of disputes arising in the domain of
trade and commercial activities
 To ensure that the member countries are abiding by the norms and regulations created
by the organization such that a free trade facilitating global environment is maintained
Over the years the regime has helped in creating considerable free trade facilitating situations
across the countries in the international commercial and economic scenario and has played
key roles in dispute resolutions among the different countries from time to time.
c) International Monetary Fund- Another crucial organization in the global framework,
which works in the domain of facilitating free trade among the global economies is that of the
International Monetary Fund, which was formed in 1945, at the famous Bretton Woods
Conference. Starting with the membership of only 29 countries in 1945, the IMF now has
189member countries under its regulatory framework. The main functions of the international
regime are as follows:
 Securing the financial stability of the member countries
 Facilitation of international trade and transfer of financial as well as productive
resources among the member countries
 To work towards the eradication of poverty by facilitating trade and productive
efficiencies
 Managing the difficulties regarding the balance of payment anomalies in the member
countries thereby averting international financial crisis arising in trading activities
(Paloni & Zanardi, 2012)
d) World Bank- The World Bank, also plays crucial roles in the facilitating international
trade and commercial activities, by monitoring the monetary stabilities of the economies and
smoothening lending activities across the globe for the purpose of investments and other
economic and social welfare activities.
The regimes, discussed above play vital roles in facilitating free trade and commercial
activities in the contemporary global economic scenario.
Part 5
As can be seen from the above discussions, there exists several theoretical
frameworks arguing in favour of implementation of free trade across the countries, with the
primary and most widely used theory being that of the theory of Comparative Advantage as
has been put forward by David Ricardo. Keeping this assertion into consideration, the
situation of the economy of the United States of America can be analysed.
The country, known to be one of the most powerful and stable economies in the
global scenario over the years, has sufficient labour as well as capital resources. The country
had always been performing well in terms of manufacturing of basic goods and services.
However, the comparative advantage of the USA, as per the assumptions of the Ricardo’s
theory has been in the production of the technologically advanced products as well as

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services. This is primarily because the production of high tech products as well as services
require efficient technologically innovative infrastructures as well as high abundancy of
capital resources as the production process of such products are capital intensive, which has
been one of the advantages of the capital resources rich country.
This in turn, has led to increase in the production of capital intensive products and
services in the country over the years, thereby leading to reduction in the basic manufacturing
activities in the country. The country, with the years, has outsourced these basic
manufacturing activities to the labour resource rich and capital deficit developing countries
like India, China, Malaysia and Taiwan, thereby strengthening the capital resource intense
high tech commodities and service sectors in the country itself (Pearce II, 2014). The strategy
of outsourcing the basic manufacturing activities to the low cost cheap labour supplying
developing countries and concentrating on high tech service sectors was proving to be
beneficial for the USA, till the economic crisis of 2008 hit the country.
The crisis, which originated as a sub-prime mortgage crisis in the country, arose
mainly due to the burst of a capital investment bubble especially in the real estate sector of
the country. This in turn affected the high tech capital intensive service sectors of the country,
thereby bringing the economy of the country to a standstill bringing in long term recession in
the country. Unemployment rose significantly with the service sector production reducing
tremendously. In this scenario, the policy of abandoning the basic manufacturing capabilities
of the country had been questioned.
Due to outsourcing of the basic manufacturing activities, practiced by the USA over
the years, these industries did not grow efficiently in the country, thereby aggravating the
unemployment problems’ severity in the economy during and post the economic crisis of
2008. The policy infrastructure of the country faced immense backlash from the critics, in the
ground that when the crisis started and people started losing employment and economic
welfare, the presence of manufacturing industries could have provided buffering to the
economic and employment scenario, by providing a chance to the work force to get absorbed
in these industries. By outsourcing their basic manufacturing to other countries, the USA lost
the support system of the economy in times of the crisis (Pisano & Shih, 2012).
Part 6
The global economy, over the years, have seen countries taking free trade policies as
well as protectionist trade policies according to their conveniences and needs of their
economies. Although almost all of the major global economies have been open economies or
have resorted to free trades with time and increased integration and inclusion of different
economic traits in the international framework, one of the global economies known for its
adherence to protectionist policies for centuries is that of the economy of China (Kee, Neagu
& Nicita, 2013). The government of China, especially before 1978, had been seen to be
implementing protectionist policies in their trade frameworks for protecting their domestic
industries and facilitating the development of economies of scale of these industries, by
securing the same from the unfair foreign competitions of the already production efficient
multinational businesses.
The protectionist trade policy framework, taken by the government of the country had
been more of the sort of import substitution as well as export promotion mixture. On one
hand the country has over the years, implemented restrictions on their imports through tariffs
and quotas and on the other hand the country has also tried to promote exports of the goods
and services produced by the domestic businesses across the globe, in order to facilitate their
growth and economies of scale. However, with time and with free trade being implemented

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more expansively in more economies across the globe, China also changed their policies, but
did not completely forego protectionism from their external relations framework. China
resorted to partially liberate the economy, by opening only those sectors for the foreign
investors were inflow of foreign credits as well as technological innovations have been
necessary, which mainly included the labour intensive basic manufacturing units, thereby
facilitating the inflow of necessary technological innovations in the economy without
threatening the other industries and their development and gaining of economies of scale.
Thus, the protectionist and semi-liberal trade policies of China contributed to the economic
progress of the country with time (Zhang & He, 2014).
However, in the recent scenario, the country has been increasingly liberating its
economy and trade sectors. The country currently increased its domestic purchase access and
is the largest economy when measured in terms of purchasing power parity in the
international scenario. The country has committed in making its markets duty free and quota
free. The rank of the country has also increased in the Enabling Trade Index, from 63 to 61 in
the recent periods and it is the only country in among the top 10 most populous ones in the
world to rank in the first half of the concerned index. With the accession of the country to the
WTO in 2001 and with the reduction of the average tariff to 4.5 percent by 2014, it can be
asserted that the country has been slowly opening up its trade scenarios with time (Haley &
Haley, 2013).
Answer to Question 2
Part 1
The currency exchange rate for a particular currency refers to the rate at which one
unit of the concerned currency is exchanged for another currency of another country. This,
thus, refers to the value of the currency of one country in relation to the currency of another
country. The currency exchange rates of different countries have considerable implications on
the export import dynamics and trade scenarios of the countries, thereby having considerable
significance on the economic and commercial scenario of the countries.
Over the years, the exchange rates of the currencies of the countries had been
determined by different process which have changed with time. In the previous periods (In
1910s), the currency exchange rates were established in different countries following the
Gold Standard, in which the value of the domestic currency of a country was determined by
the amount of gold reserves the country used to have. This system was followed by the gold-
exchange standards in the 1930s. However, both the methods became obsolete with time and
with most of the countries maintaining a managed float in their currency valuations, with the
values varying every day (Cooper, 2014). In the contemporary periods, the international
currency exchange rates are established by managed floating exchange rates, where the
values of the domestic currencies are affected by the economic actions of the monetary
authorities of the countries themselves. The values of the currencies in domestic economies
are also determined by the supply and demand forces in the money market. This means, the
demand of the currency of a country, in relation to the supply of the same, determines the
value of the currency in the international market.
However, apart from the above mentioned crucial determinants of the currency
exchange rates, the factors like the dynamics in the interest rates, inflation, economic growth
dynamics, trade and commercial activities and the unemployment scenario in the countries

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also contribute in establishing the currency exchange rates. Some countries also peg their
exchange rates, which are maintained over time by the government of the countries. The
emerging economies often do this in order to bring stability in their financial and commercial
domains. However, for pegging the rate of currency exchange, the countries need to maintain
large currency reserves, which help in controlling the supply and demand of the currencies in
the international framework (Frieden, 2014).
Part 2
The government of a country often strengthens or weakens the value of the domestic
currency of the country with respects to other countries in the international scenario. While
currency devaluation is done to facilitates exports of the goods and services produced by a
country, shrinks trade deficits and also help in reducing the cost of payments of interests on
the government debts, the increase in the value of local currency facilitates imports and
attracts investments in the country.
There are various steps which the contemporary monetary authorities of different
countries to strengthen or weaken the values of their local currency compared to other
currencies, which are as follows:
a) Interest Rates- The primary tool in the hands of the government of a country for changing
the values of the domestic currencies is the rate of interest prevailing in the domestic
economies. When the government needs to increase the value of the same, the interest rate is
increased, which increases the returns on the bonds and other securities of the government,
thereby attracting investments from all parts of the world. This increases the demand for
domestic currencies for the purpose of buying such assets, which in turn appreciates the value
of the same. On the other hand, reverse policy is taken to weaken the domestic currency in
the international money market (Klein & Shambaugh, 2012).
b) Monetary Policies- The monetary authorities of a country also monitors and controls its
exchange rates with the help of the monetary policies. When the government needs to
devaluate its domestic currency, it takes expansionary monetary policies, thereby injecting
more liquidity in the money markets increasing supply of money, thereby decreasing the
value of the same compared to other countries and vice versa.
c) Currency Intervention- In this process the Central Bank or the monetary authority of a
country sells or purchases its own currency in the foreign exchange market in order to
manipulate the value of the same in the international financial markets scenario. This method,
being one of the newest methods adopted by the contemporary governments in the global
framework, is increasingly becoming popular with most of the prominent economies
resorting to the implementation of the same, which primarily include economies like Japan.
The Bank of Japan, in the recent period, has been observed to intervene in the currency
market in order to prevent excessive appreciation of their currency, which could have
hampered their trade and productive prospects and efficiencies (Jin & Choi, 2013).
Currency intervention can be of two types:
Sterilized Transactions- Here, the exchange rates are influenced without selling changing the
monetary base of the country.
Non-sterilized Transactions- In this method simple transactions of bonds of foreign currency
bonds are involved which do not offset transactions.

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Part 3
One of the global economies, known for the immense and abrupt economic growth
and industrial and commercial prospects starting from 1950s through 1980s is the economy
of Japan, whose exemplary economic success is widely known as the economic miracle of
Japan in the international economic framework. One of the major reasons behind this huge
economic success of the country can be attributed to the robust economic framework and the
efficient export driven policy framework followed by the government of the country during
that period of time.
The primary policy taken under the trade promotion strategy of Japan was the
devaluation of the domestic currency, which proved to be a robust strategy on part of the
government of the country. Following the success of the country, the Four Asian Dragons,
Taiwan, Singapore, Hong Kong and South Korea also took similar strategies of export
promotion, as a part of their development framework. These strategies mainly included
devaluation of the domestic currency and manipulation of the exchange rates of the same in
the market. The devalued currency proved to be one of the major driving force of the
economic growth of the countries, especially between 1970 and 1990. The share of these
countries, especially Taiwan and South Korea in the world’s GDP increased manifold. These
four countries, in the mid-1980s, also accounted for nearly 60% of the total manufactured
exports from all the developing countries in the then international trade scenario (Palley,
2012). The increase in the exports, in turn, facilitated immense industrial development in
these four countries. In South Korea, between 1960 and1989, the share of the agricultural
sector in the GDP decreased from 37% to 9% and that in the total employment in the country
dropped from 66% to as low as 19%, which was accompanied by almost two times increase
in the share of manufacturing sector in the GDP of the country. The situations were similar in
the other three countries, with the industrial sector players experiencing economies of scale
and continuous increase in the global demand for their cost efficient product, much of which
can be attributed to the currency devaluation in these countries.
Part 4
China has been one of the success stories in the global economic scenario, in terms of
robust and fast economic growth and expansion of the industrial sectors of the country. The
country, in the recent periods, has emerged as one of the predominant economies in the
world, with the economic growth variables functioning better than that of many of the
developed countries. Much of the prosperity and immense economic progress of the country
can be attributed to the immense growth of the industrial sector which again was clubbed by
the robust export promotion strategies taken by the government in the last few decades.
The country, over the years have promoted exports of the goods and services
produced within the economy, which primarily consists of manufactured goods, thereby
increasing the number of customers of these industries, not only in the domestic boundaries
but also in the global scenario. The export promotional strategy of the country, primarily
consists of the policy of a consistently devaluated local currency, in the international foreign
exchange market. This maintenance of cheap local currency in the country, however, had not
only positive implications but also several negative effects on the economy of the country,
which are discussed in the following section.

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Positive Implications of cheap currency
Of the positive implications of cheap domestic currency in the economic dynamics of China,
the primary ones are as follows:
a) Exports:
The devaluated currency of the country, makes the goods and services produced in the
country appear comparatively cheaper in terms of the other currencies in the global foreign
exchange market. This in turn, has increased the demand for those goods and services in the
global scenario, thereby helping the domestic industries of China to expand considerably,
thereby facilitating the overall economic growth of the country.
b) Growth and employment:
Another crucial positive implication of the reduced rate of currency of the country,
which can be seen as an extension of the above discussion, is the aspects of facilitation of
growth and employment in the country. When the exports of a country increase, due to the
presence of cheap domestic currency, the demand for the goods and services produced by the
country also increases, as has happened with that of China. This in turn, increases the
expansion of the industrial sector, thereby creating greater employment in the economy,
which in turn, facilitates the economic wellbeing of greater share of population of the
country, thereby contributing positively to its economic growth (Mallaby & Wethington,
2012).
c) Special Drawing Rights
One of the primary intension of the country has been to include the domestic currency
as a part of the SDR, which is till now, a basket of the national currencies including the US
dollar, sterling, yen and pound. The inclusion of the currency of China, in the SDR can help
the country to increase its commercial viability and industrial prospects in the global
scenario, by facilitating alliance with the other strong economies in the world.
However, apart from positive implications of the cheap domestic currency in the
economy of China, there also remains several negative implications of the same on several
economic aspects of the country.
Negative implications of cheap currency
a) Imports
The devaluation of the currency of the country, though helps China in exporting their
goods and services, however, creates problems in the import dynamics of the country.
Imports become costlier, which not only decreases the welfare of the consumers but also
hinders the productive and cost efficiencies of the domestic producers.
b) Technology inflow
As it becomes difficult for China to import goods and services due to the presence of
cheap domestic currency, the trade relations of the country with other global economies are
also hampered significantly. With the restriction in the level of imports of goods and services,
owing to affordability issue, not only the import of productive resources and goods and
services are hampered, but the inflow of technological innovations from different parts of the
world also gets hampered (Yu, Zhang & Zhang, 2017).

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c) Hostile neighbour policy
The policy of devaluation of the domestic currency of China, which made the exports
of the commodities produced by the country cheaper has posed as serious threats to the
export of other countries. This has also led to the devaluation of the domestic currencies by
many of the other economies, which in turn decreases the trade advantage enjoyed by China
to a considerable extent.
d) Investment
Due to the presence of cheap currency, lesser number of global investors are attracted,
thereby decreasing the inflow of investment in the country.
Thus, from the above discussion, it can be asserted that the policy of cheap domestic currency
in China is seen to have both positive as well as negative implications on the overall
economic dynamics of the country.
Part 5
After the second world war, the value of the US dollar increased considerably and the
government of the USA also kept the currency strong, with relatively high exchange rate as
compared to other countries. The primary reason behind this was to increase the
attractiveness of the economy in the global scenario, by making the currency strong and
stable. The fact that the US dollar was strong and stable and acted as the numeraire for
measuring the values of other currencies, made the country attractive for the investors from
all parts of the world. This helped in increasing the inflow of investment in the country over a
prolonged period of time, which in turn accrued to the economic prosperity of the country.
However, the increasing inflow of investment in different sector of the USA slowly
created investment bubble in the economy, especially in the residential, financial and real
estate sectors of the country. The bubble burst in 2008-2009, leading to the creation of an
acute sub-prime mortgage crisis in the country, which had immense negative implication not
only on the country itself but on the global economic framework. With the investment sector
of the country abruptly losing credibility, the value of the currency devaluated significantly
(Glick & Leduc, 2013, May). The monetary authority of the USA has not taken any
significant step to strengthen the same since then. This is specifically done to increase the
exports of the country, thereby boosting the manufacturing sector, which stagnated prior to
that. With the objective of increasing the production and expansion of the manufacturing
sectors, by increasing imports, which has positive implications on the overall employment
generation and economic welfare scenario, the currency of the country has been kept
devaluated in the recent periods.
Part 6
The Euro was introduced in the Eurozone in 2002, as the single currency for all the
member countries of the European Union. The primary objective behind the establishment of
a single currency in the Eurozone was to facilitates the economic growth of these countries
by facilitating free and easy inflow and outflow of cash, productive resources, goods and
services as well as trade and commercial activities among the countries falling in the single
currency zone. However, in spite of all the advantages the single currency policy proved to

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have several crucial adverse implications on the concerned economies which can be seen
from the following discussion (Lapavitsas, 2012).
The problems of the single currency policy become apparent in the context of the
crisis which arose in the PIIGS in 2008-2010. The term PIIGS is an acronym for Portugal,
Ireland, Italy, Greece and Spain, which are designated as the most economically weak
members of the European Union, which were most adversely affected by the European debt
crisis of 2008-2009. The acute financial instability and loss of credibility of the nations’
ability to pay the bondholders, thereby increasing the risk of defaulting of the nations. The
crisis even aggravated as the countries were not able to take independent monetary or
financial policies due to the presence of the single currency policy, thereby restricting the
economies concerned (Goldstein, McCarthy & Orlov, 2017). This in turn questioned the
efficiency of the single currency policy as there arose the trade-off maintaining a single
currency and attending the individual needs of the member nations. In presence of such
economic disparities in the Eurozone, with several economies running smoothly and others
like PIIGS facing tremendous economic instability, the sustainability of the single currency
policy becomes a question of concern. This problem led to immense problem among the
member nations, which in turn can be seen from the recent voting of the UK to leave the EU
(Brexit) which the country announced in 2016 and is expected to come to implementation in
2019.

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