Interest Rate is the cost of borrowing or the price paid for rental of funds or the price for not using his own money. Interest rates vary with the period of loan. For long term loan, it is lower. For medium term loan, it is almost average but for short term loan, it is usually higher than average. Interest rates derive the economy by increasing or decreasing the money supply in the financial markets.
Demand for Money Interest Rate Supply for Money When the central bank wants to control inflation by reducing money supply in the economy, it increases interest rate which results in low demand for money. But this factor causes low investment, consequently people become unemployed and national output falls.
On the other hand, when central bank wants to boost up economic and business activities in the country, it allow commercial banks to advances loans at low rate of interest, consequently supply of money in the economy increases. At this stage people have much more investment opportunities but they have no or low savings. With falling interest rate and more supply of money consumers rush towards the consumption of money on different products and services which causes general price level to raise hence inflation increases with the decrease in interest rates.
Stock Market is a market place where Stocks (Common Stock, a share of ownership in the corporationâ€™s earning and assets as a security for the money provided by individual investor to the company) of different companies are traded. Prices are quoted in the market demand and supply of shares of a particular company. Higher share price indicates that the affairs of corporate are being conducted in accordance with the rules, policies and commitment which the directors assure to each individual shareholder.
Foreign Exchange Market:
FEM is that market place where currencies from one country (say PKR) to another country (say US$) are traded. Foreign Exchange has strong impact on the economic position of any country. When 1US$ = 52 PKR, Pakistan have less exports to other countries because Pakistani products are expensive for foreign importers as compared to when 1US$ = 86 PKR as they get less Pak- rupees against one US dollar. On the other hand, when 1 US$ = 52 PKR, Pakistan have more imports from other countries because Pakistani importers have to pay less Pak-rupees to get dollars as compared to when 1 US$ = 86 PKR.
2) Why Study Banking and Financial Institutions? Structure of Financial Systems:
Finance means the management of Money and funds. Companies need such funds for long term investments and for running their day to day operations. Individual households save and indirectly lend their savings to such corporations. Banks, Insurance Companies, Mutual Funds, Investment Banks, Saving Banks and finance banks are financial intermediaries, who takes deposits of households and lend it to the corporations and consumers. Against the savings of households, it gives interest at lower rates to households but charge high rate from companies or consumers for the loan given to them. The difference between these two rates is the profit of financial intermediaries.
Banks and other Financial Institutions:
Banks are financial institutions that accept deposits and make loans. Banks include Central bank, Commercial banks, Investment banks, finance banks, Saving banks, loan associations, credit associations, mutual funds, pension funds, insurance companies and other such like institutions who act as an intermediaries between those who lend and who borrow. Against the loan or lending, banks take collaterals and fill other legal documents as a guarantee to get their money back. Normally banks provide consumer loans as well as industrial but consumer funds bear more rate of interest than industrial because they are non-productive in nature.
Innovation means improvement in the old systems or processes. Today banks are innovating with different financial instruments and options which start with the Information Technology to E-Finance. In old ages, people withdraw money by filling a cheque but today by ATM. Account balance can be checked at home PC. Consumer finance including Car, house, marriage and other facilities are part of this innovation. Foreign Trade through L/C or TT and local trade by DD and TCs are also innovative ideas. Now banks offer insurance facility, running finance, partnership, educational loans, lockers facility and other financial service are a way to attract customers and making their profits higher and higher.
3) Why study Money and Monetary Policy? Money is anything which is generally accepted in payment for goods or services or repayment of debts. Changes in economic variables are the result of change in money supply in the economy and hence monetary policy holds vital importance for the economy.
Money and Business Cycle:
Business Cycle is the continuous change in the position of business from Boom to decline to depression to recovery and then to boom. In the period of boom, economy has much more money supply and higher production and aggregate output. Labor force is employed and there is less rate of unemployment. With the higher rate of interest, money supply fall and now national output and production comes down which results in the higher rate of unemployment in the period of declining economy. When economy is at its depression stage, unemployment rate is very high with highest rate of interest which results in low money supply and bottom level of national production. Finally when economy is at the stage of recovery, money supply increases with the increase in production and output, which results in the low unemployment rate. This cycle repeat it again and again.
Money and Inflation
Inflation is the continuous rise in the prices of goods and services in the economy. The average price of goods and services in the economy is called aggregate price level or price level. Such increase in the price level affects the individuals, businesses and govt. Most probable cause of this inflation is the increase in the money supply in the economy which increases buying power and consumption trend of people. When many people rush to buy a particular goods or services, its price rises and hence it results in increase in inflation in the economy. Price level and Money supply generally move close to each other. Formula for calculating inflation is the rate of change in the price level relative to a base yearâ€™s price, what we study in index number calculation. Countries having higher inflation rate must have higher level of money supply and vice versa. Milton Friedman says, â€œInflation is always and everywhere a monetary phenomenon.â€
Money and Interest Rate:
Interest rate on the bonds and bank loans fluctuates with the change in money supply in the economy. With more supply of money in the economy, there will be low interest rate and with less money supply, economy bears high interest rates. So, interest rate and money supply are two important factors of monetary policy of any economy.
Conduct of Monetary Policy:
Central bank of the economy like SBP regulates the money supply and rate of interest to formulate a reasonable and growth oriented monetary policy so that all economic variables show their favorable movement for economy growth and prosperity.
Fiscal Policy and Monetary Policy:
Monetary policy is the supply of money in the economy to control inflation, national output and other economic variables while Fiscal policy is the decision of govt. regarding its revenues (taxes) and expenditures (development expenditures). Budget deficit is the increase in govt. expenditures over its revenues. Budget surplus is the increase in govt. revenue over its expenditures. In the period of budget deficit, govt. takes developmental loans from Central bank, financial intermediaries, IMF, World Bank, Assian Development Bank and other financial institutions to meet their financial needs. Budget deficit also results in the increase in money supply and hence interest rate increases. Surplus or deficit is normally measured as a percentage of GDP or aggregate output of the economy.
The positive and negative impact of global integration
Introduction The global economic integration (GEI) is the process whereby different national markets, including goods, services and factors of production, are increasingly being knitted together into a single global market. It should be noted that GEI is a process of change, not a state of affairs or result. The historians appear to be in agreement that our world has gone through the two greatest periods of global economic integration, one was the fifty years before the outbreak of World War 1 (1870-1914), the other period was the fifty years following the ending of the 2nd World War (1950-2000).
Global economic integration is the result of four factors: the growth of world trade, the growth of global finance, the rise of the multinational corporation and the international migration of people. Although there is still controversy over the advantages and the disadvantages of global economic integration, objectively speaking, our world has never stopped the process of GEI. As an important link in GEI, international trade has become more and more important, as is shown in the volume, frequency and scope of the trade. How has GEI influenced the countries around us, even the whole world, that is the main topic of the essay.
Assumptions Countries can be divided into three types: developed country (e.g. the United Kingdom), developing country (e.g. China), less developed country (e.g. some countries in Africa). Then the effects of GEI on employment, welfare and environment in the three types of countries will be discussed in theoretical and practical levels.
Effects on employment: Although there are always someone complaining about the GEI leads them to lose their jobs.
In theory level, the process of GEI is the procedure of making the resource optimization worldwide. It is beneficial for overall economic efficiency.
Obviously, the most efficient outcome for both America and Britain is for America to specialize in producing wheat, while the British specialize in producing cloth. Trade, will enable both countries to exchange their products and enjoy a higher level of consumption. So why not do it? Unfortunately, at the same time of doing this, farmers in Britain and weavers in America will lose their jobs.
Furthermore, one of the most important processes of GEI is specialization. Because of this productivity improves and fewer workers are needed to produce the same amount of production. Although there are complaints, this is good news. That means there is sufficient number of labor to put into new industries. The market will eventually guide them to new jobs, although the process is not pleasant.
Specifically, for developed countries, in one hand GEI encourages capitalist put their capital into developing countries which have relatively cheaper labor. This could lead to a rise of unemployment in developed countries. At the same time, GEI means more competition on price. However higher social welfare made the developed countries in a disadvantage position in such competition. In the other hand, global economic integration make the world as one single worldwide market, the demand of the market is larger than before. Thus, it’s possible to make a large economic scale which plays a positive role in promoting employment. This is a table of developed countries (take UK and USA as an example) unemployment rate and unemployment number below:-
From the tables, the unemployment condition stayed at a same level during 1990 to 2005. Take the international labor element into consideration, the unemployment both in UK and USA is acceptable.
For developing countries, due to the lower labor costs, their products of labor-intensive industries (for example textile industry) become more competitive in the world market. Global economic integration has brought a greater demand for those industries. Prosperity of these industries also means the promotion of employment.
At the same time GEI brings foreign investment, if the country could attract foreign investment, the local surplus of labor could find jobs in foreign-owned factories. China is a good example.
The employment of FDI industry was growth all the time since 1993 in the table. By 2005, 5.98% jobs were supplied by FDI factories. Obviously GEI has brought benefits to the employment of China.
If the country has failed in attracting foreign investment, the GEI means this country become a market for all the producers. Then the influx of products would have a serious impact on local industries, which led to unemployment. But if people are put out of work, there is no income to buy imports. So these countries, which failed in attracting FDI, always set some barriers to protect their national industries and employment. Mongolia is a good example.
Mongolia joined the WTO in January 1997. Since May 1997, it took the implementation of zero-tariff except alcohol and tobacco products. As a result, there was large influx of foreign products, but no FDI. After two years practice, the Government of Mongolia believe that this policy bringing prices down while also making the national industry came under attack, and reducing the national tariff revenues, thus exacerbating the government’s financial crisis. So they made the tariffs at 5% level, for some agricultural products at 15% level.
For less developed countries, such as some countries in Africa. Although GEI has always ignored this continent, for the abundant resources and cheap primary products, GEI also played a certain role in the development of these countries. If there is no trade effect of GEI on the demand for resources, there will be more people facing unemployment. Through the export of primary resources, countries have accumulated wealth and more jobs can be created.
As a conclusion, the impact of GEI on the number of jobs is still in dispute. But GEI makes the employment more sensible.
Effects on social welfare: We can illustrate the effects of the GEI on welfare by the following diagram:
This diagram was used to illustrate the effects of the tariff on welfare in small country model in lecture 6.
Assuming the tariffs reach a very high level, as marked with the dotted line in the diagram. All the foreign products are kept out. There is no connection between this country and the world. Then all the products are supplied by the domestic producers. The demand would meet the supply at the crossing M. In this case, domestic producers obtains the greatest profit, however, customers have to endure a high price, at the same time there are many people cannot pay for the product. If this product is a necessity of life, for example food, that would mean famine. Social welfare loss is obvious.
Assuming the tariffs is zero, which means free trade, one of the final aims of the GEI. In this case, supply and demand are equal at P. Domestic producers take a low marker share and make less profit, but customers achieve the maximum benefits. They can buy goods in a low price and there is adequate supply.
Take North Korea, South Korea and People’s Republic of China (PRC) as examples. The following table compares the per capita GDP among North Korea, South Korea and China in each period.
In 1960s, the per capita GDP of North Korea is three times more than both South Korea and China. When the turbulent military rule ended, South Korea began to participate in the process of global economic integration. Then South Korea made great achievements on economy and became one of Newly Industrial Economics. In the late 1970s, PRC turned to take the reform and open policy, China’s economic success has also started to make the world attention, especially after 2000. Based on political reasons, there is nearly no connection between North Korea and the other world, excluding China. By 2004, the per capita GDP of South Korea is over 144 times than it is in North Korea, while China is 17 times than North Korea. North Korea and South Korea have the similar geographical environment, natural resources and customs. China and North Korea have the same political system. The most prominent difference is whether to participate in the process of global economic integration. No countries have succeeded in developing without participating in GEI.
As a conclusion of the theoretical analysis and empirical research, GEI contributed the increase of social welfare. No countries have succeeded in developing without participating in GEI.
Effects on ecological environment: Ecological environment pollution is one of the main reasons for complaints of global economic integration by wide range of people. As the analysis in this essay, GEI encourages greater levels of consumption. It is clear that producing more products means consuming more energy and resources. However, this can have adverse environmental consequences.
Take emissions of carbon dioxide as an example:
From this data, it is easy to see that emissions of CO2 growing. The most important contributor is developing country (as China in chart). The reason is diverse, but one of these is GEI. As developed countries, have sufficient advanced technology to improve energy and resources to reduce environmental damage. At the same time they have moved their high-polluting industries to developing countries by the way of investment. Take London as an example. Now the environment here is very good, but without global economic integration, UK have to produce all kinds of products for themselves, including high-polluting products, which they usual import from other countries. Under these conditions, the environment of London would be considerably more polluted.
In developing countries the government faces a dilemma of choice, to develop economic or to protect environment. It might be only exist in theory to accomplish the two things simultaneously. Without GEI, there would not be a strong demand on resources, then the environment could be well protected, but people here would live a simple and poor life. China is the most typical example of developing countries. In achieving economic development, environmental pollution has become a big problem, which was complained by western journalists before Beijing Olympic Games.
From another point of view, GEI makes the competition much fiercer. In this background, GEI potentially makes it difficult to deal with global environmental problems because an individual country tackling pollution could find it difficult to compete with countries with lower standards.
More importantly, we own the same earth, the same ecosystem. Despite the current environment in developed countries seems better in the situation of GEI. The environmental damage in developing countries will eventually affect developed countries. No one can gain from the environmental destruction and pollution.
The conclusion is that GEI indeed had a bad effect on the global environment.
Conclusion: As it said that there are a thousand Hamlets in a thousand people’s eyes. The disputes of global economic integration will continue, however, the process of globalization cannot be prevented. What we should do is to minimize the negative effects of global economic integration, and to maximize its positive factors. Then we will have a better life and a harmonious world.