ÚVOD DO MAKROEKONÓMIE MACROECONOMY 5 BOAStrana 4 z 33 Moderné vzdelávanie pre vedomostnú...

OA Rožňava – moderná škola ITMS kód Projektu 26110130729

Moderné vzdelávanie pre vedomostnú spolo čnos ť

Projekt je spolufinancovaný zo zdrojov EÚ

ÚVOD DO MAKROEKONÓMIE

MACROECONOMY 5 BOA

Učebné texty Ing. Helena Fra ňová

Obchodná akadémia, Akademika Hronca 8,

Rožňava

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Moderné vzdelávanie pre vedomostnú spolo čnos ť Projekt je spolufinancovaný zo zdrojov EÚ

1 ECONOMIC GROWTH

Economic growth may be defined as a steady increase in an economy´s ability to produce.

Growth can occure by making more effective use of existing resources and by increasing the

productive capacity of a nation. Each of the following can contribute to economic growth:

• increased labour force (when the number of people in the labour force growth maybe

also by increased participation of women)

• improved worker productivity . (by improving education and training of people to be

able to compute and operate machinery and equipment.)

• advances in technology (the use of more efficient equipment and machinery is

essential to increasing productivity maybe through increased research.

• increased business investment . (government can encourage businesses to invest in

plant and equipment by changing the tax laws, reducing interest rates or reducing the

threat of inflation)

• foreign investment as a source of capital (permit foreign investors to establish business

operations in the country)

• increasing foreign trade . (engaging in foreign trade allow the country to obtain things it

cannot produce or produces insufficiently. That contribute to people´s living standard

improvement.)

1.1 THE BENEFITS AND COSTS OF ECONOMIC GROWTH The benefits of economic growth and increased output can be enjoyed in a number of ways:

a) Higher level of consumption for all to enjoy

b) Higher level of output can probably be achieved using less labour. People may

benefit from shorter working weeks and longer holidays.

c) Rising incomes means more tax revenues for the government. They can use this

money to spend on schools, hospitals, roads.

There are always costs that have to be considered:

a) Economic growth may mean we use up scarce resources more quickly. Oil, coal,

metals and other natural resources are limited and may soon run out.

b) An increase in the number of factories will mean less land available for parks and

othe recreational activities. Noise, fumes, river and scenic pollution may increase

as economies strive to produce more.

c) Technical progress may replace workers with machines so that many people find

themselves without work.

Because economic growth has costs as well as benefits, mayn governments are now

concerned with using their policies to achieve sustainable growth. This means using policy to

minimize the costs and any harmful effects of economic growth for example by placing

restrictions on emissions of harmfull polutants from power stations and vehicle exhausts,

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raising taxes on petrol to reduce car use, limiting developments of large superstores in out of

town locations.

1.2 ECONOMIC GROWTH INDICATORS Economists, business managers and government officials rely on indicators to tell them

where the economy has been and where it seems to be heading. Indicators enable them to

make better decisions and more accurate predictions about the future.

Gross domestic product (GDP) - represents the total value of final goods and services

produced by the economy in a single year. (within the country´s borders) It does not include

goods and services produced overseas, even if resources used are owned by citizens or

firms of the country. GDP per capita is the total output of a particular country divided by the

number of people living there.

When prices are rising during periods of inflation, GDP may increase even though the

production of goods and services is unchanged. This is because GDP is measured in terms

of current prices. To avoid this problems, economists can adjust the GDP for changes in the

price level. The result is called the real GDP expressed in constant euros. They reflect

changes in the purchasing power of the euro from the base year.As inflation can distort the

significance of growth in GDP.

GDP could be calculated by totaling the consumer, business and government spending and

net export within a single year This is expenditure approach to GDP:

GDP = C + I + G + (EX – IM)

C – consumers´expenditure on log-term and short-term consumers goods and services. It

makes about 65% of GDP

I – investments and all business spending, long-term and current assets, depreciation. It

makes about 20% of GDP

G – the government spending and investments including transfer payments.

EX – IM means net export.

You can also calculate GDP by adding different types of income – the income approach to

GDP and the result is National income. It includes wages and salaries, profits of businesses

and companies, rents, net interest taxes, depreciation.

Gross national product (GNP ) represents the total value of final goods and services

produced by resources owned by the nation within and outside its borders.

Prosperity can also be measured in terms of Gross National Income (GNI). This includes

Money coming into a country frm investments abroad, minus Money leaving the country to go

to investors from abroad. This is the new name for what used to be called GNP.

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1.3 GDP DOES NOT INCLUDE 1. A black market or underground economy is the market in which goods or services are

traded illegally or exchanges go unreported. An example is drugs being imported into nearby

wealthier nations where the drug manufacturer charges a higher price for a similar or

equivalent product. The key distinction of a black market trade is that the transaction itself is

illegal. The goods or services may or may not themselves be illegal to own, or to trade

through other, legal channels. Because the transactions are illegal, the market itself is forced

to operate outside the formal economy, supported by the established state power. Two

common motives for operating in black markets are to trade contraband, or to avoid taxes or

price controls. The black market is distinct from the grey market or the white market (it is

legal, official, authorised, or intended market for goods and services such as adoption of

children, has been criticized as being inefficient due to government regulation).

A grey market or parallel market , is the trade of a commodity through distribution channels

which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer.

The most common type of grey market is the sale of imported goods (brought by small import

companies or individuals not authorized by the manufacturer) which would otherwise be

more expensive in the country they are being imported to. The term grey economy ,

however, refers to workers being paid under the table (it is employment not reported to the

state often done by the employer or the employee for tax evasion or circumvention of other

laws), without paying income taxes or contributing to such public services. It is sometimes

referred to as the underground economy or "hidden economy." It is difficult to measure how

much income people are hiding from the government. Econimicts, however, have been able

to make some educated guesses according which underground economy is 5 – 15% of

nation´s GDP. Since the money earned in the underground economy is untaxed, the

government looses millions in potential revenue.

2.Harmful goods and services (e.g. cigarettes cause lung cancer, but revenues from their

sale are added to GDP along with food, medecine and other beneficial items). People create

air, water and solid waste pollution. The costs of these harmful externalities are not

subtracted from GDP.

3.Non-market production . Earning some extra money by baking cakes or renting a garden

or flat or mowing someone´s lawn, tayloring a dress for a friend is not recognized by the GDP

figures.

1.4 THE ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT (OECD)

OECD is an international economic organisation of 34 countries founded in 1961 to stimulate

economic progress and world trade. It is a forum of countries committed to democracy and

the market economy, providing a platform to compare policy experiences, seek answers to

common problems, identify good practices and co-ordinate domestic and international

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policies of its members. Most OECD members are high-income economies with a very high

Human Development Index (HDI) and are regarded as developed countries.

Following the 1957 Rome Treaties to launch the European Economic Community, the

Convention on the Organisation for Economic Co-operation and Development was drawn up

to reform the OEEC. The Convention was signed in December 1960 and the OECD officially

superseded the OEEC in September 1961. It consisted of the European founder countries of

the OEEC plus the United States and Canada, with Japan joining three years later. The

official founding members are:

• Austria • Belgium • Canada • Denmark • France

• Germany • Greece • Iceland • Ireland • Italy

• Luxembourg • The Netherlands • Norway • Portugal • Spain

• Sweden • Switzerland • Turkey • United Kingdom • United States

During the next 12 years Japan, Finland, Australia, and New Zealand also joined the

organisation. In 1989, after the Revolutions of 1989, the OECD started to assist countries in

Central Europe (especially the Visegrád Group) to prepare market economy reforms. In

1990, the Centre for Co-operation with European Economies in Transition (now succeeded

by the Centre for Cooperation with Non-Members) was established, and in 1991, the

Programme "Partners in Transition" was launched for the benefit of Czechoslovakia,

Hungary, and Poland. This programme also included a membership option for these

countries. As a result of this, Poland, Hungary, the Czech Republic, and Slovakia (14

December 2000), as well as Mexico and South Korea became members of the OECD

between 1994 and 2000. Chile, Slovenia, Israel and Estonia all became members in 2010.

Currently in accession talks: Colombia, Latvia, Russia. Likely to open accession talks in

2015: Costa Rica, Lithuania. Other countries that have expressed interest in OECD

membership are Peru and Malaysia.

The OECD promotes policies designed:

• to achieve the highest sustainable economic growth and employment and a rising

standard of living in Member countries, while maintaining financial stability, and thus to

contribute to the development of the world economy;

• to contribute to sound economic expansion in Member as well as nonmember countries

in the process of economic development; and

• to contribute to the expansion of world trade on a multilateral, nondiscriminatory basis in

accordance with international obligations.

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2 THE BUSINESS CYCLE

GDP does not develop straight forward. There is a pattern of ups and downs.

Times of prosperity are above the mid-line, while difficult economic times are below.

Recession. In recession people consumers and businesses begin to reduce their spending

level. Businesses may lay off workers, reduce their purchases of materials and reduce

production because they have built up excess inventories. Some businesses may decide to

continue to use old factories and equipment rather than investing in new machines and

buildings. Because of the lay offs, workers, who are consumers spend less. This leads to still

more reductions in production and additional worker layoffs.

Trough (bottom). The econopmy will reach the lowest point of a business cycle. Factories

will be operationg at less than capacity and unemployment will reach high levels. Total output

of goods and services continues to decline.

Expansion. After some time economy begins to recover. During an expansion business and

consumer spending begin to increase. Business begins to increase production.

Unemployment declines as additional workers are hired. This leads to higher level of

consumer spending and still further expansion of employment, output and consumption.

Peak (boom). At the peak of an expansion, the economy is booming. Business is normally

producing at or near capacity and those looking for work can generally find jobs. During peak

times, business investments and consumer spending are at the highest levels. But because

the economy is at or near full employment and the demand for goods and services is

increasing, prices are also increasing and so inflation.

When the economy is booming, growing fast, commentators start to talk about the risk of

overheating with key indicators getting out of control and a loss of economic stability. They

talk about the need of soft landing with the government aiming to bring economic activity

back to more sustainable levels without the economy going into recession.

A long period of severe recession is a depression or a slump.

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A bubble is a period when demand for something grows too fast leading the prices also

rising too fast. Then the bubble burst with the demand falling too fast. Prices crash, with

buyers wanting to sell for whatever they can get.

The credit crunch of 2007-9 was part of a wider banking crisis . US banks lent too much

money to mortgage borrowers who could not repay. (informally called NINJA – no income, no

job or assets). The banks sold on these mortgages in the form of new securities to other

financial institutions who then lent money to others on the basis that they would get their

money back from repayments of the original mortgages. The buyers of these securities did

not know that the mortgages were high-risk. When house byuers started default on repaying

their loans the lenders were in trouble. These assets meant that what banks thought were

valuable securities were in fact toxic assets. Some financial institutions were in danger of

going out of business and governments in some countries had to rescue them. Banks

refused to lend each other and to companies and individuals causing problems in the real

economy.

2.1 WHAT CAUSES BUSINESS CYCLES For many years economists struggled to find a theory that would explain all buisness cycles.

Today economists often distinguish between:

a) external factors that occur outside the economic system:

• Inventions and innovations . Major changes in technology led to bursts of business

activity and investment. This, in turn, has been followed by increased employment

opportinities and periods of expansions.

• Wars and political events .(The Arab oil boycot in 1970s caused a downturn in the

economy.)

b) internal factors occur within the economy itself:

• Consumption . When consumer spending increases, business firms fire more help and

increase their production level. As production, employment and sales increase, the

business cycle enters a period of expansion. When consumer spending decreases, the

opposite occurs. Production is reduced, workers are laid off and the economy enters a

period of recession.

• Business investment . Investment in capital goods creates jobs, thereby increasing

consumer purchase power. The increase in spending leads to still more investment,

consumption and total production. When investment decreases, the opposite occurs and

the economy enters a period of contraction.

• Government activity . Government policies can affect the business cycle in two ways.

One is through fiscal policy – the use of its power to tax and spend. The other way is

through monetary policy – regulating the supply fo money and credit in circulation.

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In the mid-20th century, Schumpeter and others proposed a typology of business cycles

according to their periodicity, so that a number of particular cycles were named after their

discoverers or proposers:

• the Kitchin inventory cycle of 3 to 5 years. When the market gets ‘flooded’ with

commodities whose quantity becomes gradually excessive. The demand declines, prices

drop, the produced commodities get accumulated in inventories, which informs

entrepreneurs of the necessity to reduce output. However, this process takes some time.

It takes some time for the information that supply significantly exceeds demand to get to

the businesspeople.

• the Juglar fixed-investment cycle of 7 to 11 years. Within the Juglar cycle one can

observe oscillations of investments into fixed capital.

• the Kuznets infrastructural investment cycle of 15 to 25 years. Kuznets connected

these waves with demographic processes, in particular with immigrant inflows/outflows

and the changes in construction intensity that they caused, that is why he denoted them

as “demographic” or “building” cycles. They have been also interpreted as infrastructural

investment cycles.

• the Kondratiev long technological cycle of 45 to 60 years. According to innovation

theory, long-term waves arise from bunching of basic innovation that cause technological

revolution.

Interest in the different typologies of cycles has waned since the development of modern

macroeconomics, which gives little support to the idea of regular periodic cycles

2.2 INFLATION Inflation refers to a general rise in the level of prices of goods and services. Stagflation is

used to describe situation when prices and unemployment rise together or there is no

economic growth.

The rate of inflation is measured by calculating the percentage price increase in goods and

services usually over a year. Percentage price rises are usually shown by a price index,

which is the average price of all items selected.(food, clothing and footwear, housing, leisure

goods and services, household goods and services, fuel, light and power, motoring and

fares)

RPI(2013) –RPI(2012) Inflation = ---------------------------------- . 100

RPI(2012)

RPI = retail price index

We distinguish:

a) Mild inflation 1-9% prices are relatively stable, the monetary system Works well,

people trust Money. This measure is acceptable.

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b) Galloping inflation 10-100% this causes troubles in Money circulation, Money

lose their value very quickly, people do not trust Money, they invest them into real

estates, Money is lent on high interest.

c) Hyperinflation 1000% means disintegration of money circulation, prices grow

chaotically, people turn to barter. Occurs usually during wars.

According to the reason we distinguish:

a) Demand-pull inflation. A situation in which there is too much money chasing too

few goods. When demand increase faster than industry´s ability to satisfy

demand, prices rise.

b) Cost-push inflation. A period of rising prices due to an increase in the cost of

production. When for example price of oil, material, transport or power go up,

higher costs are passed on to consumers as higher prices. With prices going up,

workers often ask for wage increases to keep up with the increased cost of living,

but i tis not matched by increased productivity and so on in an inflationary spiral.

Similarly, efforts by producers to increase profits by increasing prices rather than

by reducing costs also trigger an inflationary spiral.

c) Imported inflation. It can occur when the value of euro falls against foreign

currencies. As the value of euro falls the price paid for imported products will rise

even if the prices of those goods in dollars or other foreigh currencies have not

changed.

2.2.1 CAUSES AND COSTS OF INFLATION

Economists today tend to agree that the main cause of inflation is that people are able to

increase their spending on goods and services faster than producers can supply the goods

and services they want to buy. The rise in spending causes the excess of agregate demand

for goods and services and their prices are forced upwards. There are some other reasons:

• labour union pressure to raise salaries

• monetary policy allows more Money in curculation than the real growth rate or real GDP

• government budget deficit, or too high National debt.

Inflation affects people differently, some suffer, while others benefit.

Those most likely to suffer from inflation are:

• People living on relatively fixed incomes . For example retirement pension cannot

increase people´s incomes enough to ofset the effects of inflation.

• Savers who put their money into saving accouts or bonds that guarantee a fixed rate of

return (interest). Unless the rate of interes tis at least as high as the inflation rate, the

Money returned to a saver will purchase less than the sum he set aside.

• Lenders . If inflation increases during the term of a loan, the Money paid when the loan

comes due will be worth less tha the original loan.

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• Business . Inflation causes uncertainty and makes it hard for managers to predict future

costs. It also raises production costs.

Those who benefit from inflasion are:

• Those who can increase their incomes. Certain professions, industries and labour

groups find it easier to increase prices and wages during periods of inflation than at other

times. Those people will be better off than before (jewelery trade, land owners)

• Borrowers will be returning money that is worth less at the end of the loan peiod than it

was at the beginning. If the inerest charged on the loan is less than the inflation rate,

those who borrowed will benefit from the difference.

• Government. During inflation, people tend to earn higher incomes, putting more

taxpayers into higher tax brackets (if progressive taxing is applied).

2.3 UNEMPLOYMENT Another indicator of economic activity compares the number of people in the labour force to

the number looking for work. The Labour Department gathers this information and gives it to

Bureau of Labour Statistics that then calculates the unemployment rate. Unemployed people

are those who are in productive age from 16 to 62, they are capable of, available for and

actively seeking work but unable to find jobs. People claiming unemployment benefits must

enter a Jobseekers Agreement setting out the action they will take to find work and improve

their prospects of finding employment (for example Employment Service training courses).

„eaving labour unemployed is a waste of resources.

Number unemployed Unemployment rate = –––––––––––––––––––––– x 100

Working population

Unemployed figures involve only people who register to claim benefits. People working in

part-time jobs or young people on government training schemes are not counted in

unemployment figures. Groups of people like these are said to be the hidden

unemployment .

The reasons people are unemployed vary. It may simply suit their needs to be temorarily out

of work. We distinguish different types of unemployment:

1. Frictional unemployment occurs as people change their job and spend some time

looking for a new one. Workers may become unemployed for relatively short periods

as they leave jobs they dislike, move to higher paid jobs, move their homes, are

made redundant or are sacked.

2. Seasonal unemployment occurs because consumer demand for some goods and

services is seasonal. Jobs in tourism industry tend to expand in summer, but in winter

they are not required. The building industry as well as agriculture also tend to be very

seasonal.

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3. Cyclical unemployment occurs when there is too little agregate demand for goods

and services in the economy during an economic recession.

4. Structural unemployment . If the fall of demand for some goods or services is

permanent because of change in peoples tastes maybe because of cheaper sources

of supply from overseas firms, the change in demand is called structural. Structural

unemployment arises from long-term changes in the structure of the economy as

entire industries close down because of a lack of demand for the goods or services

they produce. Workers whose skills are no longer wanted have to be re-trained in

new skills which may help them become more mobile and find a new job. (coal

mining, elevator operator) Failure to acquire needed skills also keeps many on the

unemployment rolls. Contrary there has been a rapid growth in employment in

technologically advanced industries such as electronics, computers and

communications.

Full employment does not mean the total elimination of unemployment. Frictional and

structural unemployment are expected, and economists combine these two rates in what is

described as the natural rate of unemployment. When the actual rate of unemployment

equals the natural rate = about 5% of unemployment, the economy is at full employment

2.3.1 ACTIVE POLICY OF EMPLOYMENT

Imperfections in the labour market:

a) Powerful trade unions demand wages for their members that are too high and not

matched by improvements in productivity. As wages rise, employers may not be

able to afford as mayn workers so they reduce their demand for labour.

b) Benefits paid to the unemplyed reduce the incentive to work. Some people would

only be willing to work at much higher wages. This is called voluntary

unemployment.

c) Employers´ national insurance contributions. For every worker a firm employs it

must pay the government a tay in the form of employer´s national insurance.

Cutting employers´ contribution may give them the incentive to employ more

workers.

d) The immobility (inability)of labour prevents workers from finding new jobs. If

workers are unable to move to a different job because it requires different skills

and people are not qualified, this is called occupational immobility. If a worker is

unable or unwilling to move to a different area, this is called geographical

immobility. If people are immobile, they tend to sta unemployed for longer periods

of time.

What does the government do to keep unemployment at natural rate? It organizes different

activities to help unemployed people find a job or enable people to earn some money for

their living.

• It organizes re-training courses via educational institutes

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• It organizes training schemes for graduates (max. 6 months, 20hours work per week)

• It provides some contributions (grants) to those who are willing to move to different

area to find a new job (the person has to persist at least 2 years in a new place of work)

• It provides some contributions to those who want to start their own business (the

volume of contribution differs from region to region and one of conditions to be granted

the money is running the business for at least 2 years).

• It organizes some activation work for long-term unemploeyed and less educated who

have difficulties to find a job (4 hours a day, at least 10 hours a week).

• It provides unemployment benefits for 6 month of unemployment

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3 FISCAL AND MONETARY POLICY

3.1 FISCAL POLICY Fiscal policy is the responsibility of the government to control taxing and spending. Fiscal

policy tools are used to stimulate the growth of GDP by lowering taxes while continuing to

spend the same amount, or by increasing spending while keeping taxes about the same.

Fiscal tools also can be used to slow the economy in an economic boom phase when prices

increase at an alarming rate. To end inflation, the government can increase taxes, reduce

government spending or both.

• Fiscal policies have several serious flaws:

• When government reduces taxes to fight a recession, it often creates a budget deficit .

Its revenues will be less than its expenditures and the national debt will increase. If the

government chooses to borrow from the public to offset a tax reduction, the money it

borrows cannot be spent by the lenders. This can cause an increase in interest rates,

making it more difficult for individuals and companies to borrow.

• The government can also finance its debt by printing money . Such increase in money

supply tend to fuel inflation by pushing up prices.

• During periods of inflation a tax increase or government spending reduction is vitable, but

who would like to do that especially i fit is an election year.

Even supporters of fiscal action admit that their success depends heavily on their timing and

the accuracy of the data available.

Some fiscal tools are called automatic stabilizers . They go into effect when needed without

of the action of the government. During recessions they increase government spending,

reduce taxes or some combination of the two. And in times of expansion, when personal

income and prices are rising, the automatic stabilizers follow an opposite course, they reduce

government spending and increase taxes.:

1. One of such automatic stabilizers is the personal income tax . During times of

recession, people earn less, and are, therefore, taxed at a lower rate. In boom times

inflation pushes wages to higher levels into higher tax brackets (progressive taxing).

2. During periods of prosperity and high employment, taxes automatically rise, putting

money into the unemployment insurance fund . This helps to reduce spending at

a time when inflation is a threat and makes funds available when a recession

appears.

3.2 MONETARY POLICY Monetary policy means regulation of money supply in circulation. The aim is to keep prices

and inflation under control.

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There is a direct relationship between the money supply and the level of business activity.

There are 3 main tools of monetary policy:

1. The discount rate . Just as business firms look to their banks when they need to

borrow, banks look to their central bank when they are in need of funds. The Central

bank is called „the banker´s bank“ The banks are charged interest on their loans from

the central bank that is called the discount rate. When the Board of Governors raises

the discount rate, it discourages banks from borrowing and consequently reduces the

number of available loans to their customers, resulting in decrease in the money

supply. On the other hand lowering the discount rate encourages banks borrowing

and increases the amount of funds available for loans, resulting in an increase in

money supply.

2. Reserve ratio . Banks are required to keep a percentage of their deposits in reserve.

A portion of their reserves is deposited at the Central Bank and the rest of deposits is

available for loans to their customers. When the Board of Governors increases the

reserve ratio, it reduces the ability of the banks to lend money. In the long run that

tends to reduce inflation. When the ratio is decreased, the commercial banks are free

to lend a larger portion of their deposits which in turn will increase the money supply

and so tends to stimulate the economy to achieve higher growth rates, but can also

create inflationary pressures.

3. Open market operations . It involves buying and selling of the government securities

such as Treasury bills and Bonds with the objective of regulationg the money supply

or reducing the government budget debt. The government securities are issued by

the Central bank and sold to the public. These securities pay interest to the owners

and are guaranteed by the government, so they are considered to be a stable and

relatively low-risk form of investment. When the government wants to decrease the

money supply in times of expansion, it sells government securities. The money it

obtains as payment is taken out of circulation, decreasing the money supply. If the

government wants to increase the money supply, it buys the government securities

from individuals and corporations that are willing to sell. The money paid for these

securities enter the circulation, resulting in an increase in the money supply.

Those favouring the monetary side of the government business policy are known as

monetarists , those arguing the fiscal case call themselves as Keynesians.

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4 GLOBALIZATION AND INTEGRATION

Globalization is the process of international integration arising from the interchange of world

views, products, ideas, and other aspects of culture. Advances in transportation and

telecommunications infrastructure, including the rise of the telegraph and its posterity the

Internet, are major factors in globalization, generating further interdependence of economic

and cultural activities. In 2000, the International Monetary Fund (IMF) identified four basic

aspects of globalization: trade and transactions, capital and investment movements,

migration and movement of people and the dissemination of knowledge. Further,

environmental challenges such as climate change, cross-boundary water, air pollution, and

over-fishing of the ocean are linked with globalization. Globalizing processes affect and are

affected by business and work organization, economics, socio-cultural resources, and the

natural environment. Globalization is the tendency for the global economy to function as one

unit, with increasing interdependence between different parts of the world. What happens in

one place affects what happens in another.

Economic globalization and integration is the increasing economic interdependence of

national economies across the world through a rapid increase in cross-border movement of

goods, service, technology and capital. Economic globalization is the process of increasing

economic integration between countries, leading to the emergence of a global marketplace

or a single world market. Economic globalization can be viewed as either a positive or a

negative phenomenon. Current globalization trends can be largely accounted for by

developed economies integrating with less developed economies by means of foreign direct

investment, the reduction of trade barriers as well as other economic reforms and, in many

cases, immigration.

After the Second World War, work by politicians led to the Bretton Woods conference , an

agreement by major governments to lay down the framework for international monetary

policy, commerce and finance, and the founding of several international institutions intended

to facilitate economic growth multiple rounds of trade opening simplified and lowered trade

barriers. Initially, the General Agreement on Tariffs and Trade (GATT) , led to a series of

agreements to remove trade restrictions. GATT's successor was the World Trade

Organization (WTO) , which created an institution to manage the trading system. The

conference established many other organizations essential to advancement towards a global

economy and global financial system, such as the World Bank and the International

Monetary Fund .

With improvements in transportation and communication, international business grew rapidly

after the beginning of the 20th century. International business includes all commercial

transactions (private sales, investments, logistics, and transportation) that take place

between two or more regions, countries and nations beyond their political boundaries.

International business arrangements have led to the formation of multinational enterprises

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(MNE), companies that have a worldwide approach to markets and production or one with

operations in more than one country. A MNE may also be called a multinational corporation

(MNC) or transnational company (TNC). Well known MNCs include fast food companies

such as McDonald's and Yum Brands, vehicle manufacturers such as General Motors, Ford

Motor Company and Toyota, consumer electronics companies like Samsung, LG and Sony,

and energy companies such as ExxonMobil, Shell and BP. Most of the largest corporations

operate in multiple national markets.

There are economic as well as political reasons why nations pursue economic integration.

The economic rationale for the increase of trade between member states of economic unions

that it is meant to lead to higher productivity. This is one of the reasons for the global scale

development of economic integration, a phenomenon now realized in continental economic

blocks such as ASEAN, NAFTA, SACN, the European Union, and the Eurasian Economic

Community; and proposed for intercontinental economic blocks, such as the Comprehensive

Economic Partnership for East Asia and the Transatlantic Free Trade Area.

4.1 THE DEGREE OF ECONOMIC INTEGRATION CAN BE CATEGORIZED INTO SEVEN STAGES:

1. Preferential trading area

2. Free trade area ,

3. Customs union ,

4. Common market

5. Economic union ,

6. Economic and monetary union

7. Complete economic integration

Establishment of free trade areas has become an essential feature of modern governments

to handle preferential trading arrangements with foreign and multinational entities. A Special

Economic Zone (SEZ) is a geographical region that has economic and other laws that are

more free-market-oriented than a country's typical or national laws. "Nationwide" laws may

be suspended inside these special zones. The category 'SEZ' covers many areas, including

Free Trade Zones (FTZ), Export Processing Zones (EPZ), Free Zones (FZ), Industrial parks

or Industrial Estates (IE), Free Ports, Urban Enterprise Zones and others. Usually the goal of

a structure is to increase foreign direct investment by foreign investors, typically an

international business or a multinational corporation (MNC). These are designated areas in

which companies are taxed very lightly or not at all in order to encourage economic activity.

A tax haven is a state, country or territory where certain taxes are levied at a low rate or not

at all, which are used by businesses for tax avoidance and tax evasion. Individuals and

corporate entities can find it attractive to establish shell subsidiaries or move themselves to

areas with reduced or nil taxation levels. This creates a situation of tax competition among

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governments. Different jurisdictions tend to be havens for different types of taxes and for

different categories of people and companies

1. A preferential trade area (PTA) is a trading bloc that gives preferential access to

certain products from the participating countries. This is done by reducing tariffs but not

by abolishing them completely. It is the first stage of economic integration.

2. A "free trade area" (FTA) is formed when at least two states partially or fully abolish

custom tariffs on their inner border. To exclude regional exploitation of zero tariffs within

the FTA there is a rule of certificate of origin for the goods originating from the territory of

a member state of an FTA.

3. A "customs union" introduces unified tariffs on the exterior borders of the union (CET,

common external tariffs). A "monetary union" introduces a shared currency. A "common

market" add to a FTA the free movement of services, capital and labor.

4. A single market is a type of trade bloc which is composed of a free trade area (for

goods) with common policies on product regulation, and freedom of movement of the

factors of production (capital and labour) and of enterprise and services. The goal is that

the movement of capital, labour, goods, and services between the members is as easy

as within them. The physical (borders), technical (standards) and fiscal (taxes) barriers

among the member states are removed to the maximum extent possible. A common

market is a first stage towards a single market, and may be limited initially to a free trade

area with relatively free movement of capital and of services, but not so advanced in

reduction of the rest of the trade barriers.

5. An "economic union" combines customs union with a common market. A "fiscal union"

introduces a shared fiscal and budgetary policy. In order to be successful the more

advanced integration steps are typically accompanied by unification of economic policies

(tax, social welfare benefits, etc.), reductions in the rest of the trade barriers, introduction

of supranational bodies, and gradual moves towards the final stage, a "political union".

6. An economic and monetary union is a type of trade bloc which is composed of an

economic union (common market and customs union) with a monetary union. It is to be

distinguished from a mere monetary union (e.g. the Latin Monetary Union in the 19th

century), which does not involve a common market. This is the fifth stage of economic

integration. EMU is established through a currency-related trade pact. An intermediate

step between pure EMU and a complete economic integration is the fiscal union.

7. Complete economic integration is the final stage of economic integration. After

complete economic integration, the integrated units have no or negligible control of

economic policy, including full monetary union and complete or near-complete fiscal

policy harmonisation.

4.2 ECONOMIC BLOCKS The Association of Southeast Asian Nations (ASEAN )is a geo-political and economic

organisation of ten countries located in Southeast Asia, which was formed on 8 August 1967

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by Indonesia, Malaysia, the Philippines, Singapore and Thailand. Since then, membership

has expanded to include Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam. Its aims

include accelerating economic growth, social progress, cultural development among its

members, protection of regional peace and stability, and opportunities for member countries

to discuss differences peacefully.

The North American Free Trade Agreement (NAFTA) is an agreement signed by Canada,

Mexico, and the United States, creating a trilateral rules-based trade bloc in North America.

The agreement came into force on January 1, 1994. It superseded the Canada–United

States Free Trade Agreement between the U.S. and Canada. In terms of combined

purchasing power parity GDP of its members, as of 2007 the trade bloc is the largest in the

world and second largest by nominal GDP comparison.

The Union of South American Nations (UNASUR) is an intergovernmental union. The

UNASUR Constitutive Treaty was signed on 23 May 2008, the Union's headquarters is

located in Quito, Ecuador. On 1 December 2010, Uruguay became the ninth state to ratify

the UNASUR treaty, thus giving the union full legality. As the Constitutive Treaty entered into

force on 11 March 2011. The South American Parliament is located in Cochabamba, Bolivia,

while the headquarters of its bank, the Bank of the South is located in Caracas, Venezuela.

The Central European Free Trade Agreement (CEFTA) is a trade agreement between

non-EU countries in Southeast Europe. As of 1 July 2013, the parties of the CEFTA

agreement are: Albania, Bosnia and Herzegovina, Macedonia, Moldova, Montenegro, Serbia

and the United Nations Interim Administration Mission in Kosovo (UNMIK) on behalf of

Kosovo. Former parties are Bulgaria, Croatia, the Czech Republic, Hungary, Poland,

Romania, Slovakia and Slovenia. Their CEFTA memberships ended when they became

member states of the European Union (EU).

4.3 THE EUROPEAN UNION The European Union (EU) is an economic and political union of 28 member states that are

located primarily in Europe. The EU operates through a system of supranational independent

institutions and intergovernmental negotiated decisions by the member states. Institutions of

the EU include the European Commission, the Council of the European Union, the European

Council, the Court of Justice of the European Union, the European Central Bank, the Court of

Auditors, and the European Parliament. The European Parliament is elected every five years

by EU citizens. The EU's de facto capital is Brussels.

The EU traces its origins from the European Coal and Steel Community (ECSC) and the

European Economic Community (EEC), formed by the Inner Six countries in 1951 and 1958,

respectively. In the intervening years the community and its successors have grown in size

by the accession of new member states and in power by the addition of policy areas to its

remit. The Maastricht Treaty established the European Union under its current name in 1993.

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The latest major amendment to the constitutional basis of the EU, the Treaty of Lisbon, came

into force in 2009.

4.3.1 HISTORY

• The inner six: Belgium , France , West Germany , Italy , Luxembourg , Netherlands are

those who responded to the Schuman Declaration's call for the pooling of coal and steel

resources under a common High Authority. The six signed the Treaty of Paris creating

the European Coal and Steel Community on 18 April 1951.

• Dependency on overseas oil and the steady exhaustion of coal deposits led to the idea of

an atomic energy community (a separate Community was favoured by Monnet, rather

than simply extending the powers of the ECSC). However the Benelux countries and

Germany desired a common market. The six went on to sign the Treaties of Rome in

1957, establishing the European Economic Community and the European Atomic

Energy Community . The institutions of these communities would later be merged in

1967, leading to them collectively being known as the "European Communities".

• Britain , along with Denmark, Ireland and Norway , applied for membership in 1960.

However, then–French President Charles de Gaulle saw British membership of the

Community as a Trojan horse for US interests. They became members in 1973 but

Norway rejected membership in a referendum.

• Greece joined in 1981;

• In 1985, the Schengen Agreement led the way toward the creation of open borders

without passport controls between most member states and some non-member states. In

1986, the European flag began to be used by the Community and the Single European

Act was signed.

• Portugal and Spain in 1986.

• In 1990, after the fall of the Iron Curtain, the former East Germany became part of the

Community as part of a reunited Germany. With further enlargement planned for formerly

communist countries, Cyprus, and Malta, the Copenhagen criteria for candidate

members to join the EU were agreed upon in June 1993.

• The European Union was formally established when the Maastricht Treaty —whose

main architects were Helmut Kohl and François Mitterrand—came into force on 1

November 1993 . In 1995, Austria, Finland , and Sweden joined the EU.

• In 2002, euro banknotes and coins replaced national currencies in 12 of the member

states. Since then, the eurozone has increased to encompass 18 countries. In 2007

Slovenia adopted the euro, followed in 2008 by Cyprus and Malta, by Slovakia in 2009,

by Estonia in 2011 and by Latvia in 2014.

• In 2004, the EU saw its biggest enlargement to date when Cyprus, the Czech Republic,

Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia , and Slovenia joined the

Union.

• On 1 January 2007, Romania and Bulgaria became EU members.

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• On 1 December 2009, the Lisbon Treaty entered into force and reformed many aspects

of the EU. In particular, it changed the legal structure of the European Union, merging the

EU three pillars system into a single legal entity provisioned with a legal personality,

created a permanent President of the European Council.

• The European Union received the 2012 Nobel Peace Prize for having "contributed to the

advancement of peace and reconciliation, democracy, and human rights in Europe."

• On 1 July 2013, Croatia became the 28th EU member.

The European Union comprises 28 sovereign member states:

o Austria

o Belgium

o Bulgaria

o Croatia

o Cyprus

o Czech Republic

o Denmark

o Estonia

o Finland

o France

o Germany

o Greece

o Hungary

o Ireland

o Italy

o Latvia

o Lithuania

o Luxembourg

o Malta

o Netherlands

o Poland

o Portugal

o Romania

o Slovakia

o Slovenia

o Spain

o Sweden

o United Kingdom

The Copenhagen criteria are the rules that define whether a country is eligible to join the

European Union. The criteria require that a state has the institutions to preserve democratic

governance and human rights, has a functioning market economy, and accepts the

obligations and intent of the EU. They were agreed upon in June 1993.

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There are five candidate countries: Iceland, Macedonia, Montenegro, Serbia, and Turkey.

Albania has submitted an application. Bosnia and Herzegovina is officially recognised as a

potential candidate. Kosovo is also listed as a potential candidate, but since their

independence is not recognised by Serbia, nor five of the 28 EU member states, the

European Commission refers only to "Kosovo."

Four countries forming the European Free Trade Association (EFTA) (that are not EU

members) have partly committed to the EU's economy and regulations: Iceland (a candidate

country for EU membership), Liechtenstein and Norway, which are a part of the single

market through the European Economic Area, and Switzerland, which has similar ties

through bilateral treaties. The relationships of the European microstates, Andorra, Monaco,

San Marino, and the Vatican include the use of the euro and other areas of co-operation.

4.3.1.1 Convergence Criteria

The Maastricht Treaty, which was signed in February 1992 and entered into force on 1

November 1993, outlined the 5 convergence criteria EU member states are required to

comply with to adopt the new currency the euro. The purpose of setting the criteria was to

achieve price stability within the eurozone and ensure it wasn't negatively impacted when

new member states accede. The original treaty article was later renumbered to become

article of the Amsterdam Treaty, and later renumbered again to Article 140 of the Treaty on

the Functioning of the European Union. Aside from the renumbering, no significant change

have happened to the content of the "convergence criteria article". The definition of the five

criteria are summarised below.

1 HICP inflation (12-months average of yearly rates ): Shall be no more than 1.5%

higher, than the unweighted arithmetic average of the similar HICP inflation rates in the 3

EU member states with the lowest HICP inflation.

2 Government budget deficit: The ratio of the annual general government deficit relative

to gross domestic product (GDP) at market prices, must not exceed 3% at the end of the

preceding fiscal year.

3 Government debt-to-GDP ratio: The ratio of gross government debt relative to GDP at

market prices, must not exceed 60% at the end of the preceding fiscal year.

4 Exchange rate: Applicant countries should have joined the exchange-rate mechanism

under the European Monetary System (EMS) for two consecutive years, and should not

have devalued its currency during the last two years, within a ±15% range from an

unchanged central rate.

5 Long-term interest rates: Shall be no more than 2.0% higher, than the unweighted

arithmetic average of the similar 10-year government bond yields in the 3 EU member

states with the lowest HICP inflation

In 2009 the authors of a confidential International Monetary Fund (IMF) report suggested that

in light of the ongoing global financial crisis, the EU Council should consider granting new EU

member states which are having difficulty complying with all five convergence criteria the

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option to "partially adopt" the euro, along the lines of the monetary agreements signed with

the European microstates outside the EU. These states would gain the right to adopt the

euro and issue a national variant of euro coins, but would not get a seat in ECB or the

Eurogroup until they met all the convergence criteria. However, the EU has not made use of

this alternative accession process.

4.3.2 SYMBOLS OF EU

1. The flag

The flag of Europe is used to represent both the

European Union and the Council of Europe. It

consists of a circle of 12 golden (yellow) stars on

a blue background. The blue represents the

west, the number of stars represents

completeness while their position in a circle

represents unity. The stars do not vary according

to the members of either organisation as they are intended to represent all the peoples of

Europe, even those outside European integration.

2. The European anthem

Is based on the prelude to "The Ode to Joy", 4th movement of Ludwig van Beethoven's

Symphony No. 9.

3. "Europe Day"

Is a celebration of Europe held annually on 9 May. 9 May 1950 was the date of the

"Schuman Declaration", the proposal to pool the French and West German coal and steel

industries.

4. Motto.

Unity in Diversity was adopted as the European Union's motto on 4 May 2000.

5. The euro

Has become a symbol since it replaced 12 national currencies in 2002. It is now used by

most EU Member States and hence it (along with its currency symbol) has become one of

the most tangible symbols of European unity for citizens of the European Union

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4.3.3 INSTITUTIONS OF THE EUROPEAN UNION

European Parliament - Legislative

European Council - Sets impetus and

direction -

Council of the

European Union - Legislative

European

Commission - Executive -

• acts together

with the Council as a legislature

• shares with the Council the budgetary power and decides in the last instance on the general budget of the EU

• exerts the democratic control over EU institutions including the European Commission and appoints the Commission members

• based and plenary sessions in Strasbourg, General Secretariat in Luxembourg, primarily meets in Brussels

• summit of the Heads of Government and of the President of the European Commission, in presence of the High Representative of the Union for Foreign Affairs and Security Policy and chaired by the President of the European Council

• gives the necessary impetus for the development and sets out general objectives and priorities

• will not legislate • based in

Brussels

• acts together with the Parliament as a legislature

• exerts together with the Parliament the budgetary power

• ensures coordination of the broad economic and social policy and sets out guidelines for the Common Foreign and Security Policy (CFSP)

• conclude international agreements

• based in Brussels

• is the "government"

• submits proposals for new legislation to the Parliament and to the Council

• implements EU policy and administers the budget

• ensures compliance with EU law ("guardian of the treaties")

• negotiates international treaties

• based in Brussels

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Court of Justice of the

European Union - Judiciary -

European Court of

Auditors - Financial auditor -

European Central Bank

- Monetary executive

• ensure uniformity of

interpretation of European law

• has the power to decide legal disputes between EU member states, EU institutions, businesses and individuals

• based in Luxembourg

• examines the proper use of revenue and expenditure of the EU institutions (see also Budget of the European Union)

• based in Luxembourg

• forms together with the national central banks the European System of Central Banks and thereby determining the monetary policy of the EU

• ensures price stability in the eurozone by controlling the money supply

• based in Frankfurt

The EU has developed a single market through a standardised system of laws that apply in

all member states. Within the Schengen Area (which includes 22 EU and 4 non-EU states)

passport controls have been abolished. EU policies aim to ensure the free movement of

people, goods, services, and capital, enact legislation in justice and home affairs, and

maintain common policies on trade, agriculture, fisheries, and regional development. The

eurozone, a monetary union, was established in 1999 and came into full force in 2002. It is

currently composed of 18 member states. Through the Common Foreign and Security Policy

the EU has developed a role in external relations and defence. Permanent diplomatic

missions have been established around the world. The EU is represented at the United

Nations, the WTO, the G8, and the G-20.

With a combined population of over 500 million inhabitants, or 7.3% of the world population,

the EU in 2012 generated a nominal gross domestic product (GDP) of 16.584 trillion US

dollars, constituting approximately 23% of global nominal GDP and 20% when measured in

terms of purchasing power parity, which is the largest nominal GDP and GDP PPP in the

world. The EU was the recipient of the 2012 Nobel Peace Prize.

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The European Parliament is the directly elected parliamentary institution of the European

Union Together with the Council of the European Union and the European Commission, it

exercises the legislative function of the EU and it has been described as one of the most

powerful legislatures in the world. The Parliament is currently composed of 766 members,

who represent the second largest democratic electorate in the world and the largest trans-

national democratic electorate in the world The European Parliament has legislative power

that the Council and Commission do not possess. Parliament is the "first institution" of the EU

and shares equal legislative and budgetary powers with the Council. It likewise has equal

control over the EU budget. Finally, the European Commission, the executive body of the

EU, is accountable to Parliament. In particular, Parliament elects the President of the

Commission, and approves (or rejects) the appointment of the Commission as a whole. It

can subsequently force the Commission as a body to resign by adopting a motion of

censure.

The European Commission is the executive body of the European Union responsible for

proposing legislation, implementing decisions, upholding the Union's treaties and day-to-day

running of the EU. The Commission operates as a cabinet government, with 28 members of

the Commission (informally known as "commissioners"). There is one member per member

state, though members are bound to represent the interests of the EU as a whole rather than

their home state. One of the 28 is the Commission President proposed by the European

Council and elected by the European Parliament.

The Council of the European Union referred to as the Council of Ministers is the third of

the seven institutions of the European Union , representing the executives of EU member

states. The Council is composed of several configurations of twenty-eight national ministers

(one per state). The exact membership of the configuration depends upon the topic; for

example, when discussing agricultural policy the Council is formed by the twenty-eight

national ministers whose portfolio includes this policy area The Presidency of the Council

rotates every six months among the governments of EU member states, with the relevant

ministers of the respective country holding the Presidency at any given time ensuring the

smooth running of the meetings and setting the daily agenda. Its decisions are made by

qualified majority voting in most areas, unanimity in others.

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4.3.4 MONETARY UNION

The creation of a European single currency became an official objective of the European

Economic Community in 1969. However, it was only with the advent of the Maastricht Treaty

in 1993 that member states were legally bound to start the monetary union no later than 1

January 1999. On this date the euro was duly launched by eleven of the then 15 member

states of the EU. It remained an accounting currency until 1 January 2002, when euro notes

and coins were issued and national currencies began to phase out in the eurozone, which by

then consisted of 12 member states. The eurozone (constituted by the EU member states

which have adopted the euro) has since grown to 18 countries, the most recent being Latvia

which joined on 1 January 2014.

All other EU member states, except Denmark and the United Kingdom, are legally bound to

join the euro when the convergence criteria are met, however only a few countries have set

target dates for accession. Sweden has circumvented the requirement to join the euro by not

meeting the membership criteria.

The euro is designed to help build a single market by, for example: easing travel of citizens

and goods, eliminating exchange rate problems, providing price transparency, creating a

single financial market, price stability and low interest rates, and providing a currency used

internationally and protected against shocks by the large amount of internal trade within the

eurozone. It is also intended as a political symbol of integration and stimulus for more. Since

its launch the euro has become the second reserve currency in the world with a quarter of

foreign exchanges reserves being in euro. The euro, and the monetary policies of those who

have adopted it in agreement with the EU, are under the control of the European Central

Bank (ECB).

The ECB is the central bank for the eurozone, and thus controls monetary policy in that area

with an agenda to maintain price stability. It is at the centre of the European System of

Central Banks, which comprehends all EU national central banks and is controlled by its

General Council, consisting of the President of the ECB, who is appointed by the European

Council, the Vice-President of the ECB, and the governors of the national central banks of all

28 EU member states.

The monetary union has been shaken by the European sovereign-debt crisis since 2009.

4.3.4.1 EURO

All coins have a common reverse side showing how much the coin is worth, with a design by

Belgian designer Luc Luycx. The obverse side varies from state to state, with each member

allowed to choose its own design. Each of the eight coins can have the same design (such

as Estonian coins), or can vary from coin to coin (such as Italian coins).

The euro banknotes are the banknotes of the euro, the currency of the Eurozone. The first

series has been in circulation since 2002. They are issued by the National Central Banks

Denominations of the notes range from €5 to €500, and unlike euro coins, the design is

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identical across the whole of the Eurozone, although they are issued and printed in various

member states. The euro banknotes are pure cotton fibre, which improves their durability as

well as giving the banknotes a distinctive feel. The euro notes contain many complex security

features such as watermarks (Infrared and ultraviolet watermarks), invisible ink, Magnetic

ink, holograms and microprinting that document their authenticity. While euro coins have a

national side indicating the country of issue (although not necessarily of minting), euro notes

lack this. Instead, this information is encoded within the first character of each note's serial

number.

Image Value Obverse Reverse

€5

€10

€20

€50

€100

€200

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5 GLOBALIZATION AND SOME NEW PROBLEMS

5.1 DIVISION OF THE WORLD In terms of economic development, the world is divided into:

• the rich industrialized countries or advanced economies of the West (including Europe,

The USA, Canada, Japan and Australia)

• the developing countries or less-developed countries LDCs at various stages of

industrialization – they are newly industrialized countries NICs , some of these are

middle-income countries and some, such as the Asian tigers – fast growing economies

is Asia like Thaiwan and Singapore are reaching wetern levels of wealth and prosperity.

The BRIC countries (Brazil, Russia, India, China) – they are the world´s largest

emerging economies. They have fast growth, strong economic foundations with large

trade surpluses and healthy foreign currency reserves, a big rise in in the size of middle

class and a big increase in demand not only for basic goods but for higher-priced goods

as well. China and India are manufacturing-based economies and big importers of rae

materials, but Russia and Brazil are big exporters of natural resources. The potential of

the Next Eleven (N-11 ) countries identified by Goldman should not be ignored. These

are at different stages of economic development: least developed country (Bangladesh),

developing countries (Egypt, Indonesia, Iran, Nigeria, Pakistan, Vietnam), newly

industrialized countries (Mexico, Philippines, Turkey) and developed country (South

Korea). The criteria for selection were: their economic stability (lack of sudden changes),

political maturity (efficient government), openness of trade and investment policy (lack of

protectionism) and the quality of education.

• Countries with rural economies based on agriculture and very lettle industry, where

most people are very poor. These are sometimes referred to as the Third world.

Some negative impact of globalization are black markets and organized crime often operate

on a transnational basis or human trafficking and smugling. Human trafficking is the trade in

humans, most commonly for the purpose of sexual slavery, forced labor or for the extraction

of organs or tissues, including surrogacy and ova removal. Human trafficking is a global

issue that is shaped by economic hardships, cultures, laws, and immigration policies.

5.2 GLOBAL NATURAL ENVIRONMENT The natural environment encompasses all living and non-living things occurring naturally on

Earth or some region thereof. It is an environment that encompasses the interaction of all

living species. The natural environment is contrasted with the built environment, which

comprises the areas and components that are strongly influenced by humans.

Human challenges to the natural environment, such as climate change, cross-boundary

water and air pollution, over-fishing of the ocean, and the spread of invasive species require

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at least transnational and, often, global solutions. Since factories in developing countries

increased global output and experienced less environmental regulation, globally there have

been substantial increases in pollution and its impact on water resources.

Burning forest in Brazil or the removal of forest to make way for cattle ranching was the

leading cause of deforestation in the Brazilian Amazon from the mid-1960s. Soybeans have

become one of the most important contributors to deforestation in the Brazilian Amazon.

The time between distances is shrinking between continents and countries due to

globalization, causing developing and developed countries to find new ways to solve

problems on a global rather than regional scale. Agencies like the United Nations now must

be the global regulators of pollution, whereas before, regional governance was enough.

Action has been taken by the United Nations to monitor and reduce atmospheric pollutants

through the Kyoto Protocol, the UN Clean Air Initiative. reached and others are near their

limits.

Without more recycling, zinc could be used up by 2037, both indium and hafnium could run

out by 2017, and terbium could be gone by 2012.[241] Other "peak" phenomena, such as peak

oil, peak coal, peak gas, peak water, and peak wheat, also affect the availability and

sustainability of natural capital.

Migration of educated and skilled workers is called brain drain. Reverse brain drain is the

movement of human capital from a more developed country to a less developed country. It is

considered a logical outcome of a calculated strategy where migrants accumulate savings

and develop skills overseas that can be used in their home country. Reverse brain drain can

occur when scientists, engineers, or other intellectual elites migrate to a less developed

country to learn in its universities, perform research, or gain working experience in areas

where education and employment opportunities are limited in their home country. These

professionals then return to their home country after several years of experience to start a

related business, teach in a university, or work for a multi-national in their home country.

A transnational marriage is a marriage between two people from different countries. A variety

of special issues arise in marriages between people from different countries, including those

related to citizenship and culture, which add complexity and challenges to these kinds of

relationships. In an age of increasing globalization, where a growing number of people have

ties to networks of people and places across the globe, rather than to a current geographic

location, people are increasingly marrying across national boundaries. Transnational

marriage is a by-product of the movement and migration of people.

5.3 SUPPORT AND CRITICISM Some critics of globalization argue that it harms the diversity of cultures. As a dominating

country’s culture is introduced into a receiving country through globalization, it can become a

threat to the diversity of local culture. Some argue that globalization may ultimately lead to

Westernization or Americanization of culture, where the dominating cultural concepts of

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economically and politically powerful Western countries spread and cause harm on local

cultures.

Critics argue that globalization results in:

• Poorer countries suffering disadvantages : While it is true that free trade encourages

globalization among countries, some countries try to protect their domestic suppliers. The

main export of poorer countries is usually agricultural productions. Larger countries often

subsidise their farmers (e.g., the EU's Common Agricultural Policy), which lowers the

market price for foreign crops.

• The shift to outsourcing : Globalization allowed corporations to move manufacturing

and service jobs from high cost locations, creating economic opportunities with the most

competitive wages and worker benefits.

• An increase in exploitation of child labour : Countries with weak protections for

children are vulnerable to infestation by rogue companies and criminal gangs who exploit

them. Examples include farm work as well as trafficking, bondage, forced labor,

prostitution and pornography.

When there are extreme situations (war, natural disaster, earthquakes, floods, epidemics,

famine, crop failure) emergency relief is provided in form of supplies, medicine assistance

and other forms of humanitarian aid by agencies such as Oxfam or Médecins sans

Frontiéres. These are non-government organizations even if in some cases they are totally or

partially funded by governments. Aid agencies also contribute to economic development

through specific development projects (official development assistance – ODA ). These

projects may use intermediate technology – equipment and machinery suited to local

conditions that local people can operate and maintain. Some of these projects are designed

to improve infrastructure – a country´s water supplies, roads, etc. Some provide seed money

for small businesses the money they need to start up until they become viable and able to

develop by themselves

5.4 SOME OTHER PROBLEMS - POPULATION Since the 18th century the world has experienced a population explosion, and it is still

increasing faster than ever before. While there is potential for the production of more goods

and services, natural resources are limited, and, as fast as goods and services are produced,

so the needs and wants of ever-increasing world population grow. The population of the

world is increasing by over 70 million people each year, or 200 000 a day.

The population explosion started in Europe after the Industrial revolution in the 18th

century. Improvements in housing, sanitasion and medicine reduced the number of death

and helped increase the number of births. In the 20th century population growth in many

western countries has slowed down and currently is growing by less than 1% per year. The

world population is expected to reach 8 billion by 2025. About 7 billion of these people will

live in less-developed countries.

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In 1798 the Reverend Thomas Malthus wrote about population growth and predicted

overpopulation. As a result, people would start to starve and there would be famines and

plagues as people lacked the strength to fight off disease. Wars would start as countries tried

to take over each other´s resources to support their own populations.

Dependency ratio compares the number of people in work with the total population of the

country.

Total population Dependency ratio = -------------------------------

Number of people in work

The dependent population consists of the very young, schoolchildren, students, housewives,

the unemployed and old-age pensioners. Any increae in these groups of people means that

the people in work have more people to support and the living standards of most people will

fall. Working people may have to pay more tax to support their dependents. If people in work

cannot produce enough goods and services to satisfy the needs and wants of a growing

dependent population, the country will have to use some of its income to purchase more

imported goods from abroad. Its balance of trade may become unfavourable.

The dependency ratio has increased for several reasons:

• The school leaving age has been increased over time. More young people are

encouraged to stay on in full-time education.

• People are living longer and the number of elderly people has increased and an

increasing number of people are taking early retirement, that is why governments are

increasing the official retirement age to 62 for women and men equally.

• In less-devloped countries medical help has allowed more people to live to old age and

more babies to survive . As the result, their dependent populations are large and

increasing, putting more strain on their scarce resources.

5.4.1 INCREASE IN POPULATION

There are 3 ways in which a country´s population can increase:

1. The number of babies born can increase.

The average number of children born in a country compared to the rest of the population is

known as the birth rate, which is normally expressed as the number of births for every 1000

people in the country.

Reasons for birth rate declining:

• Living standards . Improvements in the quality and availability of food, housing, clean

water, toilet facilities and medical care results in fewer babies dying. Many years ago

a high portion of children would die before they could go to work and earn Money for their

families. As a result, people had large families in case their children died. As living

standards improved in many developed countries, fewer children died and so people did

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not have as many children. In less-developed countries birth rates remain high because

many children still die.

• Contraception . The increased usage of contraception and abortion has dramatically

reduced birth rates in developed countries. Because of lack of education on such

matters, many people in less-developed countries are unaware of birth control.

• Custom and religion . In developed countries many women do not wish to break their

careers to bring up children. Having children also causes the drain on people´s incomes.

They may also pay a baby-sitter to look after the child if they remain at work.

• Marriages. Most people have children when they are married. In many developed

countries people are tending to marry later on in life and so birth rates fall.

2. The number of people dying can fall.

The number of people who die each year compared to every 1000 people in the population is

known as the death rate. The death rate was higher in the past. Most countries has

experienced a falling death rate, even less-developed countries had some success in

reducing their death rate, but as their birth rate remain high, so their population grows

rapidly.

Factors that effect the death rate in the country:

• Medical advance and health care. The main killer diseases can be prevented or even

cured by modern medicine. The life expectancy has increased to 80 years. The life

expectancy in less-developed countries still remains low, but increasing health care has

improved the chance of survival of many people.

• Living standards . Better-quality food, clothing and shelter, and the greater emphasis on

cleanliness have helped to improve the health and life expectancy of peiple in developed

countries. In less-developed world a lack of the right types of food to provide vitamones

and proteins has meant many people in these areas die from malnutrition. However, in

developed nations many people smoke and eat very rich food often causing cancer and

heart disease.

The rate of natural increase in a countrie´s population is the difference between the birth rate

and death rate in that country.

3. More people can come to live in the country (imm igration) than there are people

leaving the country to live abroad (emmigration). If the number of immigrants exceeds

the number of emmigrants the population in a country will rise, the net migration is positive.

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5.4.2 OTHER POPULATION PROBLEMS

Countries experience ageing of their population with falling of their birth and death rates.

There are more and more middle to old-aged people. As the number of old people grow

there will be changes in the economy:

• A fall in birth rate will be reflected in a fall in the working population. The declining

working population will have more people to support as death rates fall.

• More resources will have to be put into producing goods and services for older people

and less resources need to be put in maternity clinics, nurseries and schools.

• An ageing population will also affect the pattern of demand in the economy. Older people

want and need different commodities from younger age groups.

The sex distribution in a country refers to the number of males compared to the number of

females in the population. Females tend to live longer than males and so the number of

females in the total population exceeds that of males.

The trend in occupational distribution is expected to show a continuing increase in

employment in service industry. Female employment is concentrated in industries sucha

s textiles and clothing, food, drink, the retailing trade and many Office jobs and professions

like nursing and teching. Female employment although often include much part-time work.

The optimum population for the country refers to the size of population which, given the

existing stock of land, capital and technical knowledge, could produce the maximum amount

of output of goods and services per head. As the size of population in the country grows they

are able to produce more and more, but after a point there will be diminishing returns as

there are too many people and too few resources. Output per head would fall.

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