The International Economy And South Africa Economics Essay

In order to depict or specify the international economic system as a system we have to take a expression at all the constituents of the economic system every bit good as their relationships and find if the economic system falls within the definition of a system as defined by the field of system technology. The purpose with this inquiry is to find systems and sub systems in the economic system and see what, if any, dealingss exist between them.

1.1. International Economy

International economic system harmonizing to Krugman Paul R and Obstfeld, Maurice [ 2008 ] is about how states interact through trade of goods and services and through flow of money and investings. The international economic system grows because states are linked through bilateral trade of goods, services and investings.

The International economic system consists of three sub-systems viz. :

* International Trade

* International Finance

* National Economy of Countries

1.1.1. International Trade

International trade, as a subsystem of the international economic system, represents the flow of goods and services between states of the universe. It is stimulated by supply and demand significance goods and services will flux from an advantaged state to a lesser privilege state.

The trade is monitored through the gross domestic merchandise ( GDP ) , which is a step of national income and end products of a state. Using GDP, the growing of an economic system of a peculiar state can be determined.

International trade is a major tool within the international economic system as it is loosely represents most beginnings of economic gross and besides deriving entree to goods and services through imports. However it creates competition among states that strive for competitory advantage to better their economic growing.

To make control, ordinances are frequently created which can take a signifier of a free trade or mandatory duties, explain as

– Free Trade: Negotiated between states frequently due to political or cultural beliefs to portion resources

– Duties Controlled trade: Restricted trade, frequently put in topographic point to deter imports or even prevent foreign coup d’etat of certain services or goods.

1.1.2. International Finance

This subsystem of an international economic system is concerned with the international fundss and focal points on how capital flows across international fiscal markets. Its chief constituent is foreign investings. It is created when one state invests in another state with a chance for a better return. It promotes relationships and benefits the involved states where there is common understanding. In most instances a foreign state, its administrations or even its citizens has an involvement to prosecute an chance outside of its boundary lines

1.1.3. National Economy of Countries

The national economic system of states, as a subsystem for the international economic system, directs the channel for international trade and international fundss and besides controls economic activities within each state with an aim of sustainability for human demands satisfaction.

Within each state this subsystem governs economic issues such as:

– Distribution of goods and services

– Growth

– Unemployment

– Inflation

– Regulations and statute laws e.g. monitory policies

– Financial establishments

National economic system would include both the macro and microeconomics of a state. We can specify macro and micro economic system as follows:

– The Economist ‘s Dictionary of Economics defines Macroeconomics as: “ The survey of whole economic systems aggregating over the operation of single economic units. It is chiefly concerned with variables which follow systematic and predictable waies of behavior and can be analysed independently of the determinations of the many agents who determine their degree. More specifically, it is a survey of national economic systems and the finding of national income. ”

– The Economist ‘s Dictionary of Economics defines Microeconomics as: “ The survey of economic sciences at the degree of single consumers, groups of consumers, or houses… The general concern of microeconomics is the efficient allotment of scarce resources between alternate utilizations but more specifically it involves the finding of monetary value through the optimizing behavior of economic agents, with consumers maximising public-service corporation and houses maximising net income. ”

Figure 1 International Economy and its subsystems

1.2. Measurements and Regulations

Harmonizing to the IMF Chief, Dominique Strauss-Kahn, the modulating organic structure of the International Economy consists of establishments and regulators that act on an international degree. The chief participants that form portion of the international economic system are international establishments, authorities establishments, private participants and legal models & A ; pacts.

The international establishments consist of the International Monetary Fund ( IMF ) , the World Bank ( WB ) and the World Trade Organisation ( WTO ) . Governments of all states act in assorted ways as in the planetary fiscal system. Private participants include commercial Bankss, hedge financess and private equity & A ; pension financess. The legal model for the fiscal system includes the commonwealth of Independent States ( CIS ) , the Eurozone, Mercosur and North American Free Trade Agreement ( NAFTA ) .

The IMF presently has 184 member states and to keep stableness, the IMF reviews national, regional and planetary economic system and fiscal developments on a frequent footing. The purpose is to promote them to follow policies that promote fiscal stableness which will cut down their exposure to economical and fiscal crisis. The IMF offers a forum to all its members where they can discourse the effects of their ain policies on a national, regional and planetary degree.

The IMF besides makes financess available on a impermanent footing to members which run into payment jobs. This usually happened when they experience a deficit of foreign exchange because their payments to states exceed their foreign exchange net incomes.

The IMF in conclusion provides proficient aid and preparation to assist states to construct their ain expertness needed for economic stableness and growing in their state.

The World Trade Organisation established in 1995 and its predecessor General Agreement of Tariffs and Trade ( GATT ) is the lone planetary international administration covering with the regulations of trade between states and states. The WTO helped to make a strong international trading system, thereby lending to unprecedented planetary economical growing. Their aim is to assist merchandise flow swimmingly, free and just. The WTO settees trade differences and negotiates international trade understandings. The WTO provides a forum for its 153 members to take portion in determinations by and large taken by consensus of the full rank. The chief activities of the WTO are:

* Negociating the decrease or riddance of obstructions to merchandise and holding to the behavior of international trade

* Administrating and supervising the application of the WTO agreed regulations for trade in goods, trade in services, and trade related rational belongings rights.

* Monitoring and reexamining the trade policies of members

* Settling differences among members sing the reading and application of the understandings

* Constructing the capacity of developing state ‘s authorities functionaries in international trade affairs

* Assisting some 30 states who are non yet members

* Conducting economic research, roll uping and circulating trade informations in support of the WTO ‘s other chief activities

* Educating the populace about the WTO, its mission and activities.

The WTO would besides fall in the definition of a system. The members/components have all rules/interrelated understandings which support a common end, just trade.

From the research stuff, it is clear that the IMF and WTO are of small or no value to developing states without a strong fiscal spouse. This spouse is the World Bank. The World Bank is owned by more than 180 states and is run like a elephantine co-op where its members are stockholders. The figure of portions a state has is approximately based on the size of its economic system. The UK is the largest stockholder followed by Japan, Germany the UK and France.

As the World Bank grew it created new organisations ( sub systems ) which all form portion of the World Bank Group. The group consist of International Bank for Reconstruction and Development ( IBRD ) , International Development Association ( IDA ) , International Finance Corporation ( IFC ) , Multi Investment Guarantee Agencies ( MIGA ) and International Centre for Settlement of Investment Disputes

The IMF and the World Bank complement each other ‘s work. The IMF focal point chiefly on the macroeconomic and the fiscal sector while the World Bank is concerned chiefly with longer term development and poorness decrease. States must be a member of the IMF to be eligible for World Bank rank.

Governments and Federal/Reserve Bankss in each member state have the responsibility of go throughing the jurisprudence and ordinances for fiscal markets. Governments are besides take parting through discretionary disbursement and are closely tied to cardinal Bankss that provide authorities debt, set involvement rates and sedimentation demands.

1.3. Decision

After comparing the international economic system, with many different degrees of subsystems, to the demands of a system, it becomes apparent that universe economic sciences must so be a system as defined by system technology. Although really complex, it would necessitate the same procedure of analysis, tradeoffs, synthesis, ratings, reappraisals and feedback as is required during the development of any system and bomber systems

aa‚¬A“Systems are composed of constituents, properties and relationships.aa‚¬A? [ Benjamin S Blanchard, Wolter J Fabrycky, p 3 ] . The international economic system and the demands of each of the above mentioned sub systems can be defined as:

* Components – International trade, International Finance, National Trade,

* Attributes – common aim to merchandise which is the footing for economic system within a set of agreements/requirements.

* Relationship – working together between states within a set of agreements/requirements ( Trade ) .

Question 2:

2.1. Description of factors taking to fiscal state of affairs:

Before any anticipations and descriptions can be made on why the international economic system is in its current province, an analysis has to be done on the factors that could hold caused the recession. After the factors have been identified, it could be used in concurrence with the fiscal theoretical account to do anticipations. Factors that were identified are:

2.1.1. Housing/Property bubble:

The lodging bubble was one of the major subscribers to the economic recession. The definition of a lodging bubble is when administrations inflate the monetary values of belongings that is much higher than the existent value of the belongings. Guess in belongings is one of the major factors for the addition in belongings monetary value. Guess resulted in unhealthy monetary value additions. This was a global tendency. During 2004 – 2006 the house monetary values in the United States started to diminish. The lessening in belongings value left the proprietors with a lower value belongings and a higher mortgage bond to refund. This resulted in an addition in defaults on loan payments. Pressure increased on fiscal establishments due to failure of refunds. When mortgage loans are being granted, the belongings is normally used for security. Once the belongings monetary value declined the mortgage-based securities of fiscal establishments besides decreased, go forthing them with less security on their investings.

2.1.2. Sub-prime loaning:

Sub-prime loaning was one of the other chief subscribers to the economic recession. Sub-prime loaning can be described as the granting of loans to bad borrowers which have weak recognition histories. Sub-prime borrowers were enticed to settle for loans with an initial lower involvement rate for a certain period, one time this period finished they would pay a market-related involvement rate. This led to a job for many borrowers, who could non pay these higher involvement rate loans, and many tried to refinance their loans but refinancing became much more hard. Sub-prime loaning and the dramatic lessening in belongings monetary values resulted in an addition of defaults in loans refunds. Foreclosures began in during 2007 and the loss of income for the fiscal establishments caused many in debt and finally to cloture in some instances.

2.1.3. Commodity boom/bubble:

Apart from the lodging bubble, monetary values on trade goods were increased exponentially and out of proportion. The addition in the oil monetary value is one of many illustrations. The oil monetary value was inflated, due to guess, to a monetary value of $ 147.30 a barrel. Food monetary values besides increased and all resulted in force per unit area on borrowers, go forthing them with less money in their pockets. Monetary values on natural stuff, such as Cu and Ni, where inflated and added more economic force per unit area.

2.1.4. Inflation:

As trade good monetary values started to increase, rising prices started to increase every bit good. The addition in rising prices was chiefly fuelled by the addition in the oil monetary value. Inflation decreases the purchasing power of currency. Inflation increased the monetary values of normal family points, go forthing family to pay higher for their basic goods.

2.1.5. Easy recognition conditions:

The consequence of recognition on the broader economic system has been of concern to economic expert since the early yearss of the profession. ( Bordo M.D. et al. , 2010 ) . The United States authorities tried to resuscitate their economic system after the dotcom bubble explosion and wanted to increase the figure of place proprietors, by loosen uping the recognition conditions. A low rising prices rate besides played a function to diminish the involvement rate. The involvement rate was dropped over a period from 6 % to 1 % . Credit became readily available, but one time the involvement rate was increased it became hard for borrowers to serve their debts.

2.1.6. Fiscal invention:

Many fiscal establishments bundled sub-prime mortgages into mortgage-based securities. This was done without any proper debt hazard theoretical accounts. The mortgage-based securities where so sold to investors, with the belief that they will have involvement gross on the adjustable-rate mortgages. Once the defaults on mortgages and foreclosures started to mount, force per unit area increased on establishments and shortly many establishments found themselves in fiscal trouble.

2.1.7. Deregulation and policies:

As indicated earlier the United States authorities made a determination to increase the sum of place proprietors by loosen uping the pecuniary policies. This determination was one of the taking factors to the economic recession. Credit became readily available taking to an addition in debt. After a few twelvemonth of really low involvement rate the Federal Reserve started to fasten the pecuniary policy, by increasing the involvement rate, and get downing to deflate the belongings bubble. The addition in the involvement rate resulted in borrowers fighting with refunds of loans.

2.1.8. Addition in debt:

High trade good monetary values, rising prices and lower recognition ordinances ( sub-prime loaning policies ) are the factors that led to an addition in debt. Households fell into the debt trap, chiefly to keep their life criterions. The USA family debt as a per centum of one-year disposable personal income was 127 % at the terminal of 2007, versus 77 % in 1990 ( The Economist, 2008 ) . As indicated in the graphs below, it is clear to see one time the disposable income lessening, family debt started to increase.

Figure 2 The Economist, 2008.

2.1.9. Unemployment:

As fiscal force per unit area mounted on establishments and concerns, many had trouble in hard currency flow and had trouble to counterbalance employees for services rendered. This led to lay-offs of employees, this led to and explosive addition in unemployment, adding the figure of families fighting to refund debts on mortgages loans.

Figure 3 The Economist, 2008.

2.1.10. Failure of economic prediction:

No clear grounds can be found on hazard analysis theoretical accounts that were used when policy alterations where made, and calculating methods to foretell the recession.

2.2. Prediction of the fiscal state of affairs:

The international economic system consists of three subsystems ( international trade, international finance and national fundss ) with assorted establishments in each subsystem. The subsystems and establishments were all influenced by the factors of the recession. The factors that led to the current fiscal state of affairs can now be used to find if the recession could hold been avoided.

2.2.1. International economic subsystems:

Each of the subsystems within the international economic system played a function in the economic recession and was influenced on the recession started.

* International trade:

International trade played a immense function in the addition of rising prices on trade goods. The increasing oil monetary value has put strain on many economic systems, and influenced the rising prices rate in many states. Trade between states were influenced one time the recession started. The demand for certain resources decreased as the demand for resources within each state decreased.

* International finance:

International finance allows states to put money into other states. The economic systems of the United States ( US ) and the United Kingdom ( UK ) are among the biggest in the universe. States that invested money in the US and UK started to lose investing once the recessions pulled the interruption on the US and UK economic systems, seting strain on the investment states ‘ economic systems.

* National economic systems of states:

Each state governs its ain economic policies and ordinances. The United States authorities made some determinations that impacted each state ‘s economic system, because the US has one of the biggest economic systems in the universe. The policies that they have adapted to try to turn their economic system by cut downing recognition ordinance did make some growing in certain countries of the economic system in the short tally. The major impact of sub-prime loaning was the lodging bubble that hyperbolic house monetary values higher than the existent value. Once the US authorities started to do alterations to their recognition policies, by increasing the involvement rate, they had put force per unit area on the US economic system. Payment of loans started to diminish and the fiscal establishments within the US economic system started to hold fiscal jobs, seeking aid from the US authorities, which in certain instances did non help them.

The Gross Domestic Product started to diminish, due to the lessening in demand of goods within the states. Manufacturers of goods reacted by diminishing production, which lead to fiscal force per unit area. To salvage their concerns, they reacted to diminish their sum of employees, therefore increasing the unemployment rate.

The whole economic growing within the states decreased taking to the recession, which can be defined as a lessening in economic growing over a period of clip. [ Merriam-Webster Online Dictionary ]

2.2.2. Institutions within the fiscal system:

Institutions in the fiscal system had a immense impact on the recession. All the establishments in the fiscal system could hold managed the factors within their environment to soften the impact that the recession had on the economic system.

* The International Monetary Fund:

The International Monetary Fund ‘s ( IMF ) purpose is to promote its members to follow policies to keep fiscal stableness. The IMF clearly did non rede and supply its members with adequate information to do realistic policies.

* Governments and Federal/Reserve Bankss:

The United States authorities adopted policies that influenced the planetary fiscal system. The debut of sub-prime loaning policy was really bold and hazardous. The deficiency of proper fiscal hazard analysis should hold been a clear warning mark. The tightening of the recognition policies after a period of low involvement rates besides made a immense impact, the effects that recognition policies had in old recessions should hold been an indicant on what impact these sort of policies would hold on the economic system.

* Commercial Bankss and other fiscal establishments:

Commercial Bankss and other fiscal establishments are responsible for supplying mortgages and loans to borrowers. Due to the low involvement rate and handiness of easy recognition, Bankss provided loans really easy, without existent security. Commercial Bankss and fiscal establishments could hold insisted to the regulating governments to alter the recognition loaning policies of the state. By altering the policies, the sub-prime loaning issue could be averted. Banks and fiscal establishments were foremost in line to supply loans, and they should hold tracked the fiscal jobs experienced by borrowers.

2.2.3. Historical information and feedback:

It is really hard to foretell the exact clip a recession will happen, but if historical informations of factors that led to old recessions were analysed, a tendency could hold been determined. The historical information showed clearly the influence and impacts that certain policy alterations had on the fiscal systems. Historical information was ignored by the United States authorities and fiscal establishments.

The tabular array below illustrates the last eight recessions and which factors had an impact on the recession. It is clear that tighter pecuniary policies and recognition crunches had an impact on all of them. The lone difference in the current recession is that it was fuelled by a existent estate prostration.

Figure 4 Bordo, M.S. et Al, 2010

It is clear that if the fiscal establishments and concerns in the fiscal system reviewed the historical informations better determinations could hold been made to avoid the current fiscal convulsion.

2.3. Decision

The impact of the economic recession could hold been reduced if the factors that lead to the recession were monitored decently. As indicated in the historic informations some tendencies from old recessions were seeable. Closer monitoring of factors should go precedence within the fiscal system. All the fiscal establishments should be analyzing the impact of policies and ordinances decently to avoid the repetition of the current fiscal position.

Question 3:

After 17 old ages of a recession-free state, on the 27th May 2009 the headlines started to look: SA JOINS THE GLOBAL RECESSION [, 27 May 2009 ]

A state is officially in recession after 2 back-to-back quarters with a negative economical growing harmonizing to Statistics South Africa. By this clip the South African Reserve Bank has cut involvement rates 4 times since the December 2008, adding up to 350 footing point cut. This was done to detain the drawn-out feared planetary recession affects on South Africa.

About 6 months after the birth of the South African Recession, Statistics SA published studies that South Africa is out of recession and get downing to retrieve.

Economist Mike Shusshler commented on the 24th of November 2009 in a study by Sapa that even though statistics say South Africa is out of recession, the population might non experience the same manner. President Jacob Zuma ‘s first presidential address in 2009 promised the South African community a million new occupations. Then, with all the on-going building and substructure ascents planned for the 2010 Soccer World Cup, this seemed possible. By the terminal of 2009 over half a million South Africans has lost their occupations, chiefly due to the effects of the recession.

During a recession a state loses purchasing power, therefore if a few states lose purchasing power, exports lessening. Therefore with no foreigners conveying gross into a state, the gross needs to come from an internal model. This is easier said than done. With 1000s of people losing their occupations, lessenings in wages and bonuses the sum of extra money to pass per family is on a lessening. And yet, nutrient and fuel monetary values merely seem to increase on a regular footing. Another manner to hike an economic system is for a authorities to put into the state and strongly modulate the sums and involvement rates that the Bankss lend money to clients.

Extreme tight controls were implemented by our former Finance Minister, Mr Trevor Manual. It can be speculated without the tight control from him South Africa would hold been hit a great trade harder by the planetary recession. The execution of the new national recognition act restricted the South African population on passing money they do non possess. 100 % bonds from Bankss were no longer possible, most bonds were agreed on between a 70 – 80 % blessing of the entire loan sum.

In 2010 everything start to look a small rosier for South Africans. Cut in involvement rates have made a little but noticeable difference in the population pockets. South Africa experienced merely the top portion of the economic recession and with minimum harm when compared to other states. Our Economic-Titanic did non travel under but was it restored back to normal?

In April 2010, can we genuinely confirm that the recession is over and that our economic system has recovered?

Is the South African Economic-Titanic ready to put canvas one time once more? Or is the current phase of economic stableness merely a composure before the storm?

In the Mail and Guardian of 6 February 2008 the journalist, Denise Williams warned against a South African recession. The chief cause of this warning was our electricity demand vs electricity supply. “ We have already been traveling through an economic lag ; this [ the electricity crisis ] could force us into a recession, ” Richard Downing, a Sacci economic expert said. ( Mail and Guardian Online, )

In 2008 South Africans got to larn a new word, loadshedding! In 2010 we have non yet forgotten about how negatively loadshedding impacted our normal lives and the flow and efficiency of concerns and economic growing.

Do we hold a 2nd iceberg on the skyline? Or is the implicit in electricity crisis a fire that will fire the ship from the interior? Eskoms duties are increasing during the 2nd one-fourth of 2010 by about 35 % . Very small can yet be speculated on the consequence this will hold on the pockets of the South African population. Will this addition jostle our delicate cripple economic system to plump one time once more? This is a distressing factor for economic expert Mike Shussler ( Remarks from Stats SA informations, study from Sapa ) .

Another badgering factor is the completion of the substructure ascents, association football bowl ascents and new edifices sing the 2010 FIFA Soccer World Cup. Within less that 50 yearss South Africa would be the host of the esteemed World Cup it has been fixing for, for over 4 old ages. What awaits the South African community upon the shutting ceremonial and the farewell moving ridges of our visitants?

During the recession the building sector of our state had fundamentally no hiccough. Is the recession still expecting this sector? On completion of bowls and route ascents, where will 1000s of workers continue working? Where and with whom will the building companies sign contracts for that can guarantee work for the 1000s that had stable work during our recession period in 2009.

Millions have been spent – a certain illustration of the authorities forcing money into the state and into the upgrading of South Africa endeavoring to be portion of the first universe. But what now? How will this go on into the hereafter? How do we maneuver the Economic-Titanic towards a positive and mounting GDP for the balance of 2010 and beyond? Reports are in that the recession is over and that the population is traveling out of the ruddy.

The used and new auto markets are picking up gross revenues and easy traveling back to normal. Published on the 20th of April 2010 on, the National Association of Automobile Manufacturers of South Africa ( Naamsa ) stated that “ Expected improved economic activity degrees, the benefit of lower involvement rates on the dorsum of worsening inflationary force per unit areas and an betterment in the fiscal place of consumers will lend to an betterment in new vehicle gross revenues in 2010 ” .

Is it with certainty we can state that South Africa is out of the recession? NO! Is it safe to state that South Africa is temporarily out of recession? Yes, but in a really delicate province and if the South African authorities and population is non cognizant and cautious with this breakability, this might be merely be that composure before the storm.