About economics

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About economics

Kovalenko R.S. - student, Novikova L.V - supervisor

Vladimir State University

Vladimir, Russia

First of all, let us try to understand, what the global economy is? Owing to the growth of the international trade in goods and services, capital flows, and development of business relationship between companies, worldwide integration and interdependence is now a fact of life. This is globalization of economy. We can be reasonably confident that globalization will characterize the future, generally, because it has already existed.

Economists are tending to view globalization as a positive phenomenon in a long term. However, few of them would argue that its short run consequences, particularly for some economic groups, are likely to be extremely painful. Here I would like to underline that if this problem is ignored and little is done about it, the neglect won't be easy to dispute. Moreover, even if globalization's consequences include increased productivity, there is no guarantee that wealth and income will arise everywhere.

Nevertheless, for all of its many problems, globalization is worth pursuing as a way to raise the world's living standards. Firstly, the evident prospect is changes of the impact of time and distance factors. The international entrepreneurship, as it is known, is connected with overcoming long distances. Progressive high technologies enable to save considerable amount of time and costs on information transfer, goods transportation and people's movement. The achievements in the communication sphere, for example, satellites accelerate international interaction and intensify control over them.

Secondly, the fast information exchange regarding new products leads to growth of sales volume in foreign markets. Due to the technical innovations there is an opportunity to build up production in different countries. It means that there will be new working places and unemployment will probably decrease.

Besides, I believe that as a result of the world market expansion, the quality of goods may increase, but the prices will go down.

In addition to the above said, the important prospect of economic globalization is the global change of competition. Elimination of trade barriers means that there will be a decrease in national manufacturing and dominance of transnational production. Thus, small national companies won't be able to survive whereas large ones will have an opportunity to develop globally.

To sum up, I'm sure that these positive prospects will enable to get over the difficulties associated with unequal distribution of wealth. Therefore, I support the idea of the global economic development.

Three economic issues

Economics is the study of how people choose to allocate scarce resources to satisfy their unlimited wants. The main problem in economics is the question of allocating scarce resources between competing uses. In this section three economic issues are discussed to show how society allocates its scarce resources between competing uses. In this connection the question what, how and for whom to produce is of great significance.

The oil price shocks

Oil is an important commodity in modem economies. Oil and its derivatives provide fuel for heating, transport, and machinery, and arc basic inputs for the manufacture of industrial petrochemicals and many household products ranging from plastic utensils to polyester clothing. From the beginning of this century until 1973 the use of oil Increased steadily. Over much of this period the price of oil fell in comparison -with the prices of other products. Economic activity was organized on the assumption of cheap and abundant oil.

In 1973 - 74 there was an abrupt change. The main oil-producing nations, mostly located in the Middle East but including also Venezuela and Nigeria, belong to OPEC -- the Organisation of Petroleum Exporting Countries. Recognizing that together they produced most of the world's oil, OPEC decided in 1973 to raise the price at which this oil was sold. Although higher prices encourage consumers of oil to try to economize on its use, OPEC countries correctly forecast that cutbacks in the quantity demanded would be small since most other nations were very dependent on oil and had few commodities available as potential substitutes for oil. Thus OPEC countries correctly anticipated that a substantial price increase would lead to only a small reduction in sales. It would be very profitable for OPEC members.

Oil prices are traditionally quoted in US dollars per barrel. Fig. 1 shows the price of oil from 1970 to 1986. Between 1973 and 1974 the price of oil tripled, from $2,90 to $9 per barrel. After a more gradual rise between 1974 and 1978 there was another sharp increase between 1978 and 1980, from $12 to $30 per barrel. The dramatic price increases of 1973 - 79 and 1980 - 82 have become known as the OPEC oil price shocks, not only because they took the rest of the world by surprise but also because of the upheaval they inflicted on the world economy, which had previously been organized on the assumption of cheap oil prices.

People usually respond to prices in this or that way. When the price of some commodity increases, consumers will try to use less of it but producers will want to sell more of it. These responses, guided by prices, are part of the process by which most Western societies determine what, how and for whom to produce. Consider first how the economy produces goods and services. When, as in the 1970s, the price of oil increases six-fold, every firm will try to reduce its use of oil-based products. Chemical firms will develop artificial substitutes for petroleum inputs to their production processes; airlines will look for more fuel-efficient aircraft; electricity will be produced from more coalfired generators. In general, higher oil prices make the economy produce in a way that uses less oil.

How does the oil price increase affect what is being produced? Finns and households reduce their use of oil-intensive products, which are now more expensive. Households switch togas-fired central heating and buy smaller cars. Commuters form car-pools or move closer to the city. High prices not only choke off the demand for oil-related commodities; they also encourage consumers to purchase substitute commodities. Higher demand for these commodities bids up their price and encourages their production. Designers produce smaller cars, architects contemplate solar energy, and research laboratories develop alternatives to petroleum in chemical production. Throughout the economy, what is being produced reflects a shift away from expensive oil-using products towards less oil-intensive substitutes. The for whom question in this example has a clear answer. OPEC revenues from oil sales increased from $35 billion in 1973 to nearly $300 billion in 1980. Much of this increased revenue was spent on goods produced in the industrialized Western nations. In contrast, oilimporting nations had to give up more of their own production in exchange for the oil imports that they required. In terms of goods as a whole, the rise in oil prices raised the buying power of OPEC and reduced the buying power of oilimporting countries such as in answering the 'what' and 'how' questions, we have seen that some activities expanded and others contracted following the oil price shocks. Expanding industries may have to pay higher wages to attract the extra labour that they require. For example, in the British economy coal miners were able to use the renewed demand for coal to secure large wage Increases. The opposite effects may have been expected if the 1986 oil price slump had persisted.

economy market global

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