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Economic Exchange And Economic Growth Essay

1552 words - 7 pages

Economic exchange is an important tool to enhance economic growth. However, contrary to the expectation, intensified economic exchange in America, as a result of free trade has negatively impacted on wage rates. Consequently, as free trade extends to non- American economies, converting the whole world to a global village, the impact on wages spreads out to other nation and with the current trend it will soon flatten wages across the globe at a low level. The deregulation in trade has resulted to relocation of production towards the cheap labor zones hence gaining a completive advantage. In an effort to compete fairly, production firms left in the developed countries try to reduce their ...view middle of the document...

Competition enhances quality and sustainability of supply, but this does not guarantee improved social welfare. Technology increases efficiencies in production and the higher the level of technology, the lesser the variable costs of production. Thus with variations in technological knowhow, competition becomes unfair and the developing nations are always on the losing ends (Jensen, 2011). This was the case in Mexico as a result of increased economic exchange after introduction of North American free trade area (NAFTA). Mexican farmers could not compete with American corn. As a result, productivity in Mexico reduced lowering the real GDP and thus the per capita income as well as unemployment rate (Weisbrot, Lefebvre, & Sammut, 2014). Similarly in Africa and Middle East, export goods from technologically advanced economies have killed local industries.
In reality, the world experiences uneven distribution of capital and labor, which are the main inputs of production. Labor is relatively immobile making capital the only input that can flow to equalize production. Despite the argument that, labor abundant regions should capitalize in production of labor-intensive commodities and vice versa, completely free trade conditions are a requirement to ensure zero capital flows. However, this is not true in real world. Third world countries impose tariffs on capital intensive goods, creating an imbalance between labor-intensive goods and capital intensive goods. This causes factors such as raw materials to flow high investment zones, leading to high capital demand and excess labor in the developing countries. Consequently, if capital flow is not regulated, investors would definitely be attracted by the higher marginal product of capital in labor intensive regions. Intuitively, since labor is immobile. Capital amputation from low labor endowed regions creates high rate of unemployed in regions where production requires a high capital-labor ratio.
Whilst multinational companies establishment in developing countries is supposed to trigger development. Research has shown negative results. At the MNCs onset, high rank employees are needed. However, following low educational standards, the developing countries lack this man that moment, and thus the MNCs import employees from developed nations. Moreover, local production is waived off the market by the MNC, increasing unemployment. With time, the natives acquire skills through schooling, training and internship programmes and flood the high rank jobs market hence pushing wage rate downwards.
China is one of the economies that neglected deregulation of the market, which could be one of the reasons behind its tremendous economic rise. Notably, china‘s manufactured goods sale at very low prices. Contrary to Washington consensus, China’s government is given plays a large role in monitoring the market in addition to lowly pricing state produced goods. China’s move to reject Washington’s...

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