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Elements Of The Global Economy Essay

1962 words - 8 pages

The current account deficit of the U.S. has been growing at an increasing rate due to
factors such as high oil prices, imports growing slightly faster than exports, and the low U.S.
savings. We should be concerned over the long run because these trade deficits are
overwhelmingly large in comparison to U.S. GDP and to the small U.S. export base. This
concern in increasingly large deficits implies an even greater increase in the U.S. net external
indebtedness and external balance. U.S. has sometimes relied on dollar depreciation to reduce the
current account deficit. This passive approach suggests that a dollar depreciation of
approximately six percent for a few years would be necessary to produce the same reduction in
account deficit as with meeting the Balanced Budget Act targets. If the U.S. continues to depend
on dollar depreciation, which is resulting from changes in market conceptions, then ultimately
there would be an increase in budget deficit due to higher interest rates raising federal net interest
The Gold Standard was when the value of a country’s money used to be connected to
the amount of gold the country possessed. Any person holding the country’s paper money was
able to give it to the government and in return receive a par value from the country’s gold
reserves. The Gold Standard was the cause countries became preoccupied with keeping their
gold instead of improving their business environment. The Gold Standard frustrated the Great
Depression because the Federal Reserve increased interest rates to make dollars more valuable,
and therefore restrain people from demanding gold. Instead of increasing interest rates, the Federal Reserve should have lowered rates in order to stimulate the economy. During the mid
1800’s, numerous countries began to adopt the Global Standard in order to establish
transactions in a booming world trade market. The Gold Standard was helpful in guaranteeing
that any amount of paper money would be able to be redeemed by the currency’s government for
the value in gold. This standard increased the trust needed for trade due to the value paper
currency now held. After the war, most countries went back to the Gold Standard at the pre-war
gold price, mainly because those who loaned in nominal amounts wished to recover the exact
gold value they had lent. Deflation’s impact is difficult on sectors of economy that use loans to
finance activity on a regular basis or that are in debt. Deflation was the cause of the stock market
crash of 1929 because deflation destroys the price of commodities while increasing the value
of debt.
China has the economic potential to become the dominant economy in forty years. China
is the biggest, and the fastest growing emerging market. China has changed its political
system to contain global capitalism, and therefore has a high chance of becoming the dominant
global supplier of manufactured goods and...

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