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Suggested Answers: Global aspects of finance and labour

Exercise 1

A recession is a downturn in economic activity and is associated with falling levels of GDP, consumption and investment. Inflation and interest rates are usually declining and unemployment is increasing.

During 2001, as the demand for goods and services declined in the domestic economies so did global demand. Multinational corporations, especially those in the technology industry, reduced their domestic and global workforces to maintain productivity and growth rates.

The International Labour Organisation report in 1997–1998 indicated that the Southeast Asian economies lost nearly 30 million jobs. These economies, have learned from these events and have adequate foreign reserves and macroeconomic polices in place to provide tax cuts to dampen the impact or the expected global recession in 2001.

Exercise 2

Over the past decade, government has reduced protection and improved international competitiveness. This has created winners and losers in import competing industries. The Textiles Clothing and Footwear Industry (TCF) is one area that has undergone significant structural change.

In this case study China has a comparative advantage in production of the shoes, as a result of lower wage costs, and access to specialised production techniques. Windsor Smith’s management is hoping to gain a competitive advantage and increase profits in a very competitive market that has been affected by the global economic downturn.
Reducing protection can create structural unemployment. The government will need increase spending in areas of social security payments and job retraining schemes. The displaced workers may also need to use some of their savings while looking for new employment.

In 2001, tariffs for clothing industries will be reduced from 25% to 17%, textiles from 25% to 17% and footwear from 15% to 7%. The government should have policies in place to avoid any adverse impacts on GDP, consumption and investment levels in the economy.

Exercise 3

The article from BRW illustrates how highly–skilled labour can travel anywhere in the global village to take advantage of the increased productivity and wages generated by trade liberalisation and globalisation. Transnational corporations can also locate their business operations anywhere in the world and take advantage of favourable taxation and political conditions.
In contrast unskilled labour has many problems accessing the expanded job opportunities resulting from trade liberalisation in the global economy.

Exercise 4

On the payment date Daniel’s Hockey Supplies were expecting to receive US$50,000 from Germany ($A100,000), however the exchange rate appreciated to $A1 = $US.52 cents.

We need to convert the contract into $A at the new exchange rate to understand the problem this will cause.

$US50,000 x 1

0.52

= $A96,153.85

Therefore:

$A100,000 - $A96,153.85 = $A3846.15 loss has been made on the contract. The profit on the contract will be $A6153.85 and not the $A10000 as expected.
Forward contracts on currencies are a common form of derivative security used to reduce the risk and volatility of exchange rate movements.

Exercise 5

Some or all of the following:
- families are separated as members try to find work in other countries
- tensions are created between countries causing social unrest
- discrimination and exploitation
- denial of human rights
- many undocumented migrants end up working in dirty and dangerous jobs.
Trade liberalisation and the relentless growth of the global economy in the last few decades could only have occurred with the deregulation of world financial markets. However, deregulation has increased the volatility in exchange rates, interest rates and commodity price movements.
To highlight the problem, if you were asked to predict the value of the Australian dollar tomorrow you could guess it would go up or down but it is likely to remain close to today’s value. However, if you were to predict the value in six months, the results are less certain.
Financial instruments such as futures or forward contracts, options and currency swaps are used to reduce the risk of global financial trading.