Introduction to Global Economy
The economy of the country is considered as the international exchange of products and services which is expressed regarding money value. Thus, world economy affects the businesses and therefore, it is essential for countries to undertake global economy and does not influence business operations (Mander, 2014). In the present essay, it discusses two different questions related to economy i.e. assessing the implications of negative interest rates and the risks that come with such a policy. Further, comparing and contrasting different political economies of the two largest population countries i.e. India and China and thus focusing on its main strengths and weaknesses.
1. Some Central Bank have introduced negative interest rates. Explain why such rates have been introduced and assess the risks that come with such a policy
Negative interest rates are considered as an unconventional monetary policy that aims to set nominal target interest rates with a negative value. Further, it can be stated that negative interest rate means that central bank, as well as private banks, decide to charge negative interest which means that instead of receiving money on deposits, people who are depositing money into the bank needs to pay regular amount to the bank in order to keep their money with bank (Haufler, 2013). Thus, it increases the morale of banks to lend more money to people and businesses regarding investing, lend and spend more money rather than pay a fee to keep it safe. For instance, the central bank of any particular country decides to regulate negative interest rate policy which would be set to keep the rate at -0.2% that helps bank depositors to pay two-tenths percent on their deposits instead of receiving any positive interest. However, in the year 2014, it has been done by European Central Bank which applies the negative interest rate to bank deposits intend to prevent the Eurozone from falling into deflation. Further, negative interest rates would help in reducing the costs to borrow for companies and households, driving demand for loans and improving investment as well as consumer spending (Assessing the Implication of negative interest rates, 2016). Also, banks might choose to internalize the costs linked with the negative interest rates through paying them and also negatively impacts the profits rather than passing the costs to small depositors in the fear that they will turn their deposits into cash.
Both in Europe and Japan central banks decides the slightly negative the interest rates in practice so that they can inform depositors to pay a sum of money for holding their cash instead of paying interest to them on their deposits. Main implications of such negative interest rates decline the long run rates for monetary policy (Rivoli, 2014). Mainly it is done due to a maintaining equilibrium position and thus attaining the stable position. In the year 2014, European Central Bank became the first major central bank to introduce negative interest rate. It introduces the rate of interest on deposit is now-0.4% while the rate of refinancing operations is 0. Negative interest rates have been introduced because if banks charge negative interest rates on deposits, then the high returns on cash could lead businesses and individuals to withdraw their deposits from a bank. Thus, it would increase risk on the financial stability. Because holding cash is not at all convenient and thus having the high amount of cash will lead individuals to spend more money (Berger and Lester, 2015).
There are several risks and issues related to such policy have been identified one of which is money illusion which means that it has been assessed that the main tendency of people is to value their assets and goods in nominal terms as compared to real terms. Hence, it would lead to enhance negative interest rates (Baldwin and Venables, 2013). The main effect of such issue arises that it helps in redistributing the resources from net savers to net borrowers. Later, it is stated as the crucial feature of the financial system such as introducing legal restrictions upon applying negative rates or at least uncertainty regarding the legal standing of such arrangement. Another issue found was that IT systems were not able to cope with the negative rates. It also introduces the issues upon banks profitability and capital (Eggertsson, Mehrotra, and Summers, 2016). However capital of bank matters a lot for credit provision or lending money to individuals and businesses.
Further, in the case of Japan economy, it is dealing with long periods of deflation of fall in prices. However, a decrease in prices could be better for individuals, and it is bad news for businesses. It means that businesses have lost their power of pricing and thus decreases the demand as well. There is various risk imposed with such policy i.e. negative interest rates discourages saving and interest base investments (Neilson, Pritchard, and Yeung, 2014). It also assesses that bank aims to minimize further or decrease the interest paid to investors upon their saving accounts. Further, another risk faced by the economy is about penalizing the nation's senior members and baby boomers who felt victimized by the market crash of 2007-2009. It also raises risk in the form of penalizing financial institutions by the central banks and thus they are trying to shift the costs on customers through imposing high fees. For instance, they charge for maintaining and checking account monthly, high fees of overdrafts and transfers and fees for ATM usage, etc. Further, another risk with negative interest rate policy is that it encourages more speculative investment which will lead to increase volatility in the market (Mazur, 2013). However, it assesses that if investors are not able to generate any return on investment, then they become more desperate for sources from where they can generate more money. Thus, it becomes more risk taking and correlates to an increase in volatility in equity prices.
Furthermore, there are various risks that relate to negative interest rate policy that assesses that negative rate feed into expectations regarding low growth and inflation. Also, such lower interest rates slow down the monetary easing in the future (Williams, 2016). Also, potential legal complications assess that if negative yielding reserves are used regarding collateral and for enhancing payments (Carnoy and et. al., 2013). Further, another risk of negative interest rate is regarding the position of duration and quality so that they can assess the problem. Thus, it can be stated that negative interest rate influences businesses to lend money to a bank and for that they have to give money. Bank of Japan determines the fight to global market and threaten to provide the tip to the country into deflation which is a damaging cycle and thus price falls within the weakening economy. Thus, it increases risk and causes volatility and instability in the financial market and also decreases the confidence of domestic companies (Martin, 2016). However, now the Bank of Japan has become the second major central bank to set negative interest rates (Sassen, 2013).
Thus, it can be stated that negative interest rate lowers the interest rate and charges a sum of the amount from investors who have kept money in their accounts. Thus, instead of giving interest to account holders, banks are charging prices for keeping money and thus asset purchase program is also being launched which covers a broad range of investment grade securities. However, it becomes difficult to identify that how long such negative interest rate will persist but seems possible that they will be low for quite some period (Mander, 2014).
2. Compare and contrast the political economies of the world's two largest states measured by population, China, and India emphasizing key strengths and weaknesses
It can be stated that China is considered as the emergent political economy and thus referred as the developing nation whose businesses are governed by a capitalist structure. China's political and economic development program helps in examining the origins and development of China's communism and its influence upon modern Chinese political economy. China is developing its role in global politics, and thus it is considered as one of the main strengths (Haufler, 2013). Also, the country is focusing on improving its technology and innovation to observe and experience an opportunity regarding exploring in depth knowledge regarding political economies of the country. Moreover, the Chinese economy is now worth $17.6 trillion, and thus it helps the country to enable and compare that how much money they can purchase within different countries.
Chinese government focuses on development and thus grow their GDP figures so that they can attain success. The Chinese government has worked out a new way of growing through debt funded investment rather than improving the economy so that best results can be attained. Further, it can be stated that both India and China are the largest population country as well as growing economy about size and economy (Rivoli, 2014). However, their transformation just not affect internally but outside the world as well. Thus, such effects already are considered as the combination of new market opportunities that is arising from improved purchasing power and high competitiveness (Carter, 2014). Further, it is also crucial to identify the impact upon countries regarding making effective policies and strategies which help in anticipating the changes so that best results can be attained in the form of opportunities. Both these countries experiences a high growth and thus results in attaining targets about minimizing poverty.
Moreover, such effects help in providing market opportunities and thus enhances purchasing power and high competitiveness so that challenges can be overcome. Further, there are certain weaknesses which are being faced by both the countries about rapid growth such s rural-urban income gap and environmental degradation. Hence, such issues are affecting the economy and political situation of India and China (Berger and Lester, 2015). It assesses that richer are getting richer while poorer are getting poorer. Hence, the government of India and China needs to focus on developing such economies and make strategies to overcome such issues so that best results can be attained. Moreover, rising income creates high structural changes within agricultural and food services and thus demand and consumption pattern shifts. It also impacts upon the trade and investment within the country about the affect the growth of the country (Baldwin and Venables, 2013).
China and India both are the most populous countries respectively 20.4% and 17% of the world population. Although they are still developing nation with per capita incomes of just $ 1740 and $ 720 (Dahiman, 2007). However, both the countries India and China have experienced high growth in the agricultural sector and thus it is one of the main strength so that Green Revolution is being emphasized regarding attaining high industrial growth as well as a decrease in poverty condition within the country. Also, in the prospects of future growth, it also impacts upon the domestic economies and sustains in the country so that economic and agricultural development can be attained. Thus, rising incomes within such countries will continue to create pressure upon structural reforms and thus improve rural and agricultural economies so that change in the demand size and consumer taste can be improved (Eggertsson, Mehrotra, and Summers, 2016).
Both China and India possess effective agriculture sector and thus the experiences shows the crucial role agricultural development and thus improves the industrialization as China attains desired success. Further, it is essential for China and India to respect liberalization and thus improve the economy of the country. The main achievement of China are overall economic growth which helps in rising GDP in agriculture, and thus it helps in improving the economic condition of the country. Thus, it is essential for them to attain desired success through improving the economy of the nation (Neilson, Pritchard, and Yeung, 2014). Also, rising growth in agricultural production and productivity helps in rapidly improving the economic growth and thus attain certain policies i.e. education, rural health infrastructure, and technological improvements so that rapid growth can be attained. Another strength is a reduction in poverty that helps in declining over 33% to less than 3%. Hence, it helps in improving the economic condition of people and thus reduce the poverty condition of people and suggests that the future growth attains success. Further, food security is considered as one of the effective measures which help in changing the per capital food availability (Mazur, 2013). Hence, China and India increases the overall security of food in the market. Therefore, it is essential for the government to improve its political economies so that best results can be attained.
Further, India also faces certain strengths which are overall economic growth and thus helps the economy to improve its reforms in the form of growth in agriculture and thus to improve the urban and rural sector. Growth in primary and secondary sector helps in improving the economic condition of the country and thus attain the best solution. The country also enhances growth within agricultural production and productivity so that they can adopt certain policy reforms and thus focuses upon particular production to attain goals (Carnoy and et. al., 2013). Green revolution carried out within the country aids in attaining high yielding varieties so that they can benefit the economy. The government of the country is also focusing on reducing poverty and thus improving the economic condition of individual so that they can improve their living standard. India also helps in achieving national food security and thus positive developments are connected with the country. It helps in increasing the food security conditions and thus attains rapid growth for production and consumption so that agricultural products or services can be improved (Sassen, 2013).
Also, both the countries are rising technological powers which help them to improve their status and consider it as an advantage so that high-quality products or services can be delivered to consumers. Therefore, it is essential for both the countries to focus on innovation and thus improve knowledge so that countries can attain success. Hence, it also raises the economic condition of the country and attains desired results in the future. Currently, it has been identified that China is developing much faster than India and also improves their overall educational attainment (Rivoli, 2014). Therefore, it is significant for China and India to expand their education system and thus leads to enhance the policies and practices which lead to improving working conditions.
It can be concluded from the study that negative interest rate influences the economy within Europe and Japan and Central Bank of both the countries require undertaking effective decision so that they can manage the economic condition of the country. Through charging a sum of the amount upon deposits invested within bank from customers will affect them because instead of getting returns they have to pay the amount to the bank. Thus, it leads to discouraging people and thus such policy found to be a risky situation for the country and it was a debatable issue that it could be carried out or not within the country for a long time. Another topic profound that both China and India are at a growing stage and thus it is essential for the government to focus on its developments which aim to improve its economic condition and attain desired success.
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