European business

LO1: Understand the significance of international trade and the balance of payments to open economies such as the UK

UK, England, London Listed Palm Oil Firm Gets Cooking After £1.1bn Bid

(By Oscar Williams-Grut, Evening Standard 10/10/14)

‘You can cook with it, it does in everything from margarine to soap and it’s even used to make plastics – palm oil is big business thanks to its presence in the London commodities markets. Malaysian conglomerate, Sime Darby, one of the world’s biggest producers of the stuff, today offered £1.1 billion to snap up London-listed New Britain Palm Oil, a sustainable palm oil producer.

The 715p-a-share offer represents a whopping 85% premium to yesterday’s closing price, for a firm that has flown under the radar of most in the City. The vegetable oil, popular in Africa and south-east Asia, has recently attracted negative press from environmental groups as forests are often cleared to make way for palm trees.

New Britain Palm Oil, which has palm fields in Papua New Guinea, produces its wares in an environmentally friendly way. Its position in London gives Sime Darby a foothold in Europe, where demand for palm oil is growing fast. New Britain Palm Oil leapt 288.5p to 675p.

News of the blockbuster deal boosted Dekel Oil, an Ivory Coast-focused palm oil producer, 0.1p to 1.47p, amid hopes of further consolidation in the sector. Optimism in US and Asian markets overnight helped the Footsie shrug off its recent gloom, adding 46.15 points to 6528.39. Traders pointed to dovish sentiments in the latest Federal Reserve minutes. Comments from the Fed expressing concern about the strength of the dollar also helped gold prices, giving a welcome lift to producers.

Fresnillo added 43p to 766.5p, Randgold Resources climbed 290p to 4341.5p, Antofagasta put on 22p to 696.75p, Polymetal International improved 23p to 493.9p and African Barrick Gold rose 6.1p to 206.2p. Egyptian gold producer Centamin, up 2.85p at 60.57p, was lifted by third-quarter production figures, which revealed a 15% rise in production compared with the prior three-months. Californian, USA customer services software specialist Kofax collapsed 49.75p to 420p after missing first-quarter forecasts. It was blamed on large software deals taking too long to complete.

•       Explain the importance of international trade to an open economy such as the UK

(This provides evidence for assessment criteria 1.1)

•       a) Define Comparative Advantage, Absolute advantage and Terms of Trade & Exchange Rate

b) Assess the significance of comparative advantage, absolute advantage, the terms of trade and exchange rates to the UK economy

(This provides evidence for assessment criteria 1.2)

•       Taken that the balance of payment of a country “Sangala” comprises the following main items (all figures in millions of £): exports of goods 400; imports of goods 500; government (invisibles) -150; other invisibles +200; investment and other capital flows -45.

Describe the structure of the balance of payments and calculate the:

•       Visible trade balance,

•       Current balance and

•       Balance for official financing.

(The above provides evidence for assessment criteria 1.3)

•       What is Surplus and Deficit in an economy?

•       Explain the terms ‘surplus’ and ‘deficit’

•       Explain the significance of long-term deficits to open economies

(This provides evidence for assessment criteria 1.4)

Task 2 (LO2 AC 2.1, 2.2, 2.3, 2.4)

LO2: Understand the economic rationale underpinning the European Union (EU)

Task 2a

Productivity growth has increased in Central and Eastern European countries relative to Western European countries. This has implications for the real exchange rate. Let’s look at the Czech Republic versus France (suppose they are the only two European countries).

For your task you are required to explain the role played by exchange rates in European business.

(This provides evidence for assessment criteria 2.1)

Task 2b

The Euro is a single currency arrangement that came into theoretical operation between 11 members of the European Union in January 1999. On January 1st 2002, 12 EU members got rid of their own currencies and introduced the Euro as their sole currency. A single currency means that there are no longer separate national monetary policies, and instead a new central bank has been set up – The European Central Bank – that conducts a Europe wide monetary policy, in particular the setting of interest rates. That means a loss of separate national monetary policies – interest rates and exchange rates. Should Germany want to introduce an economic policy to fight back against unemployment, it cannot do so as this can only come from the European Central Bank.

For your task you are required to analyse the advantages attributed to the adoption of a single European currency.

(This provides evidence for assessment criteria 2.2)

Task 2c

Explain the difference between free trade and protectionism and the role played by tariffs, quotas and deregulation within the EU.

(This provides evidence for assessment criteria 2.3)

Task 2d

One of the founding principles of the European Union is the freedom of movement of workers (Article 39 of the Treaty establishing the European Community). The free movement of workers is essential for the creation of an area without internal frontiers, and for the strengthening of economic and social cohesion as well as active European citizenship in creating wealth for the economic development. Despite these obvious returns geographic and occupational mobility rates are still relatively low in the European Union, both within and between countries. For instance, on average between 2000 and 2005, workers’ mobility within EU Member States (regional mobility) amounted to only one per cent each year. This is much lower than mobility rates across Australian territories and US states, which exceed two and three per cent, respectively (Adapted from European Commission, 2007).

For your task you are required to evaluate the importance of geographic and occupational mobility in wealth creation for EU member countries.

(This provides evidence for assessment criteria 2.4)