2.6 The international economy Flashcards
Globalisation
the process of increasing economic integration of the world’s economies
Causes of globalisation (6)
- containerisation
- change in communication technology
- increasing economies of scale, causing thee MES to rise
- global production standards
- reduction in protectionism
- growth strategies of MNCS
Export
goods and services produced domestically and sold to residents abroad
Import
goods and services produced abroad and sold to residents in the domestic country
Trade
the buying and selling of goods and services
Terms of trade
the ratio of export prices to import prices
Multinational corporation (MNC)
a firm which operates in at least two countries
Containerisation
moving goods through multiple different modes of transport in containers of a standard size. They can be transported efficiently over long distances and are tracked.
WTO
World Trade Organisation. An international body whose purpose is to promote free trade by persuading countries to abolish import tariffs and other barriers to trade.
WTO Most Favoured Nation Principle
Most Favoured Nation Principle (MFN) says that any tariff reduction offered to one country must be offered to all (against trade discrimination)
Protectionism
approaches used by governments to protect domestic producers
Capital goods
manufactured goods which are used to produce other goods
Quality of life
the level of wealth, comfort, material goods, and necessities available in a country
Economic development
the expansion of total economic welfare in a country
More developed countries
countries with a relatively high degree of economic development, average income per capita, quality of life, and historic level of investment in human capital and infractructute
more developed countries
countries with a relatively high degree of economic development, average income per capita, quality of life, and historic level of investment in human capital and infractructute
Dependency theory
economic events in history have meant that resources flow from a “periphery” of poor and underdeveloped states to a “core” of wealthy states, enriching the later at the expense of the former
Describe how changing terms of trade affect development
- terms of trade have generally moved in favour of more developed countries and against less developed countries.
- by exporting the same amount of manufactured goods to the developing world, a more developed country can import a greater quantity of raw materials in exchange
- developing countries must export increasingly more in order to import the same quantity of capital goods or energy needed for economic development
- Therefore levels of income and quality of life in more developed countries have improved at the expense of less developed countries.
Absolute advantage
where a country can produce more of a good than other countries with the same amount of resources
Comparative advantage
where a country has the least opportunity cost when producing a good
Opportunity cost
the cost of giving up the next best alternative
Double coincidence of wants
two people who want to exchange goods of equal value
Specialisation
a worker only performing one task or a narrow range of tasks. Also different firms, regions, or countries specialising producing one or a narrow range of goods or services.
Protectionism
the act of guarding a country’s industries from foreign competition
Examples of protectionist methods (8)
- administrative barriers
- dumping
- embargo
- import quota
- tariffs
- subsidies
- sunset industries
- infant industries
Infant industries
new industries that have yet to establish themselves
Sunset industries
old industries that are going through deindustrialisation and face competition from abroad
Subsidies for domestic producers
financial support given to a domestic producer to help compete with overseas firms. They may allow domestic industries to sell products at a lower price than imports
Tariffs/custom duties
a tax on imports to make them more expensive
Import quota
a physical limit on the quantity of imports into a country
Embargo
a complete ban on international trade - usually for political reasons
Dumping
where an overseas firm sells large quantities of a product below cost in the domestic market
Administrative barriers
Rules and regulations (such as trading standards and strict specifications) that make it difficult for importers to penetrate an overseas market
Advantages of free trade (5)
- Countries can exploit their comparative advantage, which leads to a higher output using fewer resources and increases world GDP. This improves living standards.
- Free trade increases economic efficiency by establishing a competitive market. This lowers the cost of production and increases output.
- By freely trading goods, there is trade creation because there are fewer barriers. This means there is more consumption and large increases in economic welfare.
- More exports could lead to higher rates of economic growth.
- Specialising means countries can exploit economies of scale, which will lower their average costs.
Advantages of protectionism (5)
- protects infant, declining, and strategic industries
- improves the country’s balance of payments position
- protects domestic employment
- protects industries from low wage competition and from unfair foreign competition
- avoids potential environmental harm of excessive free trade
Disadvantages of protectionism (4)
- higher input costs causing cost push inflation
- reduced choice for consumers
- risk of retaliation
- higher prices
Free trade
international trade left to its natural course without tariffs, quotas, or other restrictions
Free trade area
member countries abolish tariffs on mutual trade, but each partner determines its own tariffs on trade with non-member countries
Customs union
a trading bloc in which member countries enjoy internal free trade in goods and services, with all the member countries protected by a common external tariff barrier
