4.1

Question 1

5 characteristics of globalisation

Answer 1

Expansion of global trade
Increasing number of multinational companies (MNCs)
Development of global brands
International out-sourcing and off-shoring of production
Greater labour migration

Question 2

5 causes of globalisation

Answer 2

Containerisation- technical economies of scale from shipping in larger ships now countries such as China that we did not used to trade with trade with
Political shift- fall of communism allowed more countries allowed more countries to trade globally
World trade Organisation - aim to remove trade barriers
Tech/Internet - barriers to communication have broken down
Multinational businesses - trade/operate around the world

Question 3

Explain absolute and comparative advantage

Answer 3

A country has absolute advantage in the production of a good when of can produce more than another country (eg higher productivity)
A country has comparative advantage when it can produce a good at a lower opportunity cost compared to another country

Question 4

List the assumptions of comparative advantage

Answer 4

Could make it worse if taken into account
No transport costs - some countries cheap some expensive
Assuming goods are homogenous, excluding factors such as quality
Assumption of perfect info
Could make it better if taken into account
E.O.S not taken into account
Tariffs + non tariffs barriers if barriers are removes, trade may increase

Question 5

Explain Tarrifs

Answer 5

Tax on imports to rise the price of imports

Question 6

Explain import quotas

Answer 6

Limit on the quantity of imports to rise prices of imports

Question 7

Explain export subsidies

Answer 7

Gov grant to a domestic firm to reduce their costs of production

Question 8

Explain Non-tariff barriers

Answer 8

Intentional bureaucracy and regulations

Question 9

Explain the reasons for and against restrictions on free trade

Answer 9

Infant industry argument
Prevents dumping
For but likely wont work as WTO
Want to protect domestic trade and jobs
Maintain a balanced current account
Against
Countries protecting domestic industries, don’t have any incentives to reduce costs and become more competitive
Distorts the competitive advantage
Conclusion- Protectionism is generally designed to achieve short run gains- removing protectionism may lead to short-run job losses but help long-run competition

Question 10

Impact of protectionist policies on consumers

Answer 10

Higher prices thus less consumer surplus + less choice

Question 11

Impact of protectionist policies on Producers

Answer 11

Higher producer surplus
However, only helping domestic firms in short run as not incentivising them to cut costs may become inefficient

Question 12

Impact of protectionist policies on Governments

Answer 12

Earn tax rev due to tariffs. Especially beneficial to small developing countries
Protect jobs- dont have to pay for unemployment benefits

Question 13

Impact of protectionist policies on Living standards

Answer 13

Distorts comparative advantage- dont specialise- less world trade- lower living standards for people around the world

Question 14

Impact of protectionist policies on Equality

Answer 14

Tarrifs can be seen as regressive tax if on necessities thus protectionism will increase income inequality
However tariff on luxury good= progressive tax

Question 15

Explain the components of the current account on the balance of payments

Answer 15

The trade in goods balance- value of goods expected minus value of goods imported
The trade in services balance
The primary balance (investment income) - income earned from assets owned overseas (interest, profits and dividends) minus income paid to foreigners for assets owned in the Uk
The secondary balance (current transfers) - payments received from foreign institutions and citizens minus payments paid abroad (taxes, social contributions and foreign aid)

Question 16

Explain the components of the capital and financial accounts on the balance of payments

Answer 16

FDI- Investments by foreign companses into the UK minus investment by UK companies
Portfolio investment in shares and bonds- purchase of UK shares and bonds by foreigners minus purchase of foreign shares and bonds by UK citizens
Short term capital flows, often referred to as hot-money flows into the UK minus flows out of the UK to other countries
Changes in foreign currency reserves

Question 17

Explain the causes of imbalances on the current account

Answer 17

Deficits on the current account -
Relatively low productivity
The relocation of money manufacturing industries from develeoped countries where labour costs are significantly lower, such as China
An increase in the countries exchange rate against that of other countries
Countries economic growth, resulting in an increase in imports
Causes of surpluses on the current account opposite of points above

Question 18

5 measures to reduce a country’s imbalance on the current account

Answer 18

Demand management (Tight monetary policy, contractionary fiscal policy so decrease spending on imports)
Cant use in a recession, doesn’t fix ‘structured’ problems with countries competitiveness

Do nothing as its part of the economic cycle
Cant fix structural problems, takes a long time

Weaken your currency - devaluation (managed), deprecation (floating) making X cheaper and M dearer
But the J curve. Products are inelastic in the short-term so the CA will get worse before it gets better

Protectionism
Import tariff, export subsidies to increase X fall in M
But tariff may cause retaliation and issues with WTO, subsidies may become uncompetitive

Supply side policies
Makes country more competitive increasing productivity
Time lag

Question 19

Explain a floating exchange rate system

Answer 19

The exchange rate is determined by market forces
ie by the forces of supply and demand

Question 20

Explain a fixed exchange rate system

Answer 20

In this case the countrys’ currency is fixed against those of other currencies

Question 21

Explain a managed exchange rate system

Answer 21

Essentially a floating exchange rate but one which is subject to intervention by the Central Bank in the foreign exchange market in order to influence the exchange rate of the country’s currency

Question 22

Explain the distinction between revaluation and appreciation of a currency

Answer 22

Revaluation is when a country decides to increase the exchange rate of its currency under a system of fixed exchange rates
Appreciation- refers to an increase in the exchange rate of a countrys’ currency under a system of floating exchange rates

Question 23

Explain the distinction between devaluation and depreciation of a currency

Answer 23

Devaluation - country decides to decrease exchange rates under a system of fixed exchange rates
Depreciation- decrease in the exchange rate of a countrys’ currency under a system of floating exchange rates

Question 24

4 benefits of a floating exchange rate

Answer 24

Reduces need for foreign currency reserves
Freedom to set policy interest rates to meet domestic objectives
May help to prevent imported inflation
Less risk of a speculative attack

Question 25

Evaluate the benefits of a fixed exchange rate

Answer 25

Certainty of currency value gives confidence for inward investment
Stability helps to control inflation- it is a discipline on businesses to keep unit labour costs low and drive efficiency

Question 26

Explain the factors influencing a floating exchange rate

Answer 26

Relative inflation rates - If a country has a higher inflation rate than its competitors, its purchasing power will fall, and in the long run, its value will fall
Relative interest rates- If a country has much higher interest rates than others, this may attract money into its banks from abroad, causing demand for the currency, increasing its value
Current account balance- If a country experiences an increase in its current account deficit the supply of its currency is increasing relative to the demand for it, leading to a deprecation in its currency
FDI- a country which is a net recipient of FDI will experience an increased demand for its currency, so causing its value to appreciate
Speculation- Speculation arises from a number of reason, eg the expected state of the economy. Greater permission about the future state of the economy would cause the country’s exchange rate to depreciate

Question 27

Evaluate the ways a Gov can intervene in a fixed exchange rate

Answer 27

Foreign currency transactions- If the aim is to reduce the exchange rate of the countries’ currency then the central bank would sell its currency of the foreign exchange market. This increase in the supply of the domestic currency would cause a fall in its value
Interest rates- To reduce the exchange rate of the country’s currency, the control bank would reduce the base rate. This would make it less attractive for foreigners with cash balances to leave them in that country, so causing an increase in supply of the currency on the foreign exchange rate and so causing a reduction in its value
Quantitative easing- although the intended effect is to stimulate the domestic economy, there is evidence that QE has had an indirect effect of causing a depreciation of the exchange rates of countries using this policy

Question 28

Impact of a depreciation on domestic current account

Answer 28

Impact on domestic current account
Relatively cheaper exports – increase in demand
Relatively more expensive imports – fall in demand
Greater spending on exports and reduced spending on imports (this assumes price elastic demand)
Improvement in current account
Evaluation
Inelastic demand may lead to worsening of current account in short-run
J-curve impact

Question 29

Impact of a depreciation on economic growth

Answer 29

Impact on economic growth
Rise in net exports (X-M)
Increases the level of AD - AD1 to AD2
Provides boost to short run level of GDP (actual growth)
Real output rises from Y1 to Y2
Multiplier effect could increase the impact
Evaluation
If trading partners are in recession then there may not be a significant upturn in demand for exports
Imported inflation could reduce SRAS countering the rise in real output

Question 30

Impact of a depreciation on unemployment

Answer 30

Impact on unemployment
Rise in job creation in export markets
Consumer spending switching away from imports to domestic goods also could create jobs
Could help to reduce rates of cyclical unemployment
Impact on unemployment - Evaluation
May only be a temporary improvement - especially in a floating exchange rate system - much more likely to have longer term impact if it is a devaluation in a fixed/managed system

Question 31

Impact of a depreciation on inflation

Answer 31

Impact on inflation
‘Imported inflation’ – rise in price of imports
Increased demand for exports could be inflationary
This creates both cost-push inflation (via higher costs of production) and demand-pull inflation (via higher AD)
Higher inflation shown by rise in price level P1 to P2
Fall in spare capacity from Y1YF to Y2YF shows that there will be greater scarcity of goods and factors of production which causes prices to rise
Evaluation
Significance depends on the proportion of the ‘basket of goods’ that are made up by imports
Depends on current level of inflation/deflation
E.g. CPI below BoE target in 2021

Question 32

Impact of a depreciation on FDI

Answer 32

Impact on foreign direct investment (FDI)
Can lead to a rise in FDI
The relative costs of investment to foreign firms is reduced when the domestic currency depreciates
Evaluation
If the currency is continually falling then firms may be put off
If it continues to fall after the initial investment, then the value of that investment in their own currency will decline

Question 33

Impact of a depreciation on domestic producers - Exporters

Answer 33

Price of exports become relatively cheaper compared to foreign goods
Firms receive greater demand, so rise in AR/MR
Shift in AR and MR leads to rise in sales from Q1 to Q2
Firms receive more from each sale due to more favourable currency exchange - this is reflected by rise from P1 to P2
Overall profit increases by the shaded area

Question 34

Impact of a depreciation on domestic producers - Importers

Answer 34

Components/materials from abroad will cost more, raising the cost of production
These are likely to be variable costs, e.g. engine parts for a car manufacturer, so a rise in AC and MC
This results in lower sales from Q1 to Q2 and rise in AC from AC1 to AC2
This reduces profit from P1ABAC1 to P2CDAC2

Question 35

Impact of a depreciation on domestic consumers

Answer 35

Increased prices of imported goods – increased cost of living
Increased demand for exports could create jobs
Evaluation
Significance of imported price rises depends on closeness of domestic substitutes (elasticity of demand)

Question 36

Explain relative unit labour costs

Answer 36

Measure the average costs of labour per unit of output and are calculated as the ratio of total labour costs to real output.
Total wage bill/ real output

Question 37

Explain relative export prices

Answer 37

A countries export prices relative to those of its major competitors are significant for competitors
Price of your exports/ Price of rival export countries

Question 38

Evaluate the factors influencing international competitiveness

Answer 38

Productivity - If firm trading partners productivity levels improve by a larger amount then in relative terms, domestic producers are becoming less competitive

Regulation (Labour)- Too little regulation may result in poor business developing long-term capital/ infrastructure

Inflation

Costs of production (CELL) (labour %)- If wage rises are earned by increases in productivity, the rise in costs may be more than offset by rises in output per worker

Exchange rates - Firms may choose to maintain their foreign retail prices and accept smaller profits ( however, thus may not be viable for longer- term trends in exchange rates) also significance depends on the elasticity of demand

Question 39

Explain the benefits of being internationally competitive

Answer 39

Improved current account
Increased growth/ fall in unemployment
Exports leading to injection into circular flow of income, rise in value of the multiplier

Question 40

Explain the problems of sustaining international competitiveness

Answer 40

1. Inflationary pressure - less competitive over time
2. Exchange rate pressure, increase demand for your currency leads to being less competitive on price
3. Marshal leaner condition