4.1 Flashcards
Globalisation definition
Globalisation is the increasing integration of the world’s local, regional and national economies into a single international market.
Factors contributing to globalisation:
- Improvement in transport infrastructure – quick, reliable and cheap methods to separate production
- Improved IT and communication = allows companies to operate everywhere
- Trade liberalisation = decreased protectionism through trading blocs
- International financial markets = ability to raise money and move around the world
- Transnational companies= growth of them = globalisation as they want to increase profits= move around to find low labour costs and they have power to lobby governments
Impacts of globalisation on consumers
- Increased choice as wide rade of worldwide goods
- Decreased prices as comparative advantage from countries with low cost
- Decreased culture sovereignty
Impacts of globalisation on producers
- Decreased risk for firms as collapse of market in one country = can switch to another
- Employ low skilled labour at low cost= exploit comparative advantage= increased profits
- Firms who are unable to compete in international markets lose out
Impacts of globalisation on workers
- Large scale job losses/ structural unemployment in western world manufacturing as they move to china
- Increased migration can lead to lower wages. However migrants can provide skills and increased AD = job creation
- Increased wages for high skilled labour whilst low skilled= decreased inequality
- TNCs provide training and new jobs however some create sweat shops = poor conditions and wages= increased employment and decreased SOL
Impacts on government
- Increased gov revenue due to TNCs paying tax and people employed
EVAL: tax avoidance and TNC’s can lobby bribe gov= corruption
Impact on environment
- Increased demand for raw materials = once they run out, countries dependant lose out
- Increased trade and production= more emissions and pollution
Impact on individual countries:
- Trade imbalances
- Income and wealth inequality
- Spread of culture
Absolute advantage definition
when a country can produce a good more cheaply in absolute terms than another country
Comparative advantage definition
when a country is able to produce a good more cheaply relative to other goods producing meaning it has a lower opportunity cost
Limitations and assumptions of the theory of comparative advantage
- Assumes no transport costs= prevents /lowers adv
- Assumes costs are constant and theres no EOS
- Assumes goods are homogenous when in reality goods are very diversified = cannot perfectly compare goods
- Assumes factors or production are perfectly mobile ie not tariffs and other barriers and there is perfect knowledge when markets are not perfectly competitive
Adv of specialisation and trade in an international context
- Increased world output if countries produce what they’re good at= economic growth
- EOS = decreased cost = decreased prices globally
- Increased choice of goods= increased consumer welfare
- Increased comp= incentive to lower cost and decrease prices and innovate = increased consumer welfare and increased quality
Dis of specialisation and trade in an international context
- Over dependency = some countries rely on different export and imports= can reduce standards of living if prices increase
- Structural unemployment, as decreased jobs due to firms moving abroad for comp adv = decreases SOL and incomes
- Environmental damages due to transport costs and increased demand for resources, eg deforestation
- Loss of sovereignty due to trading blocs
- Loss of culture due to foreign ideas and products
Factors influencing patterns of trade
- Comparative advantage change eg growth in exports of manufactured goods from developing countries to developed due to developing countries low labour costs = production shifts abroad
> De-industrialisation of countries like UK = manufacture secor declines = shift abroad eg China whilst UK focus on services eg finance = industrialisation of China and india = increased exports - Impact of emerging economies= collapse of communism= more countries participate in world trade
^ and shifts in pattern of trade due to emerging economies taking up a higher proportion of exports as they grow due to export-led growth and they also import more due to increased incomes and demand - Trade blocs = increased level of trade between countries and reduces trade for others
- Changes in relative exchange rates = affect prices of goods. Increased exchange rates of one country = decreased exports and shift trade to another
What is terms of trade?
- Measures the volume of imports an economy can receive per unit of exports
Avg export price index/ Avg import price index x100
Increased terms of trade = favourable as more imports bought for same level of exports= improvement
Decreased terms of trade= unfavorable = when export price falls or import price increases = detoriation
Factors influencing term of trade
SR
- Exchange rates, inflation and supply/ demand of imports and exports effect it since price changes
LR
- Improved productivity compared to countries main trading partner = decreased terms of trade as export prices fall relative to import – caused by new or efficient tech
- Changes in income - terms of trade increases if incomes rise = countries with strong tourism industry eg spain would see an improvement as prices of exports rise
- Protectionism measures= improves terms of trade because imports are restricted unless other countries dont retaliate
Prebish singer suggests LR price of primary goods declines in proportion to manufactured goods = those dependant on primary exports = decreased terms of trade
Primary goods eg mining/agriculture
Impacts of changes in a country’s terms of trade
- Improvement in terms of trade = decreased GDP and increased unemployment as international competitiveness of goods reduces = decreased exports and increased imports due to low price= decreased production in country = decreased jobs and output
- Worsening terms of trade= for every import, country has to export more = increased prices for new tech = expensive= decreased productivity = decreased SOL as goods more expensive. Additionally, it becomes more difficult to earn foreign currency = harder to pay foreign debt
Marshal lerner- If PED of exports and imports is inelastic then its a favourable movement in terms of trade = improvement in current account on the balance of payments, whilst if elastic = favourable movement in TOT = worsen
What is a trading bloc
Trading bloc- group of countries that reduce or remove trade barriers between them leading to trade liberisation eg EU, NAFTA
Define regional,bilateral, PTA, customs union, common market, monetary union
Regional trading bloc= group of countries within a geographical region that protect themselves from imports of non-members
Bilateral agreement = between one single country and another country
Preferential trading area (PTA) - tariffs and other trade barriers reduced on some goods but not all
Free trade area (FTA) - all trade barriers are removed between member countries. However member countries can set their own trade barriers on non-member countires
Customs union- all trade barriers are removed between member countries. Also all member counntires must have a common external tariff on imports from non-member countries
Common market- all trade barriers are removed between member countries. Also all member countries must have a common external tariff on imports from non-member countries. Also there is free movement of factors of production
Monetary union- 2 ore more countries with a single currency, with a exchange rate controlled and monitored by one central bank eg EU
Eurozone
- European central bank - distributes notes and coins, sets IR, maintains stable financial situation and manages foreign currency reserves
- Govs agree not to exceed fical deficit of more than 3% and no national debt over 60%
Advantages of trade agreements/ trading blocs
- Free trade encourages specialisation= increased output due to comparative advantage= allows for EOS = decreased prices and costs
- Increased growth due to larger markets = EOS
- Firms inside protected from cheaper imports
> EVAL- some imports may be cheaper even with a tariff placed - Increased competition due to trade liberalisation = increased innovation = decreased prices = increased productive and allocative efficiency
- Increased jobs
- Increased choice= increased consumer welfare
Disadvantages of trading bloc
- Decreased sovrity of counties
- Cant benefit countries outside bloc= leads to distort world trade= decreased benefits of specialisation as inefficient producer protected from efficient producers= trade diversion
> decreased comp as inefficient firms driven out and change structure to oligopolistic
Loss of resources= high regional inequalities as successful countries attract skilled labour/ capital - Trade disputes
– Diistributed gains from trade= unequal as developed = most
Reasons for restrictions on trade
- Protect infant industries- chance to build reputation and customer base and cover sunk costs as their AC will be high= unable to compete with international firms
- Job protection- allowing imports =domestic producers lose to international firms= job losses= decreased innovation as missing out on knowledge
- Protect from dumping (surplus goods to other markets at low prices)= harm domestic firms as cant compete
- Protect from unfair competition- unable to compete with low labour costs or low health and safety costs= gov has to intervene
- Terms of trade= country buys large amount of imports of a goods= increases demand= increased prices= worsen terms of trade as less imports can be bought with same amount of exports. Restriction= decreased supply = decreased price = improve trade
- Danger of over specialisation - reduces reliance on other countires
- Protect from demerit goods= corrects market failure
Restrictions on free trade
- Tariffs- taxes placed on imports. Qty demanded for domestic good should rise and decrease for imported goods. Tariff = increased price and decreased consumer surplus
- Quotas- limit placed on the level of imports allowed in a country= increased prices for domestic consumers = forces them to buy domestic goods
- Domestic subsidies to consumers= decreased prices for goods
>EVAL- depends where its spent, how and for what, magnitude
Non tariff barriers
- Embargo = total ban on imported goods
- Import license = license needed to import, decreased number of licenses = decreased imports
- Legal and technical standards= cannot be sold in a country= decreased imports eg EU
- Voluntary export restraint agreement= set volume of exports limit to another country to let domestic producer grow
What is trade creation and trade diversion
Trade creation is high cost domestic producer to low cost partner producer
Trade diversion is lower cost producer outside trading bloc to higher cost producer inside
Diagram for trade creation/diversion
Tariff diagram
Impacts of protectionist policies on consumers
- Increased prices as cant buy cheap imports also due to low comp= complacency = increased prices for domestic goods
- Less choice
Impacts of protectionist policies on Prodcuers
- Decreased comp = increased prices
- If consumers retaliate = increased cost for exports= wastage
- Foreign producers lose out due to limits
Impacts of protectionist policies on workers
- Some argue that inefficient firms close down = good for workers in LR as market reallocation= new jobs created with greater security
> EVAL- depends on job type
Impacts of protectionist policies on gov and living standards
- Increased tariff revenue
- Inefficiency in economy = decreased growth
- Deadweight loss
- Can lead to trade wars due to retaliation of countries
- Tariffs are regressive to low incomes, increases wealth inequality = cant afford
Components of balance of payments account
- Current account- trade in goods/ services and incomes and transfers
- Capital account- records debt forgiveness, inheritance taxes and transfer of financial assets and sale of assets and emmigrants taking money abroad or bringing to uk
- Financial account- FDI, portfolio assessments
A country is able to run a current account deficit if they have a surplus on the capital account
Causes of deficits/surpluses in current account
SR causes
- High level of demand = real household spending increases faster than supply of economy = import goods to meet demand and high incomes
- Strong exchange rates= decreased prices of imports= expenditure twitching incomes effect from domestic goods. High value pound =improves terms of trade due to buying more imports for less pounds = decreases exports
- Relative inflation= increases price of exports = decreases international competittveness
Medium
- Acountry may lose its comparative adv = ppl transfer their purchases to other countries and country has to produce something else
LR
- Lack of capital investment- use older technology = decreased efficiency and productivity
- De-industrialisation= service based exports = harder to export = create deficit
- Natural resources countries eg saudi =export more
- Corruption within countries= harder to export due to barrier to starting frim
Ways to reduce imbalances in current account
Demand side
- Monetary or fiscal policy to decreased AD= decreased incomes = decreased demand for imports
>EVAL- only SR as they limit output of economy = decreased economic development and SOL and growth
Supply side
- Increased productivity and effiiciency/ quality eg infrastructure
> Encourage and seek to exploit opportunities in export market overseas and focus on resources where you have real comp adv accepting some industries will close = decreased jobs in SR
Expenditure switching policies lcan also be used eg
- Tarrifs and quotas = decreased attractiveness of imports . However trade war= can worsen deficit
- Control inflation= control prices of goods= increases competitveness
>EVAL= can decrease demand for domestic goods= unemployment and decreased growth
- Devalue/depreciate pound.
>EVAL- marshal lerner and j curve
Exchange rate definition
Exchange rate is the value of one currency in terms of another
Types of exchange rates
- Free floating- value of currency is determined purely by market demand and supply of the currency, no gov targets and official intervention in market eg UK
- Managed floating- value of currency is determined by demand and supply but central bank intervenes to prevent large chnages eg Brazilian real, swiss franc and japanese yen
> Adustable peg - currency fixed against another but level of which theyre fixed can change
- Fixed system- value of currency is set against the value of another and exchange rate doesnt change
Factors affecting floating exchange rate
- Demand for pound is determined by- foreign demand for goods, number of foreigners wanting to invest in UK,visit or put money in banks and speculation around pound
- Supply of pound is determined by - amount of goods foreigners want to buy, number of uk firms wanting to invest abroad, amount of people going on holiday or place in foreign banks and speculation around pound
SR= speculation - if speculators fear a fall in pound= pound falls as they will sell pound for another currency
LR= X-M and long run capital flows
- Inflation= decreased international competitiveness= decreases value of currency as demand falls
Appreciation and depreciation
Revaluation and devaluation
Appreciation -Increase in value of currency under floating exchange rates
Depreciation- fall in value of currency under float exchange rates
Revaluation= currency is increased against the value of another under under fixed system
Devaluation= currency is decreased against another under a fixed system
2 main ways gov can influence the value of their currency
- An increase in IR relative to other countries= makes it more attractive to invest funds into a country due to increased return on investment= increased demand for currency = appreciation= hot money flow
- Foreign currency and gold- if pound is too high gov can increase supply by buying foreign currency or gold with pounds= shift supply to right= depreciates value of pound
Competitive delavluation
And eval
Deliberately intervene to foreign exchange rates markets to decrease value of their currency = decrease value of exports for other countries and increase price of imports = current account is likely to improve as fewer imports, more exports
EVAL
- Increased inflation due to increased cost of imports and demand pull inflation from increased AD
- Gov and central bank doesnt have market knowledge and balance of payment wont instantly adjust to market shocks
- Costly and difficult to hold large foreign currency reserves to depreciate/devalue
- Depends on PED of exports - inelastic= wont increase if price drops
- If trading partners = recessions then demand for exports wont rise by alot and decreased value of exchange rate wont effect and much
Impacts of changes in exchange rates
- J-curve - current account worsens before improving due to people wont realise uk goods are cheaper instantly and take time to find (time lag) and UK consumers wont see imports are more expensive or unable to switch = contracts
> Marshal lerner only improves if imports and exports are elastic if a decrease in currency occurs - Economic growth/unemployment - decreased exchange rate = increased exports as cheap and decreased imports = increased AD = increased growth and development
- Inflation- depreciation = inflationary as increased price of imported goods = increased COP= cost push inflation. Also AD shift fue to increased exports also increased prices
- FDI- flow of capital from one country to another in order to gain a lasting interest in enterprise there. Fall in currency = decreased wages and production costs relative to another country = increased competivtness = increased FDI . Also cheaper to invest
