4.1 International Economcis Flashcards
What is globalisation?
The process in which national economies become increasingly integrated and inter-dependent
What are the causes of globalisation?
Trade liberalisation, trading blocs, growth of MNC’s, technological advancements, mobility of labour and capital
What are the pros of globalisation?
- Can drive prices lower because of international competitiveness
- Benefits of trade, trade blocs, WTO
- Greater employment
4.Benefits from large EoS - Free movement of labour and capital (FDI)
- Technological transfer and innovation
What are the cons of globalisation?
- Growing inequality
- High structural unemployment
- Environmental costs - lack of sustainability
- Trade imbalances
- Greater risk of external shocks
- Less cultural diversity
What is the evaluation for an appreciation in the exchange rate?
- SPICED - imports cheaper exports more expensive, firms that import will benefit from cheaper prices - reducing cost of production - shift LRAS to the right and lower cost push inflation
- Lower growth - potential account deficit
- Higher unemployment in exporting industries
- Higher unemployment in domestic industries because domestic industries now have to compete with cheaper imports.
Counterbalance:
1. Lower inflation - Demand pull and cost push
2. Cheaper imports can lead to increased standards of living
3. Potential efficiency gains for domestic firms in order to compete
What is the evaluation for a depreciation in the exchange rate?
- WIDEC , imports expensive exports cheaper - Increase AD - shifts right, demand for exports rises (X-M) - Increase in real gdp (growth)
- Firms importing increased costs, increased costs of production , shifting SRAS to the left
- Increase employment in exporting industries
- Increased employment in domestic industries because firms will buy domestic goods as it’s cheaper
- Higher inflation , cost push and demand pull
How could a government wanted to raise the value of their currency?
Buy their currency from FEM using foreign exchange reserves as this would increase the demand for the currency and appreciate the currency
How could a government decrease the value of their currency?
They could sell their own currency into the FEM and buy foreign currencies back therefore increasing supply of their currency and depreciating the value
What is purchasing power parity (PPP)
PPP is a theoretical exchange rate that allows you to buy the same amount of a good/service in every country
What are the advantages of floating exchange rates?
- Reduces the need for foreign exchange reserves
- Means domestic monetary policy can work freely
- Useful instrument for macroeconomic adjustment
4.Partial automatic correction of trade deficit - reduces current account deficit - Reduced risk of currency speculation
What are the disadvantages of floating exchange rates?
- Volatility - constantly change/uncertainty
- Self-correction of trade deficits unlikely
What are the advantages of fixed exchange rates?
- Lower uncertainty
- Some flexibility
- Reduction in the cost of trade
- Discipline on domestic products - increase efficiency to be competitive
What are the disadvantages of a fixed exchange rate?
- Interest rate effects to correct the exchange rate can have bad consequences
- Large levels of foreign exchange reserves
- Speculative attacks if exchange rate set too high or too low
What is the marshal Lerner condition?
The marshal Lerner condition states that a current depreciation will only correct a current account deficit if PEDx + PEDm >1
True or False the marshal Lerner condition only happens in the short run?
False it only happens in the long run because firms are bound to contracts
What is economic integration?
A process whereby countries coordinate to reduce trade barriers and to harmonise monetary and fiscal policy
What is a trading bloc?
A group of countries that join together and agree to increase trade between themselves
What is a trade agreement?
An agreement to reduce tariffs and quotas between 2/multiple countries
What is a preferential trading area (PTA)?
A PTA is where countries join together to reduce tariffs and quotas on certain goods
What is a free trade area (FTA)?
A FTA is where countries join together and eliminate all trade barriers between them but still have trade barriers with others outside the group
What is a Customers Union?
A customs union is a free trade area without the freedom of setting their own barriers to countries outside the group.
- Common external barriers
What is a common market?
A common market is customer union but with deeper integration such as common policies across countries and free movement of labour,capital etc.
- EU
What is an Economic and monetary union?
An economic and monetary union is a common market but with the same currency and monetary policy.
- Euro zone
What is full economic integration?
A full economic integration is when the countries share everything, government, central bank etc
What is terms of trade?
Terms of trade is the amount of imports you gain from an export
What is the formula for terms of trade?
TOT = (Price of exports/ Price of imports) x100
What does an improvement in terms of trade mean?
An improvement means that you can buy more imports than before
How can terms of trade improve?
- Export prices increase
- Import prices decrease
What does a deterioration in the terms of trade mean?
A deterioration means that they can buy less imports with one export
How can the terms of trade deteriorate?
- Imports increasing in price
- Exports decreasing in price
What can cause fluctuations in the terms of trade?
SR:
1. Demand/ supply of the exports/ imports
2. Relative inflation rates
3. Exchange rate movements
LR:
1.Incomes
2.Productivity
3.Technology
What does the result of an improvement in TOT on a country depend on ?
International competitiveness
Quantities of Imports and exports
PED of imports and exports
What is the World trade Organisation?
An international organisation that regulates world trade
What are the roles and functions of the WTO?
- Set and enforce rules of world trade
- Resolve trade disputes
- Provide a forum for negotiating trade liberalisation
- To monitor further trade liberalisation
- To increase transparency of the decision making process
- To help developing countries fully benefit from world trade
- Cooperate with other major economic institutions
What does the current account measure?
- Trade balance - trade in goods - and services +
- Income +
- Transfers -
What are the reasons for protectionism?
To protect/stop:
Infant industries - protect from MNCS
Surest industries - limit the impact of closing abruptly
Strategic industries - energy, defence etc
Dumping
Employment
Current account deficit
Labour/ environment regulations
What are the types of protectionism?
Tariffs
Quotas
Subsidies to domestic producers
Non tariff barriers - product specification - regulation
What is the impact of a tariff on domestic producers and consumers?
Producers:
- Producer surplus increases because firms are more willing to produce
Consumers:
- Consumer surplus decreases because consumers have to pay a higher price
What is the impact of a tariff on the government and standards of living?
Governments:
- Receive more tax revenue
Standards of living:
- Worse for consumes because incomes have been eroded
- Domestic firms could increase employees wages thus increasing standards of living
What is the impact of a tariff on equality?
Workers that have experienced structural unemployment will feel that they are treated more fairly
What is the balance of payments (BoP)?
A record of all financial transactions that occur between it and the rest of the world
What is a remittance?
Money sent by someone working abroad to their family back home
What are the causes of current account deficits?
Low productivity
High value of country’s currency
High inflation rate
Rapid economic growth - increased imports
Non price factors such as poor quality and design
What are the benefits of doing nothing to tackle a current account deficit?
Floating exchange rates act as self correcting measures.
Over time a higher level of imports will depreciate the currency causing imports to decrease and exports to increased because they’re cheaper. Thus improving the deficit
What are the costs of doing nothing to correct a current account deficit?
There may be external factors to prevent the currency form depreciation. Can take a long time for self correction to happen and domestic firms may go out of business
What are the benefits of expenditure switching to correct a current account deficit?
Often successful in changing the buying habits of consumers, switching consumption from imports to domestic goods
What are the costs of expenditure switching to correct a current account deficit?
Protection often leads to retaliation by trading partners. Can be reverse tariffs and quotas which decrease the level of exports
What is expenditure switching policy?
Use of protectionism or devaluation of the currency under a fixed exchange rate
What are the benefits of expenditure reducing on a current account deficit?
Deflationary fiscal policy reduced post tax incomes which leads to a fall in demand for imported goods & improved a deficit
What are the costs of expenditure reduction on a current account deficit?
Deflationary fiscal policy dampens domestic demand which can cause output to fall/ when output fall, GDP slows & unemployment may increase
What are the benefits of supply side policies on a current account deficit?
Improved quality of products and lowers the cost of production. Help the level of exports increase thus reducing the deficit.
What are the costs of supply side policies on a current account deficit?
Tend to be long term so benefits may take some time. Usually involve government spending therefore there’s an opportunity cost
What is expenditure reducing policies?
Measure designed to reduce AD such as deflationary fiscal policy
What are supply side policies?
They aim to improve the quantity/quality of factors of production therefor increasing output
