4.1 International Economics Flashcards
What are the characteristics of globalisation
- Growth in free trade + movement of labour and capital across national borders.
- Increased importance of global financial systems.
- Growth in trading blocs (groups of countries, like EU).
- Growth of TNC’s
What are the factors contributing to globalisation
- Growth of free trade; made countries more closely integrated.
- Multinational companies.
- Technology: internet has improved communications
- Transport: containerisation + shipping
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WTO: helped reduce barriers to trade and
provide a forum for discussing global issues. - Trading blocs.
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Opening up of China and Eastern Block.
e.g. China investment in Africa to benefit from raw materials.
What is the impact of globalisation on the government
- Global trade cycles: dependence on others
- International co-operation.
-
Interdependence.
China has become reliant on Africa for raw materials. Africa is reliant on China for inward investment. -
Higher taxes but TNC’s lobby and ‘race to the bottom’
apple 0.005%
What is the impact of globalisation on workers
-
New opportunities
e.g. finding new opportunities to work abroad, like workers from Eastern Europe coming to work in Western Europe –> but problems of housing shortages -
Wages helped equalise wages across the world.
For example, self-employed computer programmers in India can work for US firms through the internet. - FDI has created manufacturing jobs in developing countries e.g. clothing retailers setting up in Asia.
–> but sweatshops; 36 hr shifts Indonesia - Encourage Skilled labour.
What is the impact of globalisation on firms
- Domestic firms uncompetitive. Some local firms may be pushed out
-
Lower costs for multinationals. outsourcing labour.
but costs to outsourcing (e.g. bad potential
publicity from ‘sweat shop’ factories) and possibly harder to
maintain quality of production. -
Economies of scale. significant for industries with
high fixed costs, like cars and aeroplanes; mainly benefits TNC - Impact on firms in developing world; reliance on primary prod.
o But new opportunities to firms in developing countries, e.g. computer software firms in India - Cheaper imports + lower risk from dependency on one country
What is the impact of globalisation on the enviroment
- Environmental costs. goods are increasingly imported from; higher carbon foorprint
- firms switch production to countries with weaker environmental legislation.
- But greater cooperation
What is the impact of globalisation on economic growth
- Investment by TNC, increase in LRAS
- TNC’s bring human capital through knowledge
- Increased trade
- Compartivie adv. change over time
What are the limitations of MNE’s
Footloose-MNE’s can and will relocate for more favourable tax and or cheap labour
e.g. Rust Belt (700,000 jobs lost) in USA
Repatriated profit
How does globalisation affect cultural identity
- Cultural globalisation is a key part of globalisation
- Communication and media transmits cultural ideas and has a large effect
- Communication technology allows acculturation through the internet
How did Covid ‘kill’ globalisation
- Clothing sales fell by 73.56% and bangladhes lost out on 2.6 billion dollars, millions of low income workers were laid off
- 2008 caused slowbilisation, opposition to the system grew in response to the movement of labour to China
- Desire to bring back maufacturing brought Populist leaders to ban immigrants ‘the future does not belong to Patriots, it belongs to Globalists’
According to the Economist how much has containerisation impacted bilateral trade over 20 years
over 790%
How much of the world’s outsouring businesss does India control
controls 44 percent of world outsourcing business
How much of the world’s wealtth does the top 1% of income earners control
43% of the world’s wealth
What is slowbalisation
The stagnation of the rate of globalisation after 2008
- Cost of moving goods has fallen
- the average tariff rate on all American imports will rise to 3.4%, its highest for 40 years
- Asian firms made more foreign sales within Asia than in America in 2017
How can it be argued that globalisation isn’t dying but changing
Figures in physical goods doesn’t take into explosion of digital economy
Cross border data flows have increased from 1 terabit per second in 2005 to 1,400 in 2017
What did Hal Varian say if trade flows recorded the true value of US-made operating systems installed on smartphones assembled in Asia
It would reduce the U.S.’s $500 billion trade deficit with the world by more than $120 billion in one fell swoop.
What is absolute advantage
This occurs when one country can produce a good with fewer resources than another.
What is comparative advantage
A country has a comparative advantage if it can produce a good at a lower opportunity cost i.e. it has to forego less of other goods in order to produce it.
What is the law of comparative advantage
This states that trade can benefit all countries, if they specialise in the goods in which they have a comparative advantage.
According to the law of comparative advanatage, what should happen in this scenario
Clothes:
For the UK to produce 1 unit of clothes, it has an opportunity cost of 4
computers.
* For India to produce 1 unit of clothes, it has an opportunity cost of 1.5
computers.
* Therefore, India has a comparative advantage in producing clothes
because it has a lower opportunity cost.
Computers
* If the UK produces a computer, the opportunity cost is 1/4 (0.25).
* If India produces a computer, the opportunity cost is 2/3 (0.66).
* Therefore, the UK has a comparative advantage in producing computers.
After Specialisation, total output increases by 2
What are the limitations of the theory of comparative advantage
- Increased specialisation –> diseconomies of scale
- Trade may be restricted through tariffs.
- Comparative advantage measures static advantage but not any dynamic
advantage. - Assumes constant cost, homogenous goods, perfect knowledge, no transport costs, constant return to scale
- Ignores exchange rate
Portray absolute advantage diagramatically
in the context of the PPF. Country 1 has an absolute advantage in both as they can produce more of both. However, trade is not worthwhile because they have the same opportunity cost since the gradients of the lines are the same.
Portray comparaitive advantage diagramatically
Country 1 has an absolute advantage in producing good B and country 2 has absolute advantage in good A. Specialisation is worthwhile since the opportunity cost is different.
This creates the new green PPF, since they maximum they can produce is 200 and 1600. If they produce at a rate of 1:1, they produce on the line but they can produce anywhere in the area between all three lines, A.
Both countries are able to produce beyond their PFF, which shows both have benefitted from specialisation.
Why do manufactured goods tend to be non-homogenous and what does Preference Similarity Theory suggest
Preferance similarity theory suggests that some goods are imported simply because consumers want choice.
What is the Hecksher Olin principle
Countries export what they can most easily and abundantly produce
What is the pattern of trade
The pattern of trade refers to how a country trades with other countries and in which direction.
Trade flows refer to where the countries exports and imports go
What are the factors influencing the pattern of trade
-
Comparative Advantage
e.g. deindustrilisation in UK led to moving to other places such as Poland -
Emerging Economies
As countries grow, likely to need more imports such as China
International trade contributes 20% of LIC’s economies compared to 8% of US - Trading blocs and bilateral trading agreements Leaving EU meant that the UK had a 14% fall in trade w them
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Relative exchange rate
UK’s trade deficit with Europe is due to the strength of the pound.
China have kept their currency weak in order to increase their trade surplus by making exports more competitive.
What is the pattern of trade between the UK/USA + China/Germany
- UK/USA run a persistent current account deficit
- China and Germany run a consistent surpluss
What is the reason for the nature of the pattern of trade between the UK/USA + China/Germany
China lower labour costs –> gives a omparative advantage in manufactured goods.
* Chinese currency relatively undervalued. China has often sought to
maintain an undervalued currency to make exports cheaper.
* In the Euro, German exports become relatively cheaper because in the
Euro, there is no appreciation within the Eurozone
* It also reflects a higher marginal propensity to consume in the UK and the
US. This means more willing to spend income.
What is the terms of trade
the quantity of exports that need to be sold in order to purchase a given level of imports.
an improvement if buy more imports with the same level of exports.
Detoriation if converse
What are the factors influencing the terms of trade
-
Exchange rate. depreciation cause a deterioration in the
terms of trade. - Commodity prices. If a country produces mainly primary products, then falling commodity prices worsens their terms of trade.
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Higher inflation. A relatively higher inflation rate will increase the price
of exports relative to imports and improve the terms of trade- but depreciation on FX -
Demand for products. rising export demand will push
up export prices, causing an improvement in the terms of trade.
Long-run:
* Improvement in productivity will decrease terms of trade
* changing incomes - Prebish Singer Hypothesis –> primary goods decline in price propotionately so those dependent on them will see fall in terms of trade
What is the effect of a detoriation in the terms of trade
countries will need to export more goods to finance the
same quantity of imports.
* A deterioration in the terms of trade could mean higher import prices and
cost-push inflation.
* A long-term decline in the terms of trade can lead to lower living
standards, because the country can afford relatively fewer imports
- Beneficial if caused by depreciation; if demand elastic then increase in exports
How does elasticity affect the terms of trade and the current account
If PED of exports and imports is inelastic, a favourable movement in terms of trade would improve the current account on the balance of payments
if it is elastic, a favourable movement would worsen the current account
Why is an improvement in the terms of trade likely to lead to a fall in GDP and a rise in unemployment
, since if it is caused by a rise in export prices, exports will fall and if it is caused by a fall in import prices, imports will rise. Both of these causes a reduction in production within the country and so a fall in jobs and output
What is the issue with a long-term decline in the terms of trade
suggests a long term decline in living standards as less imports can be bought.
What are the stages of economic integration between countries
- Free Trade Area
- Customs Union
- Single/Common Market
- Economic Union
- Monetary Union
- Fiscal Union
What is a PTA and FTA
● Preferential trading areas (PTA): These are where tariff and other trade barriers are reduced on some but not all goods traded between member countries.
● Free trade areas (FTA): These occur when two or more countries in a region agree to reduce or eliminate trade barriers on all goods coming from other members. Each member is** able to impose its own tariffs and quotas on goods it imports from outside the trading bloc. **
What is a customs union
A customs union involves the removal of tariff barriers between members and the acceptance of a common external tariff against non-members.
members may negotiate as a single bloc with third parties such as other trading blocs or countries.
(FTA + Common External Tariff)
What is a single/common market
hen members trade freely in all economic resources so barriers to trade in goods, services, capital and labour are removed.
They impose a common external tariff on imported goods from outside the market
significant level of harmonisation of micro-economic policies
‘aim to create a single market’
What is an economic union
A common market as well as a common external tariff but free to pursue independent macro economic policy
What is a Monetary Union
– Economic Union plus common currency and common
monetary policy. (e.g. Eurozone).
What is a fiscal union
A fiscal union is an agreement to harmonise tax rates, to establish common levels of public sector spending and borrowing, and jointly agree national budget deficits or surpluses.
The majority of EU states agreed a fiscal compact in early 2012, which is a less binding version of a full fiscal union.
What are the conditions necessary for the success of a monetary union
- there should be free movement of labour, capital mobility and wage and price flexibility, fiscal transfers from one country to another when a country is performing poorly, and countries should share the same business cycle.
The main problem for the EU is the** lack of automatic fiscal transfers**, for example these would have helped Greece, Spain and Portugal following the financial crisis of 2007-08.
What are the costs and benefits of a monetary union
- prices are fixed as all currencies are the same and there are reduced exchange rate costs.
- It becomes easier for prices to be compared across the union and so MNCs are less able to price discriminate.
- There are financial costs in starting a new currency and with one breaking them
- Loss of policy independence can be bad for countries e.g. black wednesday, greece
What are the advantages of a customs union
Without a unified external tariff, trade flows would become distorted
A common external tariff effectively removes the possibility of arbitrage
What are the disadvantages of a customs union
Union members must negotiate collectively with non-members or organisations like the WTO as a single group of countries. While this is essential to maintain the customs union, it means that members are not free to negotiate individual trade deals.
Also, it makes little sense for a particular member to impose a tariff on the import of a good that is not produced at all within a that country.
e.g. banana tariff 10.9%
Members that trade relatively more with countries outside the union, such as the UK, may not get their ‘fair share’ of tariff revenue.
What are regional trade agreements
- These are agreements between neighbouring countries e.g. South-East
Asia, Latin America, Africa and the EU. - The WTO often calls these regional trade agreements preferential trade
agreements, because they are exclusive to a certain number of countries.
What are the advantages of regional trade agreements
- Most trade is with neighbours so large effect
- enable more free trade –> trade –> increase economic growth
- They are a potential stepping stone to more inclusive trade agreements.
What are the costs of regional trade agreements
- WTO argues they should be preferable since FTA should involve all countries
- PTA can conflict with WTO global trade treaties
- Leads to conflict between other trading blocs
- Increasesd complexity –> NTB
What are the benefits of general economic integration
- Greater trade and gains from comparative adv. –> EoS
- Increased FDI
- Clout for international negotiations
- More flexible labour markets
What are the potential costs of economic integration
- Regional inequality due to geographical immobilities e.g. difficult to move from Spain to Germany to get a job.
- Increased specialisation –> structural unemployment
- The UK experienced trade diversion when joining the EU, because
agricultural tariffs to Commonwealth countries increased. - Free movement of labour may cause friction over housing and
overpopulation.
What is trade diversion
when tariff agreements cause imports to shift from low-cost countries to higher-cost countries; concentrates production in countries with a higher opportunity cost and lower comparative advantage.
typically occurs w a common external tariff
Draw the trade diversion diagram
- decline in consumer surplus
- DWL
- Loss of EU efficiency in net loss area
- also net loss to society
What is trade creation
increase in economic welfare from joining a free trade area, such as a customs union due to a reduction in tariffs allowing for lower prices
- increase in consumer surplus, equal to area 1+2+3+4
- Domestic producers will sell less as consumers buy cheaper imports (decline in producer surplus is shown by area 1)
- Government lose tax revenue (from import tariffs) (shown by area 3)
How can the impact of trade creation and trade diversion be lessened
If demand and supply are inelastic, the effect will be much lower.
How does trade creation benefit exports
If you cut import tariffs, other countries are likely to reciprocate and reduce tariffs on your exports. Therefore, there will also be an extra benefit from increased exports.
What are the potential issues with trade creation
Often domestic job losses are more visible, than the gains from cheaper prices.
e.g. nafta caused rust belt 700k america and 2 million agricultural mexico
What is the WTO
- responsible for trying to promote and regulate free trade and trade agreements between countries.
- Forum for agreeing and resolving conflict
- Help trade flow except when conflicts with other objectives
How has world exports as a % of GDP changed from 1970
World Bank stats show how world exports as a % of GDP have increased from 13% in 1970 to 30% just before the financial crisis of 2008.
In the past decade, world exports as a share of GDP have flatlined, with no rise since the peak of 2008.
What is the infant industry argument
- Prevent economic dumping
- Need to diversify from a reliance on primary products:
1) Low YED in LR
2) Price Volatility
Draw the effect of a tariff
S world shifts up
tariff of size (Pw + t – Pw) is introduced. That raises the price of chicken wings in the UK to Pw + t. Quantity supplied by domestic producers increases Q1 -> Q2 (extension of S domestic).
· Quantity demanded contracts Q4 -> Q3.
· Hence, imports shrink to (Q3 – Q2).
What is the effect of tariffs on: consumers, government, domestic producers, foreign producers, DWL
· Consumers: consumer surplus lost by area (Area 1 + Area 2 + Area 3 + Area 4) lost.
· Government: gain in revenue of Area 3
· Domestic producers: domestic producers gain surplus Area 1.
· Foreign producers: they lose revenue as tariff decreases the quantity of chicken wings imported.
Deadweight welfare loss: due to tariff there is social surplus lost to nobody which is the DWL: Area 2 + Area 4.
Draw the effect of subsidy on trade
the domestic supply curve shifts downwards by the size of the subsidy per unit: (Pw + subsidy – Pw).
Domestic production increases Q1 → Q2 and the quantity imported shrinks to Q4-Q2
What are the 2 diagrams for quotas
Same as tariff and just shifting
or
This leads to a fall in imports to just Q3-Q2
Domestic suppliers gain more revenue. The price rises to P quota and domestic suppliers, supply more Q1 to Q2. It can create domestic jobs.
What is the welfare loss of quotas
Consumers pay a higher price and also total quantity falls from Q4 to Q3.
Governments are not affected directly, as there is no income.
There is a net welfare loss to society because the increase in producer surplus is outweighed by the decline in consumer surplus.
World exporters will make less revenue – unless demand is very inelastic, meaning increase in price is greater than fall in quantity.
What is the J Curve Effect
In the** short term**, demand for imports and exports tends to be inelastic
Therefore, after a devaluation, the current account can get worse before it gets
better. However, over time, demand becomes more price elastic and the current
account improves.
What is the export multiplier effect
Many industries rely heavily on key export industries remaining competitive – these include:
* Transportation / freight / logistics businesses
* Trade finance businesses e.g. Insurance and trade credit
* Service businesses that operate in ports and airports
Exports particularly important for regional economic performance
What is an exchange rate index
This gives a measure of a currency against a tradeweighted basket of currencies. It is expressed as an index, where the value of the index will be 100 in the base year.
weight given to each currency depends upon the proportion of
transactions done with the country
Evaluate the effects of an appreciation
- Marshall Lerner condition states an appreciation will only worsen current
account, if PEDX + PEDM >1. - It depends on other components of AD, consumer bigger impact
- Inverse J Curve
- It depends on productivity growth. If the exchange rate appreciates
because firms are becoming more productive, then they will remain
competitive. - Capital Equipment + tech becomes cheaper –> inc productivity and LRAS
- It depends on the state of the economy. If the economy is growing
strongly and is near full capacity, a rise in the exchange rate could help
reduce inflationary pressure and keep growth sustainable.
What is the UK competitiveness ranking sin 2022
