4.1 International Economics Flashcards
What is globalisation?
Process of interaction and integration among people, companies and governments worldwide.
Increases interdependence of economies across globe.
Changes in economic conditions in one country consequently has larger impact on other economies in highly globalised world
Factors contributing to globalisation over past 50 years.
- Trade liberalisation
- Transport
- Communications technology
- Economic and political transitions
- Global companies
What is trade liberalisation?
Removal of restrictions on the free exchange of goods and services between nations.
What is a TNC?
Business that is based in one country but has outlets in other countries
What is comparative advantage?
When a country produces a good or service at a lower opportunity cost than other countries
Industrialisation
Development of industries in a country on a wide scale
Impacts of globalisation on individual countries.
GOOD- allows countries to specialise and become productive in goods they have comparative adv over
GOOD- strong nationalised firms can turn into successful global ones- boost employment and living standard
BAD- overdependent on certain sectors
Impacts of globalisation on consumers.
GOOD- increased choice
GOOD- lower prices
BAD- don’t know how imported goods are made (ethically)
Impacts of globalisation on government’s.
BAD- if countries become members of organisations, have to abide by rules
BAD- lose sovereignty due to increase in international treaties
Impacts of globalisation on producers.
GOOD- competition: encourages them to lower average cost and become efficient
GOOD- allows firms to expand beyond what’s possible in one country
GOOD- develop global supply chains
GOOD- have copies over supplier, shifty production to places with cheaper labour
BAD- firms that would’ve thrived in protected domestic market gone bankrupt
impacts of globalisation for workers.
GOOD- in developed, worker in industries with comparative advantage have higher salaries
BAD- low skilled workers lose out as their industries uncompetitive
Impacts of globalisation on environment
BAD- increased environmental destruction
BAD- rise in industrial activity=increased demand for raw materials=mining raw materials= environmental destruction
What is trade?
Provides mutually beneficial methods to obtain goods and services that are unavailable to an economy
What is specialisation ?
Occurs when an individual, firm or country focuses production on a narrow range of goods and services
Absolute advantage
Country has absolute advantage if it can produce more of a goods using equal amounts of resources than another country
Comparative advantage
Occurs when a country can produce a good or service at a lower opportunity cost than another country
Evaluation of specialisation and trade.
GOOD- allows countries to focus on producing goods and services they have comparative advantage in
GOOD- consumers have access to wider range of goods and services
GOOD- competition= incentive to reduce average costs=higher quality=innovate= consumers benefit
GOOD- trade provided larger market for firms
BAD- dependence increases
BAD- Deindustrialisation
BAD- structural unemployment if comparative advantage lost
Free trade
International trade without restrictions
Protectionism
Policy of restricting imports through trade restrictions
Reasons why countries use trade restrictions
- National security
- Protect domestic industries (inc infant industries)
- Public safety
- Retaliation
- Tax revenue
- Prevent dumping
Which countries are tax revenues from tariffs more valuable from?
Developing countries
Infant industry
An industry new to a country, but already established in other countries
Why do countries use retaliation?
- punish the other country
- serve as a warning to other countries
- convince other country to remove trade restrictions
Dumping
Occurs when exporter sells goods in domestic market below production costs
Do this because excess supply or failure to find buyer
Methods of protectionism
- Tariffs
- Quota
- Embargo
- Administrative barriers
- Subsidies to domestic producers
Tariffs
Tax on import or exports
Quota
Limit on number of imports allowed in a country
Embargo
Official ban on imports or exports
Administrative barriers
Procedure or legal requirement that can inhibit trade if it’s set in difficult manner
Subsidy
State grant given to firms to encourage production
Impact of protectionism on producers
GOOD- gain advantage over foreign producers
BAD- if state support given unconditionally, big danger that firms inefficient
Impact of protectionism on consumers
BAD- limited choice
BAD- tariffs make goods more expensive
Impact of protectionism on workers
GOOD- increased job security
BAD- protectionism making raw materials more expensive =increases costs of final good = reduce output= less demand for labour
Impact of protectionism on governments.
GOOD- for developing countries, tax revenue increases
GOOD- used to win political support
BAD- subsidies= opportunity cost
WTO
Provides formal mechanism to solve trade disputes
Permanent institution formed in 1995
Free trade agreement
Where countries agree to trade goods with other countries without protectionist barriers.
E.g. NAFTA
Trading bloc
Group of countries that mutually agree to remove or reduce trade barriers
Advantages of FTA’S
Trade creation and trade diversion (for non members)
Competitive sectors benefit
Improved choice for consumers
Reduced administration for governments
Increase in FDI
Better allocation of resources
Disadvantages of FTA’s
Decline of uncompetitive sectors
Risk of structural unemployment= shift production elsewhere
Trade diversion for non-members
Customs union
Free trade areas that impose uniform restrictions to non-members
Common external tariff
Trade policy agreed by members of customs union that sets identical restrictions on trade for non-members
Evaluation of customs union
GOOD- Increased bargaining power when negotiating trade deals
GOOD- Ability to set common external tariff to protect industries
BAD- loss of independent trade policy
Common markets
- Common standards agreed through collective decision making
- Freedom of movement of labour
Restrictions of trade in customs unions and FTA’s.
Workers still need visa’s
Countries set qualification standards
Firms still have to modify products based on different countries
Checks on goods and paperwork still required at customs
Monetary union
Creates common currency
Evaluation of monetary union
GOOD- exchange rate risk eliminated
GOOD- greater price transparency
BAD- difficult to gain competitiveness through devaluations
BAD- loss of independent monetary policy
Factors influencing the pattern of trade
- Comparative advantage
- Emerging economies
- Changes in relative exchange rates
- Growth of trading blocs
Trade creation.
When trade shifts from a high cost producer to a low cost producer
Less competitive/efficient to more competitive/efficient
Trade diversion
Trade diversion occurs when trade shifts to a less efficient producer
Terms of trade
An index that tracks the relative price of a country’s exports compared to its imports
Terms of trade calculation
Index of exports/ index of imports X 100
A deterioration in terms of trade
Occurs when terms of trade gets smaller
An improvement in terms of trade
Occurs when terms of trade increases, exports increases compared to imports
Short run factors that affect terms of trade
- Changes in demand and supply for exports and imports
- Changes in inflation rates
- Changes in exchange rates
Long run factors that affects terms of trade.
- Changes in income
- Changes in relative productivity
Components of current account on BOP
- Trade in goods
- Trade in services
- Investment incomes (e.g. dividend) - primary income
- Transfer payments (e.g international aid)- secondary income
Components of financial account on BOP
- FDI
- Net balance of portfolio investment
- Balance of banking flows
- Changes to value of reserves of gold and foreign currency
Advantages of international capital flows
- Facilitate growth in world trade
- Provide additional source of finance for firms
- FDI can lead to transfer of technology and skills
Disadvantages of international capital flows
- Stability risks
- Potentially undermine national security
- Can lead to excessive borrowing
Causes of current account deficits and surpluses
- Relative export competitiveness (determined by: inflation, productivity, innovation and protectionism)
- Exchnage rates
- State of the economy
Current account deficit problems
- AD is reduced (depends on size of multiplier)
- Debt burden increases (depends on how sustainably current account deficit is financed)
Current account surplus problems
- Indicator of heavy reliance on exports
- Can be harmful to economies of trade partners
