4.1 - International economics Flashcards
Define globalisation
The increased integration and inter-dependence between countries economically, socially and culturally.
Define foreign direct investment (FDI)
When a private sector company in one country establishes operations or acquires physical assets or stakes in another country.
Define offshoring
When companies transfer manufacturing to a different country, where production costs are lower, in order to raise their profits.
Define transfer pricing
A form of tax avoidance, where firms manipulate the price of their goods & services so that profit is increased in areas of low tax.
Define absolute advantage
When a country can produce a good more than another country with the same amount of resources (quantity of inputs per unit of time).
Define comparative advantage
When a country can produce a good with a lower opportunity cost than that of another country.
Define trans/multinational corporations (TNCs & MNCs)
A company that is involved with the international production of goods or services, foreign investments, or income and asset management in more than one country.
Define terms of trade
Measures the price of a country’s exports relative to the price of its imports.
avg. export price index/avg. import price index x 100
Define trading blocs
A group of countries that agree to reduce or eliminate trade barriers between them.
Define trade diversion
Occurs when trade is diverted from a more efficient exporter towards a less efficient producer (low cost producer outside bloc to higher cost producer inside bloc).
Define trade creation
The removal of trade barriers between countries resulting in increased trade between them (high cost to a lower cost producer).
State the theory of comparative advantage
Countries will find specialisation mutually advantageous if the opportunity costs of production are different.
Define dumping
Define quotas
Define protectionism
Define capital account
Define global trade imbalances
Define the Marshall-Lerner condition
Define international competitiveness
Define unit labour costs
State the J-curve effect
Define a currency-war
Define sectoral imbalance
Refers to an imbalance in the 3 main sectors of the economy - primary, secondary and tertiary.
Define exchange rate
The value of one currency in relation to other countries.
State the three exchange rate systems
Floating, fixed and managed.
Explain the floating system
The exchange rate is determined by market forces.
For the currency on the forex market:
- If there’s excess DEMAND, then prices rise so the currency is worth more. This is an APRECIATION.
- If there’s excess SUPPLY, then prices fall so the currency is worth less. This is a DEPRECIATION.
Explain the fixed system
A country’s currency is fixed against that of other countries.
- A REVALUATION occurs if the Central Bank decides to change the peg (fixation) and INCREASE the strength of its currency.
- A DEVALUATION occurs if the Central Bank decides to change the peg and DECREASE the strength of its currency.
Explain the managed system
When the exchange rate is neither entirely fixed or floating. The central bank determines the preferred currency value, in which it’s then free to FLUCTUATE within a certain range.
If it goes ABOVE:
- Central Bank sells its own currency in forex markets to increase its supply. This DECREASES the value of the currency.
If it goes below:
- Central Bank buys its own currency in forex market (using foreign reserves) to increase its demand. This INCREASES the value of the currency.
State the factors influencing the floating exchange rate
- Relative inflation rates
- Relative interest rates
- Current account balance
- Foreign direct investment
- Speculation
Explain relative interest rates as a factor influencing the floating exchange rate
They influence the flow of ‘hot-money’ between countries.
If interests rates are INCREASED:
- The demand for £’s by foreign investors increases (exports increase) & the £ APPRECIATES.
If interests rates are DECREASED:
- The supply of £’s increases as investors sell their £’s in favour of other currencies (imports increase) & the £ DEPRECIATES.
Explain relative inflation rates as a factor influencing the floating exchange rate
As UK’s inflation rises relative to other countries , it’s exports become more expensive, so there is less demand for UK products by foreigners, which means there’s less demand for the £. So value of the £ DEPRECIATES.
Explain the current account as a factor influencing the floating exchange rate
UK exports have to be paid for in £’s and imports have to be paid for in the local currency which requires £’s to be supplied to the forex market.
- INCREASING trade surplus will lead to an APRPECIATION of the £.
- INCREASING trade deficit will lead to a DEPRECIATION of the £.
Define international competitiveness
Refers to how well a country’s product competes in international markets. The lower the level of international competitiveness, the more likely that the country will face a current account deficit.
State the 2 ways of measuring international competitiveness
Relative unit labour costs
Relative export prices
Explain relative unit labour costs as a way of measuring international competitiveness
The total wages in an economy / output
- This provides a number that indicates the labour costs for each unit of output produced.
- If the relative unit labour costs of a country is lower than that of another country, then it’s more competitive in the international market.
Explain relative export prices as a way of measuring international competitiveness
Monitoring export prices provides an insight into whether they are rising or falling over time.
If a country’s export prices are falling relative to other countries, than they are more competitive in the international market.
State the factors affecting international competitiveness
- Unit labour costs
- Rate of inflation
- Regulations
- Wages & non wage costs
- Real exchange rates
Explain real exchange rates as a factor affecting international competitiveness
- This is the nominal exchange rate adjusted for inflation levels between countries.
Calculated as: nominal exchange rate - domestic price level / foreign price level
- A rise in the exchange rate of the pound will cause exports to become more expensive and thus make UK goods less competitive as their price decreases.
