4.1 International Economics Flashcards
Globalisation
The growing interdependence of countries and the rapid
rate of change it brings about.
Why has globalisation come about?
- Improvements in transport infrastructure and operations
- Improvements in IT and communication
- Trade liberalisation
- International financial markets
- TNCs
why are economies emerging
- transitioning from a low income, less developed, towards a modern, industrial economy with a higher standard of living.
- new trade deals
- structural changes to government
- change from oil dependent industry
Characteristics of Globalisation
- The increasing integration of the world’s local, regional and national economies into a single international market.
- There is movement towards free trade of goods and services, free movement of labour and capital and free interchange of technology and intellectual capital.
Impact of Globalisation on consumers
- consumers have more choice.
- lower prices due to comparative advantages and choice of where to produce.
- culture may be lost
- costs may rise due rising incomes so higher demand.
Impact of Globalisation on workers
- jobs will be lost in certain areas due to growth of production in China
- increased migration could lower wages but can also provide important skills and an increase in AD which will increase jobs.
- international competition has led to a fall in wages for low skilled workers in developed countries compared to increasing wages in developing countries.
- TNCs tend to provide training for workers and create new jobs.
- sweatshops.
Impact of Globalisation on producers
- can source products from more countries and sell them in more countries, which will reduce risk as one collapsed market in one company will ahve a smaller impact.
- can expolit comparative advantage and have larger markets.
- firms who cannot compete internationally will be miss out.
Impact of Globalisation on government
- higher taxes, however they could lose out due to tax avoidance.
- TNCs also ahve the power to bride and lobby governments, which could lead to corruption.
- If the government uses the correct policies, they can maximise the gains and minimise the losses.
Impact of Globalisation on environment
- increased demand for raw materials, which is bad for the environment.
- increased trade and production has also led to more emissions
- globalisation means the world can work together to tackle climate change
Impact of Globalisation on economic growth
- increases investment within the country
- comparative costs and advantages will change over time
- trade will increase output.
- power of TNCs could lead to political instability as they may support regimes which are unpopular and undemocratic but that benefit them or could hinder
regimes which don’t support them
The theory of comparative advantage
that countries find specialisation mutually
advantageous if the opportunity costs of production are different. If they are the same,
there will be no gain from trade.
Assumptions of comaprative advantage
- no transport costs
- costs are constant, so no economies of scale
- factors of production are perfectly mobile
- depends on terms of trade between the countries.
Advantages of specilisation and trade
- world output can be increased
- economies of scale
- different countries have different factors of production
- greater consumer choice
- greater competition
Disadvantages of specialisation
- over-depedence
- can cause structural unemployment
- environment can suffer
- countries can lose sovereignty due to signing international treatises and joining trading blocs
- loss of culture
Factors influencing the pattern of trade
- comparative advantage
- emerging economies
- trading blocs and bilateral trading agreements
- relative exchange rates
Patterns of trade
evolve over time as countries develop and build new comparative advantage in both goods and services
terms of trade
measures the rate of exchange of one product for another when two countries trade.
What is movement in the terms of trade described as
favourable if the terms of trade increase as the country can buy more imports with the same level of exports. This is called an improvement in the terms of trade.
Calculation in terms of trade
(average export price/average import price index) x 100
Factors influencing a countrys terms of trade
- in the short run exchange rates, inflation and changes in demand/supply of
imports or exports affect the terms of trade since these affect the relative prices of
imports and exports - improvement in productivity
- changing incomes - changes demand
- in general - anything which affects the price of a country’s imports or exports will affect its terms of trade.
Impact of changes in terms of change
- 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 whilst if it is elastic,
a favourable movement would worsen the current account. - improvement in the terms of trade is likely to lead to fall in GDP
- long term decline in the terms of trade suggests a long term decline in living standards
- If an improvement has occured due to increased demand for exports, then this will be beneficial for the country. If a deterioration is caused by an improvement in international competitiveness, this will also be beneficial.
Trading areas
These are where tariff and other trade barriers
are reduced on some but not all goods traded between member countries.
Free trade areas
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.
Customs unions
A customs union involves the removal of tariff barriers between members and the acceptance of a common external tariff against non-members. This means that members may negotiate as a single bloc with third parties such as other trading blocs or countries
common markets
This is the first step towards full economic integration and
occurs when 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 markets. For a common market to be
successful there must also be a significant level of harmonisation of micro-economic policies, common rules regarding monopoly power and anti-competitive practices and the removal of custom posts.
Monetary unions
These are two or more countries with a single currency, with an
exchange rate that is monitored and controlled by one central bank or several central banks with closely coordinated monetary policy.
economic union
the final step of economic integration. There will be a
common market with coordination of social, fiscal and monetary policy.
Cost and benefits advantages
- comparative advantage
- benefit from economies of scale
- larger consumer market
- firms in the bloc are protected
- increased competition
- creates more job
- increased choice for consumers
Cost and benefits disadvantages
- distort world trade - reducing benefits of specialisation
- reduction in competition as the market could become oligopolistic
- loss of resources as the most successful regional countries attract capital so also heightens regional inequality
- retaliation between trading blocs - trade disputes
- can distract governments from the gains of signing a full free trade agreement
- distributes the gains from trade unequally - developed countries get most.
- may be weak if they cover limited range of goods
- lessen national sovereignty.
- can be seen as second best solutions - efficiency oudl be maximised with no barriers to trade
Trade creation
When trade is created by the joining of a trade union. It removes the tariffs and leads to welfare gain and higher consumer surplus. It is when consumption shifts from a high cost domestic producer to a low cost partner producer.
Trade Diversion
trade diversion occurs where consumption shifts from a lower cost producer outside the trading bloc to a higher cost producer within it
Aim of WTO
- bring about trade liberalisation
- act according to the trade agreements
what happens if a country fails to follow its agreements
a country or group can file a complaint and the WTO will attempt to solve the issue through negotiations but the complaint can go to a panel of experts and countries must agree to their rulings. If they reject the ruling, the country which wins the ruling has the legal right to impose trade
sanctions against the exports of the losing country.
what is a problem with organisations with the WTO
all countries must agree
Possible conflicts of the world trade organisation
- regional trade agreements contradicted WTOs principles.
- they can compliment the trading systems
- can be seen as too powerful or that it ignores developing countries
reasons for restrictions on free trade
- infant industry agreement
- job protection
- protection from potential dumping
- protection from unfair competition
- terms of trade
- danger of over specialisation
Types of restrictions
- tariffs
- quotas
- subsidies to domestic products
- non-tariff barriers
tariffs
- These are taxes placed on imported goods which make them more expensive to buy,
making people more likely to buy domestic goods. - Although tariffs help home producers, raise revenue and reduce the money leaving in imports, they are inefficient as they cause deadweight loss.
Quotas
- These are limits placed on the level of imports allowed into a country, meaning people are forced to buy domestic goods if they want that good and the quota is already used up.
- There will be a welfare loss and shift of consumer subsidy to producer subsidy but instead of tax revenue,
there will be extra revenue for the exporting, foreign firms.
Subsides to domestic products
- These are payments to domestic producers which lower their costs and help them to be more competitive by enabling cheaper prices.
- Sometimes subsidies are purely given to goods that are exported whilst other times they are given to firms that have a large proportion of their sales as exports.
- Subsidies can also be given to domestic firms that compete with imports, usually in the form of indirect subsidies like tax breaks or cheap loans.
Research and development subsidies will help the firm to be competitive by ensuring they have the most up to date technologies
Non-tariffs barriers
- embargos
- import licensing
- legal and technical standards
- voluntary export restraint agreements.
Impact of protectionist policies on consumers
- higher prices
- less choice
Impact of protectionist policies on producers
- can sell more at hogher prices
- higher costs if there are controls on the imports they need for production
- foreign producers will lose out
Impact of protectionist policies on workers
- little difference to employment figures
- create new jobs
Impact of protectionist policies on governments
- gain tariff revenues
- politically popualr
- can lead to an inefficient economy
Impact of protectionist policies on living standards
- welfare loss
- retalition
Impact of protectionist policies on equity
- regressive effect
components of the balance of payments
- the current account
- the capital and financial account
causes of a deficit or surplus
- uneven distribution of natural resources.
- differential competitiveness
- exchange rates
- inflation rates
- investing and LT economic growth
- domestic and government spending
policies to rectify the deficit
- protectionism
- exchnage rates
- supply side
- tight fiscal
- loose monetary
- government investment in domestic industry
- deflationary policy
is a deficit sustainable?
- reliant on other country’s
- more imports
- export firms may leave the market
- exchange rate weakness
- deficit financed by financial accounts
structural changes under a deficit
- under-investment
- low productivity
- high inflation
- low r+d / innovation
- emergence of low cost competition
cyclical changes under a deficit
- over-valued exchange rates
- boom in domestic demand
- recession in key export markets
- slump in global price of exports
- increased in demand for imported technology
specific changes in uk under deficit
- elasticity for demand for imports
- decline of manufactering
- growth of emerging markets
- net importer of food and fuel
- lack of competitiveness
how does deflationary policy work to improve fiscal balance?
- demand drops - drop in imports.
- increase IR means pound gets stronger - SPICED
eval of deflationary policy
- consumer and business confidence
- conflcit of objectives
- output gap
-MPM
how does supply side policy improve trade balance
- increase productivity
- increase the size of the workforce
- producitvity of business
how does protectionsim improve the trade balance?
money spent on imports can be switched and spent on improved exports instead
eval on supply side ploicies
- policies are limited such as subsidies
- effective in long term
eval of protectionism
- retaliation
- non-price factors
- ability of country to make goods
- limits positives of globalisation
- inflationary pressure
- anti-WTO
- loss of efficiency
how is exchnage rate policy in terms of interest rate work to reduce the trade deficit
- raising interest rates will weaken the pound - WIDEC
how is exchnage rate policy in terms of selling domestic currency work to reduce the trade deficit?
increase the supply of a currency will cause the exchange rate to depreciate - WIDEC
Eval of exchange rates
- liquidty trap
- marshall lerner
- j-curve
- dependent on other countries
- inflation
- currency wars
Marshall lerner
A currency depreciation will only correct a current account deficit if the combined elasticity of exports and imports are greater than 1
what does the J-curve show
shows time lag between a falling currency and improved trade balance
Does a deficit matter? YES
- Structural weakness
- An unbalanced economy
- less output and employment
- money flowing out and problems finacing debt.
- downward exchange rate pressure
Does a deficit matter? NO
- Partial auto correction
- investmetn and supply side policies
- capital flows
- financial account
why do some countries have a trade surplus
- export orientated growth
- FDI
-under-valued exchange rate - high domestic savings
- closed economy
- strong income from overseas investment
consequneces of a trade surplus
- growth
- rise in inflation
- appreciation of the exchnage rate
- financial account defiict
- can harm international relations
- sign of an unbalanced economy.
fiscal drag
- gov freezes tax allownace
- people get pay rises due to inflation.
this means people now have to pay more tax
exchange rate
the value of one currency comapred to another.
flaoting exchange rate
changes caused by demand and supply
benefits of floating exchange rate
- stability in the balance of payment
- foreign exchnage is unrestricted
- market efficiency enhanced
- large foreign exchnage reserves not required
- import inflation
- allows greater change of internal policy
- partial-auto correction
- can be used as a tool of economic adjustment
- freeedom for domestic monetary policy
fixed exchange rate
fixed against other major currencies through action of government or central bank
benefits of a fixed exchnage rate
- more certaintiy - encourages trade and investment
- maintain low inflation
- prevents specualtion in foreign exchange
- essential for smaller notions
- attracts foreign investment
- reductions in costs of currency hedging
- disciplines domestic producers
- reinforcing gains in comparative advantage
- some flexibility permitted
managed floating
when the central bank choose to intervene in the foreign exchange markets to affect the value of a currency to meet macroeconomic objectives.
benefits of managed floating
- option for government to get involved
- can reduce effects of volatilty in markets
- gives the government another macro-policy lever
limits of managed floating
- requires large scale foreign exchange resources
- central banks on their own may have little or no power against the sheer weight of speculate buying and selling in global currency markets.
- using interest rates may conflict each other macroeconomic objectives
why do exchange rates depreciate?
- Fall in world price of country’s made export
- Surge in volume and values of imported goods.
- Country’s central bank reduce monetary policy - interest rates - outflow of hot money.
- depreciation may cause intervention from the central bank
- fall in demand if depreciation is expect so they sell them
exchange rate devaluation
- elasticity for demand of imports and exports
- state of thr global economy
- inflation
- depends why currency being devalued
exchange rate and QE
- the bond market will see an increase the demand for bonds, which then increases
How does international competitveness work
The lower the level of international competitiveness, the more likely that the country will face
a current account deficit. For goods to be competitive internationally, they need to be cheap,
have good quality, design or after-sales and good marketing.
measures of international competitiveness
- relative unit labour costs
- relative export prices.
Factors influencing international competitiveness
- exchange rates
- producitvity
- regualtion
- investment
- taxation
- inflation
- economic stability
- flexibility
- competition and demand at home
- factors of production
- openness to trade
benefits of international competitiveness
- current account surpluese
- FDI
- employment
- rise in wages
Disadvanatges of intermational competitiveness
- easily lost
- a rise in the exchange rate
- dependency culture
