4.1 International Economics Flashcards
What is globalisation?
- refers to the growing interdependence between countries and the integration of different national economies with the world economy -> eventually becoming one global market
- essentially, countries specialise in specific goods and then trade with other countries
What is the impact of globalisation on governments?
- larger multinational companies operating in those countries would have to pay more in the form of corporate tax, which will contribute to tax revenue made by the government - this will mean a better govt. budget
- however, larger companies are more likely to participate in tax avoidance because they have to pay so much in taxes
What is the impact of globalisation on producers?
- Firms can source resources from more countries, that are probably cheaper, and then sell them in more countries -> this reduces risks since the collapse of the market in one company will have a smaller impact
- however, there will be increased competition in any one market - which is one negative of free trade
- they can also employ low skilled workers much cheaper in developing countries and exploit a comparative advantage and have larger markets - both of which can increase profits
What is the impact of globalisation on consumers?
- Leads to a wider range of products being sold so consumers have more choice
- Lower prices available for consumer because the companies are more competitive and want to achieve the cheapest prices
What is the impact of globalisation on environment?
- The increase in world production has led to an increase in demand for raw materials - which harms the environment
- However, globalisation means the world can work together to tackle climate change by sharing ideas and technology
What is the impact of globalisation on workers?
- there will be more available job opportunities available to the population because there are more companies operating in the countries
- Increased migration may also help by lowering wages and migrants can also provide important skills and increase AD which increases the number of jobs
What is the impact of globalisation on overall economic growth?
- Globalisation increases investment within countries; the investment of TNCs (Transnational Corporation) represents an injection into the economy and cause a multiplier
- TNCs bring world class tech which can have knock on benefits to all industries as these techniques will become available to them too
- however, the power of TNCs can cause political instability as they may choose to support regimes which are unpopular and undemocratic but that benefit them
What is an absolute advantage?
- occurs when a country can produce a good or service using fewer factors of production than another nation
- may also refer to the ability of a party to produce a greater quantity of a good than a competitor with the same resources
What is a comparative advantage?
- when a country has the lowest opportunity cost of producing a good - this is ideally the good that the country should produce in
What are terms of trade?
- the rate of exchange of one product for another when two countries trade
- also tells us the quantity of exports that need to be sold in order to purchase a given level of imports
When is movement in the terms of trade said to be favourable? And when is it considered unfavourable?
- said to be favourable if the terms of trade increase as the country can buy more - also known as an improvement in the terms of trade
- deemed to be unfavourable if they decrease, when export prices fall or import prices rise - called a deterioration
What is the equation for terms of trade?
Index of export prices / index of import prices x 100
What is a change in the terms of trade?
- A rise in exports relative to import prices = a favourable movement
- A fall in exports relative to import prices = unfavourable movements
How can a change in price level/inflation rate cause a change to the terms of trade?
- a rise in a country’s relative inflation rate would also make its export prices higher and import prices lower - which would benefit the country
What is a pattern of trade?
- the composition of a country’s imports and exports, and the volume of its trade with the rest of the world and how that is likely to change over time
What is devaluation?
- a deliberate attempt to deterioration of its terms of trade
- this is because it is a deliberate attempt to reduce export prices and raise import prices in order to make the country’s products more internationally competitive
How do changes in demand and supply of imports or exports?
- demand is dependent on productivity and income of the buyer
- an increase in the demand for exports would increase their prices - depending on excess demand - and so cause a favourable movement in the terms of trade
How can a change in terms of trade impact balance of payments?
The effect on the BoP would depend on the PED of exports and imports
- a favourable movement would improve the current account on the balance of payments
- but if it elastic, a favourable movement, would worsen the BoP
How can a change in the terms of trade affect economic growth and employment?
- improvement in the TOT: likely to lead to a fall in GDP and a rise in unemployment - since, if caused by a rise in export prices, exports will fall and imports will rise
- leads to a reduction in production within the country and so a fall in jobs and output
- eventually, long term decline in the TOT suggests a long term decline in living standards as less imports can be bought
What are the factors affecting the pattern of trade?
- comparing advantage
- emerging economies
- relative exchange rates
- trade blocs
How does a comparative advantage influence a pattern of trade?
- countries trade where there is a comparative advantage to trading so a change in this will influence the pattern
How do emerging economies influence the pattern of trade?
- growing countries are likely to need to import more goods and export more goods to pay for this
- emerging economies shift the trade pattern by taking up a larger proportion of a country’s imports and exports than they had previously
How do relative exchange rates influence the pattern of trade?
- the exchange rate affects the relative prices of goods between countries
- this then influences the level of exports and imports of a country
How do trading blocs influence the pattern of trade?
- these increase the level of trade between certain countries and so influence the pattern of trade because trade increases between these countries and decreases between others
What are the different levels of trading blocs?
Preferential trading areas -> free trade areas ->customs union -> single market/common market -> monetary union -> economic union -> political union
What are preferential trading areas? + example?
- the loosest form of economic integration: where tariffs and other trade barriers are reduced on some, but not all goods traded between member countries
- provide lower barriers on trade among participating nations than in trade with non-members -> lower tariffs on imports of each other
- commonwealth preference system (1932) - established among 48 commonwealth countries of the empire