4.1 - International Economics Flashcards
What is globalisation?
Globalisation is the economic integration of different countries through increasing freedoms in the cross-border movement of people, goods/services, technology & finance
What are the four main characteristics of globalisation?
- Increased movement of labour: 1 million people from the UK live/work in other countries & more than 3% of the global population live outside their birth country
- Increased international movement of financial capital (money for investment): Tata paid £1.7bn to acquire British Jaguar + £144bn of FDI in 2017 went to China
- Increased specialisation: comparative advantage e.g. Saudi specialises in oil production - accounts for 50% of their real GDP
- Increased international trade: 80% of international trade is driven by TNCs
- Increased trade-to-GDP ratio: e.g. USA = 27% but Luxembourg = 400%
What factors have contributed to globalisation in the last 50 years?
- Economies of scale generated by containerisation in the shipping industry -> 790% increase in international trade
- A rapid growth in the number & influence of TNCs
- Improvements in transport
- Improvements in IT: e.g. development of Google, Skype -> increased international movement of financial capital
- The Increased effectiveness of the WTO in negotiating new trade agreements & helping countries to open up to free trade (trade liberalisation),→ increased international specialisation & volume of trade
What are the impacts of globalisation on consumers?
- More choice - wider range of goods avaialable from all around the world
- Lower prices - firms are taking advantage of comparative advantage & produce in countries with lower costs
- Rise in prices - rising incomes → higher demand for G&S
- Loss of culture
What are the impacts of globalisation on workers?
- Structural unemployment from shifiting sectors
- Increased migration - could lower wages but also important skills could increase AD & jobs
- Wages for high skilled workers increase due to high demand → increasing inequality
- Poor conditions in sweatshops
What are the impacts of globalisation on producers?
- Firms are able to source products from more countries & sell them in more countries → reduces risk since a collapse in the market of one country will have a smaller impact on the business
- Can employ low-skilled workers cheaply in developing countries, exploit comparative advantage & have larger markets → increased profits
- Firms unable to compete internationally will lose out
- Monopoly power of MNCs
What are the impacts of globalisation on government?
- May receive higher taxes as TNCs pay taxes and so do their employees - could lose out through tax avoidance
- TNCs have the power to bribe and lobby governments → corruption
- Increase in organised crime
What are the impacts of globalisation on environment?
- Rapid depletion of natural resources
- Deforestation
- Increased global warming
- The world can work together and tackle climate change by sharing ideas and technology
What is comparative advantage?
- Comparative advantage is the theory which states that a country should specialise in the G&S that it can produce at the lowest opportunity cost
- Excess production can be exported
- G&S not produced in the country can be imported
- Developed by David Ricardo in 1817
What is absolute advanatage?
- Absolute advantage occurs when a country is able to produce a product using fewer factors of production than another country
- A country may have absolute advantage but comparative advantage - it should produce G&S in which it has comparative advantage
What are the assumptions of comparative advantage?
- Transport costs are zero: it does not account for moving the G&S between countries - depending on a nation’s location this is more/less of a problem
- There is perfect knowledge: each country knows what it has a comparative advantage in & also the comparative advantages of other countries
- Factor substitution is easily achieved: economies can quickly adjust to changing global market conditions by switching from capital to labour - and vice versa
- Constant costs of production: the theory does not take into account the economies of scale that can be achieved with an increase in output
What are the limitations of comparative advantage?
- Over-dependence: specialisation creates a dependence on other countries which generates vulnerability e.g. receiving gas supplies from Russia works well when relations are good but has proven otherwise in an unexpected time of war
- Environmental damage: The impact of negative production externalities isn’t considered by the theory - can worsen the quality of life in towns, cities & countries
- Distribution of income: The GDP/capita is likely to increase, however, the distribution of the extra income is likely to be uneven with the wealthier gaining more
- Structural unemployment: as countries specialise certain industries are likely to shut down → unemployment → these workers may not be able to move into other occupations → rise in long-term unemployed
What are the advantages of international specialisation & trade?
- Lower prices
- Greater variety of G&S
- More competition leads to better-quality products
- Economies of scale create efficiencies
- Higher economic growth
- Improved living standards
What are the disadvantages of international specialisation and trade?
- Global monoplies emerge: as TNCs grow in size & increase market power, they can dictate prices & output in many regions + can influence governments & gain access to raw materials through bribery & corruption
- Exposure to external shocks: shocks to other economies have a knock-on effect due to the interdependence that develops with trade e.g. russia-ukraine war
- Deficit on current account on balance of payments: in developing countries, this situation is usually as a result of a lack of global competitiveness & it is importing necessity products
- Unemployment: many firms that were successful in the local market may well fail in a global market + structural → government SSPs make a difference to the length & severity of structural unemployment
- Dumping due to illegal government support: some governments support key industries to ensure they are globally competitive - usually in the form of subsidies which encourage excess production - this excess production is then dumped on world markets at low prices
- Loss of sovreignity and culture
What is terms of trade and what is the formula?
- Terms of trade refer to the ratio of a country’s average price of exports to the country’s average price of imports
- Terms of trade = index of average export prices / index of average import prices x 100
What factors influence a country’s terms of trade?
Relative inflation rates: their price is now more expensive to the rest of the world → if exports have price inelastic demand, terms of trade will improve → if elastic then terms of trade will likely worsen
Raw material prices: cost of raw materials fall -> developing exporters (deterioration), developed importers (improvement)
Relative productivity rates: continuous improvements in productivity can lower costs & these can be passed on in the form of lower prices → lower export product prices = terms of trade will deteriorate i.e. fewer imports can be bought with one unit of exports
Changes in exchange rates: if prices change then the terms of trade between the two countries change → specific data would need to be provided to determine if the ToT have improved or deteriorated for each trading partner
What are the impacts of changes in the terms of trade?
- Changes to the current account balance in the Balance of Payments
- Changes to national output (GDP)
- Changes to unemployment levels
- Changes to the level of international competitiveness
- Changes to disposable income
- Changes to standards of living
What are the two outcomes of an improvement to the terms of trade?
- Improvement where export price rises → if PED of exports is inelastic then the reduction in QD will be less than increase in price → economy will benefit → output rises, unemployment falls, standard of living improves
- Improvement where import price falls → if PED of imports is elastic (necessity) then the increase in QD will be more than decrease in price → economy will spend more on imports → more disposable income, standard of living improves, domestic output may fall as foreign consumption rises
What are the two outcomes of deteriorations to the terms of trade?
- Deterioration where export price falls → if PED of exports is elastic then the increase in QD will be more than the decrease in price → economy will benefit → output rises, unemployment falls, standard of living improves
- Deterioration where import price rises → where demand for imports is price inelastic, consumers would demand the goods in similar proportions → spend significantly more on imports → domestic output unlikely to fall, imports will fall slightly,
less disposable income so worse standard of living
What is a trading bloc?
When countries join together and agree to remove trade barriers
What is a free trade area?
Give a real-world example.
- Removes trade barriers between each other, but free to set their own trade barriers on non-member countries
- USMCA (US-Mexico-Canada Agreement) -> USA removed 75% chicken tariff on Mexico and 15% lumber tariff
What is a customs union?Give a real-world example.
- Removed trade barriers with other member countries but must also have the same tariffs on non-member countries (common external tariff)
- EU -> has 27 member states and a common external tariff of 10% on imported cars
- South African customs union -> includes Botswana, South Africa, Namibia
- Mercosur - Brazil, Argentina, Paraguay
What are common markets?
Give a real-world example.
- Remove all trade barriers between each other and adopt a common external tariff + free movement of factors of production between members without special permission
- Goal: improve the allocation of resources between the common market members & lower costs of production
- EU single market
What is a monetary union?
Give a real-world example.
- Trade barriers removed between members, adopt a common external tariff + all members share a common currency
- Eurozone - all use the euro -> 20 out of 27 EU nations
- Eastern Caribbean currency union
Essential conditions for a successful monetary union?
What are the benefits of regional trade agreements?
- Trade creation -> improves efficiency & generates higher income
- Tariffs between member states are eliminated & common tariffs to third party countries simplify trading conditions
- Monetary union -> less uncertainty around exchange rates as they all use the same currency
- Monetary union - simplifies trading costs & provides pricing transparency
- Monetary union -> some member countries gain from improved monetary policy conditions e.g. european interest rate may be lower than individual country’s
What are the costs of regional trade agreements?
- Trade diversion - as countries reallocate trade to partners in their agreement -> global inefficiency
- Some domestic industries experience structural unemployment
- Increased negative externalities of production, resource depletion & environmental damage
- Transitioning to a monetary union can be expensive + firms may find it hard to adjust/change their menu prices
- Member countries lose ability to set interest rates & control monetary policy
- Loss of sovereignty
What is trade liberalisation?
The process of rolling back barriers to free trade
What two roles does the WTO have in trade liberalisation?
1) Organising rounds of talks: brings countries together & encourages them to reduce/eliminate protectionist trade barriers between themselves e.g. The Doha Round
2) Settling trade disputes: member countries can file a complaint if they believe a trading partner has violated a trade agreement - WTO then runs a hearing & makes a judgement
What are the conflicts between regional trade agreements and the WTO?
- 320 RTAs globally in 2022
- Regional agreements shift trade from a non-member who has comparative advantage, to a member who doesn’t
- Regional trade members often institute common trade barriers on non-members - protectionism
- RTAs can be beneficial for member countries but -> global inefficiency in the allocation of resources
- WTO advocates for free trade between all member countries
What are the 3 industry-based reasons for protectionism?
- Infant industries: protects new firms that would be unlikely to succeed at start-up due to the level of global competition
- Sunset industries: firms at the end of the life cycle, on their way out -> the government chooses to support them to help limit the economic damage that would occur if they closed abruptly
- Strategic industries: industries e.g. energy, defence & agriculture are essential to self-sufficiency & security - being reliant on other countries for these -> vulnerability
