4.1 - International Economics Flashcards

Question

What is a monetary union? Give a real-world example.

Answer 1

- 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

Answer 2

- 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

Answer 3

- 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

Answer 4

The process of rolling back barriers to free trade

Answer 5

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

Answer 6

- 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

Answer 7

- 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

Answer 8

- Dumping: when foreign firms sell products at unfairly low prices in foreign markets -> harms industries - Employment: when firms outsource production to other countries or certain industries are experiencing structural unemployment - gov steps in to protect jobs - Current account deficit: when imports > exports -> less money to support domestic firms - Labour/environmental regulations: many countries offer cheap labour & low-cost production due to poor environmental regulations -> protectionism helps apply pressure to bring change in these countries

Answer 9

- A tariff is a tax on imported goods/services (customs duty) Domestic producers pay the tariff when the G/S crosses the border -> raises domestic firms' cost of production -> often passed on to consumers as higher prices -> allows some domestic firms to increase their output -> employment rises

Answer 10

- A physical limit on imports - E.g. in June 2022 the UK extended their quota on steel imports for a further 2 years to protect employment in the UK steel industry - This limit is usually set below the free market level of imports - As cheaper imports are limited, a quota raises the market price - Domestic firms benefit as they are able to supply more due to the lower level of imports -> increased employment - Severe shortages caused!

Answer 11

- A subsidy lowers the cost of production for domestic firms -> lower prices their goods/services = more competitive internationally -> export level increases -> increased output -> increased domestic employment - E.g. Malawi inputs subsidy programme (subsidised cost of fertilisers for tobacco farmers

Answer 12

- Health and safety regulations e.g. 2017 EU health regulation regarding the permitted level of aflotoxins in nuts - naturally higher in southern hemisphere countries -> blocked the import of southern hemisphere nuts - Product specifications e.g. Canada specified that all jam imported into Canada needed to be in a certain size of jar - many countries don't usually manufacture jars in the required size - Environmental regulations e.g. in November 2021 new regulations in the EU & the USA to limit the amount of imports of 'dirty steel' - predominantly produced using coal fired power stations prevalent in China - Product labelling - expensive for firms to apply & may limit their desire to sell into certain markets

Answer 13

- Domestic producers: before tariff domestic producers produced output Q1 & their revenue was Pw x Q1;after tariff domestic producers produced Q3 & their revenue was Pw x Q3 -> domestic producer surplus has increased by area 2 - Domestic consumers: before tariff domestic consumers consumed Q2 at a price of Pw; after tariff domestic consumers consumed less at Q4 at a higher price of Pw+tariff-> consumer surplus has decreased by areas 1, 2, 3 and 4

Answer 14

- Government: after tariff, government receives centre box in tax revenue - Living standards: SoL for consumers worsen as the value of their income is eroded - paying higher prices; domestic firms who benefit from increased production may increase employees' wages-> increased SoL for employees - Equality: workers in industries that have been experiencing structural unemployment due to foreign competition will feel that the tariff results in them being treated more fairly

Answer 15

- Quota: increases their output, raises the selling price, increases their revenue - Subsidy: decreases costs of production, increases output, increases international competitiveness - Non-tariff: limits foreign competition, protects levels of outputs, may increase selling price and revenue

Answer 16

Strengths: - Protects infant industries - Raises tax revenue - Reduced dependence on imports - Environmental protection Weaknesses: - Higher prices & less choice - Risk of retaliation - Higher input costs

Answer 17

- Quotas: decreases their output, compared to a tariff, those firms who manage to export in the quota receive a higher price for their sales - Subsidy: harder to compete with domestic firms - Non-tariff: acts as a disincentive to sell into foreign markets, costs of meeting the non-tariff barriers may reduce profit margins

Answer 18

- Quotas: higher prices and less choice - Subsidy: lowers prices - Non-tariff: may reduce choice/variety in a market

Answer 19

- Quotas: they don't receive any tariff revenue (as there is no tariff), may receive higher tax revenue at the end of the financial year when domestic firms pay their corporation tax - Subsidy: costs the government the amount of the subsidy, opportunity cost - Non-tariff: may lose some credibility with the WTO, enforcing the non-tariff barriers may be difficult or expensive

Answer 20

- Quotas: reduces SoL for consumers as higher prices erode purchasing power of their income - Subsidy: improves SoL for consumers as they benefit from lower prices - their income goes further - Non-tariff: less choice & higher prices erode standards of living, product labelling information may improve decision making & life quality

Answer 21

- Quotas: Improves for domestic firms but worsens for foreign firms - Subsidy: domestic firms can compete more equally - Non-tariff: may help improve equality e.g. environmental standards help create equal production inputs -> equality in the costs of production

Answer 22

- It records the net income that an economy gains from international transactions Includes: - Trade in Goods & Services - Net income: income transfers by citizens & corporations - credits are received from UK citizens who are abroad & send remittances home - Current transfers: payments at government level between countries e.g. contributions to the World Bank

Answer 23

- Records small capital flows between countries and is relatively inconsequential E.g. - Debt forgiveness by the government towards developing countries - Capital transfers by migrants as they emigrate & immigrate

Answer 24

- It records the flow of all transactions associated with changes of ownership of the UK’s foreign financial assets and liabilities 1) FDI: flows of money to purchase a controlling interest (10%>) in a foreign firm - money flowing in = credit (+) & money flowing out = debit (-) e.g China received $144bn (2017) 2) Portfolio Investment: flows of money to purchase foreign company shares & debt securities (government & corporate bonds) 3) Financial derivatives: sophisticated financial instruments which investors use to speculate & return a profit 4) Reserve Assets: assets controlled by the Central Bank & available for use in achieving monetary policy goals - includes gold, foreign currency positions at the IMF & foreign exchange held by the Central Bank (USD, Euros)

Answer 25

- Trump imposed a 30% tariff on low-price South Korean washing machine producers e.g. Samsung - Trump thereatened 200% alcohol tariff on EU & EU retaliated with a 25% tariff on American whiskey -> whiskey sales to the EU fell by 20% - Argentine president removed 35% tariff on laptops - Protectionism e.g. tariffs will increase the price of imports -> consumers switch from imports to domestic goods -> decreased import expenditure -> improves current account

Answer 26

- Low productivity raises costs -> exporting firms find themselves at a price & cost disadvantage in overseas markets - Decreased competitiveness & level of exports - Higher domestic prices -> consumers buy abroad -> increased imports - Falling exports & rising imports -> deficit

Answer 27

- Currency appreciation makes a country's exports more expensive relative to other nations - Foreign buyers look for substitute products with lower prices - Exports fall & current account balance worsens - Currency appreciation makes imports cheaper -> domestic consumers may switch demand to foreign goods & as imports rise, current account balance worsens

Answer 28

- Spain & Greece export fruit/veg e.g. oranges, olives - Spain's inflation = 9% and Greece = 2% (hypothetical) - If a country’s inflation rate is lower relative to other countries -> exports will become relatively cheaper -> foreign consumers will buy more of its exports -> export revenue will rise -> improves the current account

Answer 29

- When Saudi discovered they had large oil reserves (1938) -> increased oil exports -> incomes rose -> economic growth - Import more normal goods eg. prada bags from germany - Households respond by purchasing G&S with a high-income elasticity of demand (income elastic)- > many of these goods are imported & as imports rise, current account balance worsens

Answer 30

- Germany is known for the high quality of its manufacturing - exports cars + created brands like Porsche of high quality - When a country develops a reputation for poor quality & design, its exports fall as foreign buyers look for better substitutes elsewhere - Domestic buyers who are able to shop abroad also choose to buy better quality products elsewhere & the level of imports rise

Answer 31

- Relative inflation - Exchange rate - Productivity & costs - Quality - Growth - Protectionism

Answer 32

- Increases AD - Eval: domestic firms prioritise producing goods e.g. computers for china, to export & satisfy foreign consumers -> produce less agricultural goods e.g. meat, dairy, to satisfy domestic consumer demand -> fall in consumer choice -> lower SoL

Answer 33

- Specifies the circumstances under which a depreciation (or devaluation) of a country's currency will improve its trade balance - According to this condition, a currency depreciation will only improve the trade balance if the combined price elasticity of demand for exports and imports is greater than one (elastic)

Answer 34

1) Do nothing - leave it to market forces in the foreign exchange market to self-correct the deficit 2) Expenditure switching policies 3) Expenditure reducing policies 4) Supply-side policies

Answer 35

- Benefit: floating exchange rates act as a self-correcting mechanism -> over time a higher level of imports will end up depreciating the currency causing imports to decrease & exports to increase -> improves the deficit - Cost: there may be other external factors that prevent the currency from depreciating - may take a long time for self-correction to happen & many domestic industries may go out of business in the SR -> the longer it takes to self-correct, the more firms will delay investment in the economy

Answer 36

- Benefits: often successful in changing the buying habits of consumers, switching consumption on imports to consumption on domestically produced G&S - Costs: any protectionist policy often leads to retaliation by trading partners, e.g. reverse tariffs/quotas which will decrease the level of exports - > may offset any improvement to the deficit caused by the policy

Answer 37

- Policies that get consumers to reduce spending on all goods, which will in turn reduce spending on imports - E.g. raising income tax, cutting benefits - Reducing consumer spending -> reduce SoL

Answer 38

- Policies that get consumers to switch from imports to domestic goods - Two types: trade barriers, low interest rates (investors reduce demand for the currency & increases supply) - E.g. getting a consumer to switch from Kenyan PG tips to Tregothnan teabags made in the UK or Indian Primark shirts -> Tesco F&F shirts

Answer 39

- Benefits: deflationary fiscal policy invariably reduces discretionary income -> fall in the demand for imported goods & improves a deficit - Costs: deflationary fiscal policy dampens domestic demand -> output falls -> slow GDP growth & unemployment

Answer 40

- Reduced corporation tax -> less tax paid by firms -> lowers costs -> shifts SRAS - Less tax paid -> more profit kept by firms -> increased investment & expansion -> productivity rises -> LRAS rises - Shifts out LRAS & SRAS -> price level falls -> cheaper domestic goods

Answer 41

- Benefits: improves the quality of products & lowers the costs of production - helps the level of exports to increase thus reducing the deficit - Costs: these policies tend to be long term policies so the benefits may not be seen in SR - usually involve government spending in the form of subsidies -> opportunity cost

Answer 42

- Persistent deficits - means that finance from abroad (e.g. loans, FDI) is required to fund continued imports -> may mean that a country is gradually selling its assets - owing money to a foreign entity creates vulnerabilities -> 2008 Financial Crisis demonstrated the impact of fast changing conditions in which creditors were insisting on being repaid quickly e.g. Greece owed creditors (including Germany) significant sums & was required to pay these back -> numerous problems in their economy

Answer 43

- Persistent surpluses = the focus of the allocation of a nation's resources is on meeting foreign demand instead of domestic demand - limits availability of G&S in the local economy -> decreased standard of living for households - Can also create instability in the foreign exchange market if there is a floating exchange rate mechanism in operation - e.g. China ran a surplus for years but didn't let its currency float freely -> recently switched their focus to increasing domestic demand -> significant FDI by Chinese firms & the level of foreign asset ownership is high

Answer 44

The price of one currency in terms of another

Answer 45

An increase in FDI going into a country -> increase demand for its currency-> appreciation

Answer 46

- It fixes the value of one currency to another - Whenever changes in supply/demand move the exchange rate from its target - government intervenes - Until 2005, Chinese Yuan was fixed to the dollar - 8.28 yuan -> $1

Answer 47

- Changing interest rates: high interest rates -> increase hot money flow -> investors need to exchange their currency for domestic currency to store in banks -> increase demand for currency -> depreciation - Foreign currency transactions -> sell its own currency -> increases foreign currency supply -> depreciation

Answer 48

- Government/central bank will intervene to keep exchange rate within a certain range - Before the euro, EU countries used to all keep their currencies within +/- 2/25% of each other

Answer 49

- The government/central bank doesn't intervene to manage their exchange rate - exchange rate is determined by supply/demand for domestic currency e.g. euro, pound, dollar, rupee

Answer 50

- Relative interest rates - Relative inflation rates - Imports & Exports - FDI - Speculation - QE

Answer 51

- A decrease in demand for a country’s imports -> fall in supply of that country’s currency -> appreciation - A decrease in demand for a country’s exports -> fall in demand for that country’s currency -> depreciation

Answer 52

- Quantitative easing is when a central bank creates new money to purchase financial assets from high street banks -> increases the supply of pounds -> depreciation - Bank of England created £375bn new pounds between 2009-2012

Answer 53

- If investors predict that the price of a currency will increase in the future -> they will begin to purchase the currency in the hopes of selling it at a higher price later on -> increases demand for the currency in the present -> appreciation

Answer 54

- Brexit (June 2016) caused the exchange rate to depreciate from £1 = $1.48 to £1 = $1.20 - Import less Mexican toothpaste (Colgate) & export more financial services - Increases AD -> increases growth & employment - Eval: increased price of imports - costly for UK firms that import raw material e.g. oil -> SRAS shift left

Answer 55

- Revaluation: when countries increase the value of their fixed exchange rate e.g. uk used to be fixed and revalued in 1925 - £1:$4.27 -> £1:$4.86 (14% rise) - Devaluation: when countries decrease the value of their fixed exchange rate

Answer 56

- Nominal exchange rate: price of one currency in terms of another - Real exchange rate: how much a currency is worth relative to the prices of G&S in another country

Answer 57

nominal ER x domestic price level/foreign price level

Answer 58

- High unit labour cost -> each unit produced costs more in terms of wages -> higher production costs -> fall in SRAS -> increased price level -> exports more expensive -> less competitive.

Answer 59

- Lower export prices -> more competitive relative to other countries

Answer 60

- Calculated annually by the World Economic Forum + accounts for: costs & prices, infrastructure, health, education, technology - The higher the index competitiveness rating, the more competitive

Answer 61

- Exchange rates - Wage costs - Non-wage costs - Supply-side policies - Also consider: productivity, regulation, taxation, investment, inflation

Answer 62

- SPICED & WPIDEC - Depends on elasticity of good & firm reactions

Answer 63

- Increased wages -> increased COP -> decreases SRAS -> increases price level - In April 2025 the UK will increase national minimum wage from £11.44 -> £12.21 and £18.60 -> £10 (18-20yrs)

Answer 64

- Regulations -> less health and safety standards in developing countries e.g. China - Pensions -> there is a mandatory pension scheme in Australia with employer contributions - not mandatory in Iran - Tax - 10% corporation tax rate in Macedonia and a 30% tax in Germany - Non wage costs are higher in developed countries

Answer 65

- Policies which aim to increase AS e.g. lower corporation tax, increased healthcare spending - UK has reduced CPT from 28% -> 19% since 2010 - UK has decreased healthcare spending -> British firms have a £77bn annual loss in productivity due to ill health -> fall in LRAS -> increase in PL

Answer 66

Dumping is where foreign firms aggressively cut their prices, below average variable costs, to force out domestic producers from a market

Answer 67

Unit labour cost = Total cost of UK labour / Total Output in the UK - average amount spent on wages per unit of output

Answer 68

- minus £28.4bn - Deficit was only 6% of Real GDP in 2016 (eval)

Answer 69

- China = $62bn - Germany = $27bn

Answer 70

- Trade diversion: when tariff agreements cause imports to shift from low-cost countries to higher-cost countries -> undesirable because it concentrates production in countries with a higher opportunity cost & lower comparative advantage - Trade creation: when the formation of a FTA or customs union leads to an increase in trade between member countries, resulting in overall economic benefits for the group