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Economics theme 4 > 4.1 International Economics > Flashcards

4.1 International Economics Flashcards

1
Q

What is globalisation?

A

The economic integration of different countries through increasing freedoms in the cross border movement of people, goods/ services, technology and finance.

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2
Q

What are the four main characteristics of globalisation?

A

Increasing foreign ownership of companies
Increasing movement of labour and technology across borders
Free trade in goods/services
Easy flow of capital across borders

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3
Q

What are two factors contributing to globalisation

A

Improvements in containerised shipping
innovation in communication technology

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4
Q

What is meant by economies of scale

A

An increase in output results in a lower cost per unit

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5
Q

What is meant by transnational corporation

A

A firm that has production facilities in two or more countries

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6
Q

What is containerised shipping

A

A system where many goods are placed in large metal containers for transport by boat

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7
Q

Positive impacts of globalisation on stakeholders

A

Increased capital and labour mobility
Greater competition = lower prices
Reduction in absolute poverty
Rising incomes
Rising levels of education
Increased trade = greater choice of goods
Economies of scale- more efficient production

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8
Q

Negative impacts of globalisation on stakeholders

A

Structural unemployment from shifting sectors
Monopoly power of multinationals
Rapid depletion of natural resources
Increase in global warming
Deforestation
Increase in organised crime
Rising inequality
Tax avoidance easier

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9
Q

What is structural unemployent

A

Unemployment caused by a mismatch between jobs and skills as the structure of the economy changes

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10
Q

What is transfer pricing

A

Technique use by multinational corporations to shift profits out of the countries they operate in and into tax havens

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11
Q

What is comparative advantage?

A

A theory that states a country should specialise in the goods and services that it can produce at the lowest opportunity cost

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12
Q

What is opportunity cost?

A

The loss of the next best alternative

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13
Q

What is absolute advantage

A

When a country is able to produce a product using fewer factors of production than another country

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14
Q

What are the factors of production

A

Land
Labour
Capital
Enterprise

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15
Q

What are the assumptions of comparative advantage

A

Transport costs are zero
There is perfect knowledge- every country knows what countries have the comparative advantage over each other
Factor substitution is easily achieved0 economies can quickly adjust to changing markets
Constant costs of production- doesn’t take into account economies of scale

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16
Q

Limitations of comparative advantage

A

Over dependence on the good you specialise in
Environmental damage as negative externalities of production are not considered
Distribution of income- GDP is likely to increase but the extra income is likely to spread unevenly
Structural unemployment

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17
Q

Advantages of international specialisation and trade

A

Lower prices
Greater variety of goods/services
More competition leads to better quality products
Economies of scale create efficiencies
Higher economic growth
Improved living standards

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18
Q

Disadvantages of specialisation and trade

A

Global monopolies emerge- transnational firms grow in size and market power
Exposure to external shocks due to dependence on other countries
Deficit on the current account of the balance of payments
Unemployment

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19
Q

What is the pattern of trade

A

The nature of trade between two countries and how it changes over time

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20
Q

Factors influencing the pattern of trade

A

-Comparative advantage- a country should specialise in the goods/services that it can produce at the lowest opportunity cost
-Impact of emerging economies - emerging economies are obtaining a higher share of global business
-Growth of trading blocs and bilateral reading agreements
-Changes in relative exchange rates. WPIDEC and SPICED

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21
Q

What is trade creation

A

A trade agreement shifts production of certain goods or services from a high cost country to a low cost country

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22
Q

What is trade diversion

A

The formation of a trading bloc results in the production of a good or services transferring from a country with a lower opportunity cost to one with a higher cost

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23
Q

What is a trading bloc

A

A trading bloc is a group of countries who come together and agree to reduce or eliminate any barriers to entry that exist between them

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24
Q

What is a free trade area

A

A bloc in which countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries

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25
Q

What is a customs union

A

An agreement between countries in which all goods/services produces by members are traded without any tariffs. Countries will also agree on common tariff rates on imports from external countries

26
Q

What is a common market

A

goods and services are traded without tariffs as well as the four factors of production flow freely between member countries.
The goal is to improve the allocation of resources between the common market members

27
Q

What is a monetary union

A

Members enjoy benefits of a custom union and common market but they also establish a central bank which issues a common currency and controls the monetary policy of member countries

28
Q

Essential conditions for a successful monetary union

A

-Movement of labour - labour should be able to move freely without any major barriers
-Similar trade cycles to avoid tensions with the union
-Mobility of finance- should be complete mobility of finance with prices and wages free to adjust to market conditions
-Fiscal transfers- should be automatic fiscal transfers to countries that are performing badly

29
Q

What is a trade cycle

A

Stages of economic growth that an economy moves through. (Boom, slowdown, recession and recovery)

30
Q

Benefits of regional trade agreements

A

Trade creation improves efficiency and generates a higher income
Tariffs between member states are eliminated
Less uncertainty surrounding exchange rates

31
Q

Negatives of regional trade agreements

A

Trade diversion occurs as countries reallocate trade to partners in their agreement
Some domestic industries experience structural unemployment
Increased negative externalities of production, resource depletion and environmental damage
Transitioning to a monetary union can be expensive
Loss of sovereignty

32
Q

What is sovereignty

A

Decision making process and authority of the state

33
Q

What is the role of the WTO (World trade organisation)

A

Promote free trade

34
Q

What is trade liberalisation

A

The process of rolling back the barriers to free trade

35
Q

What is the balance of payments?

A

A record of all the financial transactions that occur between it and the rest of the world

36
Q

What are the two main sections of the balance of payments?

A

Current account
Financial and capital account

37
Q

What is a current account?

A

Transactions related to goods and services along with payments related to the transfer of income

38
Q

What is the financial and capital account

A

All transactions related to savings, investment and currency stabilisation

39
Q

What is currency stabilisaion?

A

Government intervention in exchange rate markets so as to influence the price of a currency

40
Q

What does the capital account record?

A

Small capital flows between countries and is relatively inconsequential

41
Q

What does the finance account record?

A

The flow of transactions associated with changes of ownership of the UK’s foreign financial assets and liabilities

42
Q

What is an asset?

A

Any resource/good that can provide future economic benefits

43
Q

What is a liability?

A

A debt that has to be repaid

44
Q

What is the monetary policy?

A

The adjustment of interest rates and the money supply so as to influence AD and meet the inflation target

45
Q

What are the main causes of current account deficits?

A

Relatively low productivity

Relatively high value of the country’s currency

Relatively high rate of inflation

Rapid economic growth- raises household income

Non price factors such as poor quality and design

46
Q

How does relatively low productivity cause a current account deficit

A

raises costs. This causes firms to find themselves at a price and cost disadvantage

47
Q

How does relatively high value of the country’s currency cause a current account deficit

A

Exports are more expensive compared to other nations so foreign buyers look for substitute goods. Therefore, the number of exports falls.

48
Q

How does relatively high rate of inflation cause a current account deficit

A

Exports more expensive than other nations. Foreign buyers look for substitute products for cheaper.

49
Q

How does rapid economic growth cause a current account deficit

A

raises household income ->purchase goods with a high income elasticity of demand -> many of these goods are imported

50
Q

How do non price factors such as poor quality and design cause a current account deficit

A

foreign buyers look for better quality substitutes elsewhere. This causes a fall in exports

51
Q

What measures could the government take to tackel a current account deficit

A

`Could do nothing and leave market forces to self correct the deficit

Could use expenditure switching policies

Expenditure reducing policies

Supply side policies

52
Q

What are expenditure switching policies?

A

The use of protectionism or devaluation of the currency under a fixed exchange rate mechanism

53
Q

What are expenditure reducing policies?

A

Measures designed to reduce AD such as deflationary fiscal policyW

54
Q

What are supply-side policies?

A

These aim to improve the quantity/quality of the factors of production thereby raising potential output

55
Q

What are the benefits and costs of doing nothing to tackle a current account deficit

A

benefits: Floating exchange rates act as a self correcting mechanism.

Cost: May be other external factors that prevent the currency from depreciating. May take too long to self correct

56
Q

What are the benefits and costs of expenditure switching to tackle a current account deficit

A

Benefit: Often successful in changing the buyer habits of consumers, switching consumption on imports to consumption on domestically produced goods and services

Cost: any protectionism often leads to retaliation by trading partners. e.g. reverse tariffs or quotas

57
Q

What are the benefits and costs of expenditure reducing to tackle a current account deficit

A

Benefit: Deflationary fiscal policy reduces disposable income which leads to a fall in the demand of imported goods

Cost: Deflationary fiscal policy also dampens domestic demand which can cause output to fall -> gdp growth slows -> unemployment increases

58
Q

What are the benefits and costs of supply side policies to tackle a current account deficit

A

Benefit: Improves the equality of the products and lowers the costs of production

Cost: These policies tend to be long term so the benefit may not be seen for some time

59
Q

What is deflationary fiscal policy?

A

When the government raises taxes, decreases government spending or both

60
Q

Why can current account deficits be problematic?

A

They can cause you to acquire finance from abroad in the form of loans, this creates vulnerabilities

61
Q

Why can current account surpluses be problematic?

A

The focus of the allocation of a nations resources is on meeting foreign demand as opposed to meeting domestic demand

62
Q
A

Economics theme 4 (6 decks)

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