4.1 - International Economics Flashcards
What is globalisation?
Globalisation refers to the growing interdependence of countries and the rapid rate of change it brings about
- It can also be defined as the increased integration of the world’s local regional and national economies into a single international market
What factors contribute to globalisation?
*Improvements in transport infrastructure and operations - easier to move production around
*Improvements in IT and communication - allow companies to operate globally
* Trade liberalisation and reduced protectionism
* International financial markets
* TNCs (large companies operating around the world) - sell and produce goods all around the world to take advantage of low labour costs
How does globalisation impact consumers?
*Consumers have more choice
*Can lead to lower prices due to comparative advantage and lower labour costs
*It could lead to a rise in prices since incomes are rising and so there is higher demand
* Many consumers worry about the loss of culture
How does globalisation impact workers?
*Large-scale job losses in some regions but also lots of job creation in other regions
* Increased migration may affect workers by lowering wages but migrants may also provide skills and increase AD which increases the number of jobs
* International competition has led to a fall in wages for low-skilled workers in developed countries while increased for those in developing ones
* The wages for highly skilled workers appear to be increasing since there is more demand for their work; this is increasing inequality
*TNCs tend to provide training for workers and so create new jobs
*Those working in sweatshops will see poor conditions and low wages, but this is better than other alternatives
How does globalisation impact producers?
- Firms can source products from more countries and sell them in more countries. This reduces risk since a collapse of the market in one country will have a lesser impact
*They can employ low-skilled workers much cheaper in developing countries and can exploit comparative advantage and have larger markets, both of which can increase profits
*Firms who cannot compete internationally will lose out
How does globalisation impact the government?
*The government may be able to receive higher taxes, since TNCs pay tax and so do the people they employ - however, tax avoidance may occur
*TNCs also have 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
How does globalisation impact the environment?
- The increase in production had led to increased demand for raw materials, which is bad for the environment
*Increased trade and production has led to more emissions
*However, globalisation means that the world can work together to tackle climate change and share ideas and technology
How does globalisation impact economic growth?
- Investment increases
- Trade increases output due to the exploitation of comparative advantage
- Comparative cost advantages will change over time
What is an absolute advantage?
Absolute advantage exists when a country can produce a good more cheaply in absolute terms than another country
What is a comparative advantage?
Comparative advantage exists when a country can produce a good more cheaply relative to other goods produced (at a lower opportunity cost)
What are the assumptions and limitations of comparative advantage?
- Assumes there are no transport costs, these could lower or prevent any comparative advantage
- Assumes costs are constant and there are no economies of scale
*Goods are assumed to be homogenous, which is unlikely to hold in real life
*Assumes that factors of production are perfectly mobile, there are no tariffs or other trade barriers and there is perfect knowledge - Whether trade takes place will depend on the terms of trade between the countries
What are the advantages of specialisation and trade?
*Comparative advantage shows how world output can be increased if countries specialise in what they are best at producing
* Allows for economies of scale which reduces costs and therefore decreases prices globally
*Different countries have different factors of production and so trade allows these factors to be used effectively
* Trade enables consumers to have greater choice about the types of goods they buy, and so there is a greater consumer welfare
* There is greater competition, which provides an incentive to innovate - creates more choice
What are the disadvantages of specialisation and trade?
*Trade can lead to over-dependence, where some countries become dependent on particular exports and others on imports - this can cause problems if there are price falls in exports or if imports are cut for political reasons
*Can cause structural unemployment as jobs are lost to the foreign firms who are more efficient and competitive
*The environment will suffer due to the problems of transport as well as the increased demand for resources e.g. deforestation
* Countries may suffer from a loss of sovereignty due to signing international treaties and joining trade blocs
*They may see a loss of culture as trade brings foreign ideas and products to the country
What factors influence the pattern of trade?
*Comparative advantage
* Emerging economies
*Trading blocs and bilateral trading agreements
* Relative exchange rates
How does having a comparative advantage influence the pattern of trade?
Countries will trade where there is a comparative advantage to trading. A change in the comparative advantage will affect the trade pattern. There has been a recent growth in the exports of manufactured goods from developing to developed countries. Developing countries have gained an advantage in this field due to low labour costs, so production shifted abroad
How do emerging economies influence the pattern of trade?
Countries grow at different rates and when they grow, they are likely to need to import more goods and services than before as well as exporting more 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 trading blocs and bilateral trading agreements 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
How do relative exchange rates influence the pattern of trade?
The exchange rate affects the relative prices of goods between countries. Prices are an important factor in determining whether consumers buy goods and so a change in price will affect the pattern of trade
What are the terms of trade?
- The ToT measures the rate of change of one product for another when two countries trade. It tells us the quantity of exports that need to be sold in order to purchase a given level of imports
Is a movement in the terms of trade favourable or unfavourable?
A movement is said to be favourable if the ToT increase as the country can buy more imports with the same level of exports. This is called an improvement in the terms of trade. It is unfavourable if they decrease, when export prices fall or import prices rise - this is called a deterioration
How do you calculate the terms of trade?
(Average export price index / Average import price index) x 100
What factors influence the terms of trade?
*Exchange rates, inflation, and changes in demand/supply of imports or exports
* Change in productivity
* Changing incomes
*Anything which affects the price of a country’s imports or exports
How do exchange rates, inflation, and changes in demand/supply of imports or exports affect a country’s terms of trade?
In the short run, these factors will affect the terms of trade since these affect the relative prices of imports and exports
How does an improvement in productivity affect a country’s terms of trade?
In the long run, an improvement in productivity compared to a country’s main trading partners will decrease the terms of trade since export prices will fall relative to import prices. This can be caused by new technology, more efficient labour, etc
