4.1 international economics Flashcards

Question

customs union

Answer 1

a free trade area (all g/s produced by members are traded tariff free) combined with a common external tariff. This is where all members of a customs union adopt a common trade policy towards all non-member countries. E.g EU.

Answer 2

a customs union and common market with a common central bank, currency and a common monetary policy e.g Eurozone.

Answer 3

all elements of a customs union plus there is free movement of labour and capital. This factor mobility leads to a more efficient allocation of resources. -unemployed workers in 1 country can seek work in another country facing labour shortages. -capital can gravitate to the more profitable country, making better use of capital resources.

Answer 4

where tariffs are reduced on some but not all goods traded between member countries.

Answer 5

benefits- prices are fixed, reduced E.R costs, simplifies trading costs and provides pricing transparency. costs- financial costs with strarting a new currency, would be a waste if the union broke up. member countries lose ability to set I.R and control money supply, what might be good for 1 country may not be for another.

Answer 6

final step of econ integration, common market with a coordination of social, fiscal and monetary policy.

Answer 7

benefits- -Trade creation-increases efficiency, creates higher income -tariffs between member states are eliminated, common tariffs to 3rd parties -simplifies trading costs and provides pricing transparency -some members gain from improved monetary policy conditions -less uncertainty surrounding E.R as all member use the same currency costs- Trade diversion-may worsen global efficiency -structural unemployment in some industries -increased -ve externalities of production, resource depletion and environmental damage. -transitioning to a monetary union can be expensive and firms may find it hard to adjust -member countries lose ability to set I.R and control money supply -loss of sovereignty

Answer 8

when the formation of a trading bloc increases trade between member countries, resulting in overall economic benefits for the group.

Answer 9

occurs when a country/ group replaces more efficient producers from non-member countries with less efficient producers from member countries, resulting in overall economic inefficiencies.

Answer 10

-set up in 1995 -base on the following principles: -helps trade flow as freely as possible-main driver of E.G. -trade liberalisation -ensures that trade policies are non-discriminatory-offers same trade access to all countries-fair, reduces chance of trade disputes. -ensures countries act according to the trade agreements they have signed. -predictability-govts firms investors should have confidence that barriers won't be raised arbitrarily. WTO- handles and settles trade disputes-acts as a court-can fine the guilty party, administers trade agreements, monitors trade policies and domestic countries, provides technical assistance to developing countries.

Answer 11

-promotes Economic Growth and raises living standards -promotes a “fairer” trading system -doesn’t just benefit the richest countries -leads to more effective domestic policy -leads to greater international cooperation and peace

Answer 12

trading blocs/regional trade agreements contradict WTO's principles -common external tariffs-form of protectionism and creates unequal competition. -some argue it is too powerful and it ignores developing countries as they don't trade freely with developed countries. - WTO judgements are not legally binding.

Answer 13

Infant industry argument- An infant industry is one that is just being established within a country. They need to be able to build up a reputation and customer base and will have to cover a lot of sunk costs, meaning their AC will be higher. So industry- unable to compete in the international market so govts protect them till they can compete on an equal level. BUT tends to be ineffective as firms grow to be inefficient and the govt tends to have a poor record of ‘picking winners’. -other more effective methods, e.g subsidies. Global monopolies emerge- transnational firms grow in size and increase market power, they can dictate prices and output in many regions, can influence govts and gain access to raw materials through bribery and corruption. -Job protection- allowing M will mean domestic producers have to compete with international firms and may lose out-job losses & politically unpopular. -Protection from potential dumping- Dumping is when a country or company with surplus goods sells these goods off to other countries at very low prices, harming domestic producers in those countries. Dumping is dangerous as it can create a world monopoly over gds and the price can be increased at any time, but then there will be no domestic firms to compete so countries will have to continue purchasing. govt intervenes to protect domestic producers who are unable to compete with overseas firms that are willing to make a loss. In China, tariffs are placed on stainless steel tubes from the EU and Japan to prevent dumping. -Protection from unfair competition-producers in different countries can produce at different prices due to different/lower labour costs, very low health and safety costs due to regulation or with a firm that is heavily subsidised by the government. Domestic producers are unable to compete so govt intervenes to protect them. -Terms of trade- If a country buys a large amount of imports for a certain good, this will increase demand for that good and hence increase the price. This will worsen the terms of trade and so therefore they can buy less imports with the amount of exports. Restrictions will reduce supply of the goods and lead to a fall in the price received by the importer, so improve the terms of trade. -Danger of over-specialisation- Some people believe that no country should become totally reliant on another for important products, so it is important to introduce protectionism on these goods to prevent firms and consumers becoming reliant on them. -shocks. -Sometimes countries may decide to place controls on ‘dangerous’ goods, such as unsafe electrical items or drugs. -They may feel too dependent on one industry so introduce barriers to allow others to develop, or don't want to become too dependent on another country for something.

Answer 14

-tariffs-tax imposed on goods. -subsidies-government grants given to domestic industries to lower their costs of production, allows them to be more competitive-lower costs=lower prices. -regulations-laws which dictate how something is produced. -quotas-physical limit on imports/goods.

Answer 15

-increase in govt revenue-retrain workers in sectors where they're trying to increase domestic production and tax revenue can subsidise domestic production. -consumers switch to buying domestic goods as imported goods have become more expensive-beneficial for domestic producers who receive more sale and profit-less competition. -increased domestic production-more employment-higher incomes, positive multiplier effect. -domestic firms-increased profits-reinvest.

Answer 16

-create inflation-cons paying higher prices-CPI rises, or if tariff is on raw material-increase firms cost of production-cost push inflation. -black markets -regressive-tariffs increase price for cons-won't be able to purchase the same amount of goods-SoL fall. -other countries may retaliate by taxing our imports-trade wars and our exports may fall-less AD. -impact of tariff depends on the PED for the imported good, good=elastic-fall in D for imports so effective, inelastic-small fall in demand-ineffective. -may be price inelastic due to few/ no substitutes or specific good can only be produced in certain countries. -in theory with tariff domestic production should increase but depends on PES of domestically produced goods-e.g time lags.

Answer 17

-leads to a decrease in demand for imports and increase in demand for domestic goods/ exports-improve trade balance and may need more workers for the increased production-more employment-multiplier effect. -Indirect subsidies-tax breaks and cheap loans -Research and development subsidies help the firm be more competitive by ensuring they have the most up to date technologies.

Answer 18

-govt has to spend tax revenues-worse govt budget deficit -taxpayers are worse off -opportunity cost-which sector?? -govt failure!! -increased bureaucracy-costly to administer -zombie firms-lack incentives, inefficient, and subsidy dependant/reliant -may be given for political not econ reasons -could lead to overproduction and waste

Answer 19

with quotas, no one has to explicitly make a payment to the government, they reduce supply and increase the equilibrium price in the domestic market. -importers who get to import the products under the quota can sell the products at a higher price than the world price. -additional revenue is called the quota rent. -quotas reduce consumer surplus, increase domestic producer surplus, and reduce total econ surplus (because of deadweight loss). -hard to implement-as the govt has to constantly monitor the quantity of the imports limited by the quotas.

Answer 20

regulations about how a good is produced, handled or advertised. E.g health and safety, environmental regulations, product specifications, product labelling-expensive and may limit desire to sell into certain markets, insufficient administration systems. -rules of origin-rules which require proof of where goods were produced. -can lead to preferential state procurement policies, where govts favour local producers when finalising contracts for state spending. -intellectual property-e.g patents and copyright protection -embargo- total ban on imported goods

Answer 21

a record of all the financial transactions that occur between a country and the rest of the world.

Answer 22

capital-all transactions related to g/s & payments related to the transfer of income. -trade in g+s, income and current transfers. current & financial accounts-all transactions related to savings, investment and currency stabilisation. -current-mainly records transfers of immigrants and emigrants taking money in/out of UK, or govt transfers such as debt forgiveness to Third World countries. -financial- FDI, portfolio investment and other investments. FDI is the flow of money to purchase part of a foreign firm. Portfolio investments=same but buy less than 10% of the company. Other investments e.g loans, purchasing of currency & bank deposits. -credit-money flowing in + -debit-money flowing out -

Answer 23

there can be deficits and surpluses on particular parts of the accounts e.g -if there is a C.A deficit, there must be a surplus in the capital and financial accounts. The excess spending on M (current account deficit) has to be financed from money flowing into the country from the sale of assets (financial account surplus). -If there is a current account surplus, there must be a deficit in the capital and financial account. The excess income from X (current account surplus) is financing the purchase of assets (financial account deficit) in other countries.

Answer 24

ST causes-high levels of consumer demand (possible caused by rapid E.G) -If real household spending grows more quickly than the supply side of the economy can deliver, the only way of meeting this demand is by importing those g/s. High incomes lead to high M but have no effect on the level of exports. -strong exchange rate- reduces the UK price of M and leads to an expenditure-switching effect away from domestically produced goods. high value of the pound improves the terms of trade between the UK and other countries, allowing us to buy more M with each £. It increases the price of X so leads to a fall in the value of X. -assumes that PED is inelastic. -inflation-decreases X as they are more expensive to foreign buyers. MT causes- if a country loses its comparative adv, ppl will transfer their purchases to other countries and the UK will need to switch resources to production of other things. -growth of cheap M from countries e.g China caused a substitution effect. LT causes- structural/supply side deficiencies e.g lack of capital investment- firms use older tech-lack of productivity. Germany has 35% higher productivity per hr worked than UK. -Deindustrialisation-decrease in importance of industry/ manufacturing in the econ. makes it more difficult to export, since services are harder to export. -Countries with a large amount of natural resources tend to export more, and if they also have a small population ( e.g. Saudi) then they tend to have a C.A surplus. -Some countries are more competitive than others, e.g high labour productivity/ a reputation for high quality. -Countries with corruption and where it is difficult to set up a business tend to find it difficult to export.

Answer 25

Demand side policies: -Monetary or deflationary F.P can be used to reduce AD. -they reduce income so reduces demand for M. It should be effective in improving the deficit as there is high income elasticity for imports. -BUT, they are only ST and also dampen domestic D which can cause output to fall. When output falls, GDP growth slows and unemployment may increase, causing a reduction in SoL & E.G.

Answer 26

Supply side policies: -competition policy, improving labour or improving infrastructure. -these improve productivity, efficiency and quality-lowers cost of production. BUT LT solution and usually involve govt spending in form of subsidies- opp cost. - seek and encourage industries to exploit opps in X market overseas & focus resources on industries where the UK has a real comparative adv, BUT politically unpopular as some industries would close and jobs would be lost; but only in the ST. It will solve the BoP issues in the LT rather than temporarily as with AD.

Answer 27

Expenditure switching policies: -Tariffs or quotas will reduce the attractiveness of M. -changes buying habits of consumers. BUT, can cause trade wars as other countries retaliate by implementing protectionist policies- decrease X =worse deficit. -also almost impossible to implement, given trading blocs & WTO regulations. -They could attempt to control inflation which will mean that the price of British gds rises slower than those in other countries, so they become more competitive over time. BUT it will lead to a fall in demand for domestic gds =unemployment & a fall in growth. -devalue/depreciate £ as this will makes X cheaper & M dearer. BUT, this will not always work. (Marshall-Lerner & J-Curve). also its not feasible for many countries as they have a floating exchange rate and so central banks intervening in the market will only nudge the E.R for a short period. -The best way to affect the value of the currency is by changing the I.R, but this has effects on AD and so may not have the intended effect. -can't solve LT causes of a deficit!!

Answer 28

-Persistent deficits can be problematic as it means that finance from abroad e.g loans or FDI is required in order to fund M. -a country may be gradually selling its assets, & Owing money to a foreign entity creates vulnerabilities. e.g 2008 Global Financial Crisis demonstrated the impact of fast changing conditions, where creditors were insisting on being repaid quickly e.g. Greece owed creditors (including Germany) significant sums and was required to pay these back creating numerous problems in their econ. -shows how -C.A imbalances become a problem when govts can’t repay their foreign currency debts. -Persistent surpluses- problematic as it means that the focus of the allocation of a nation's resources is on meeting foreign D as opposed to meeting domestic D. -limited availability of g/s in local econ can decrease SoL for some households. -surpluses also create instability in the foreign exchange market if there is a floating exchange rate mechanism. E.g. China ran a surplus for years but did not allow its currency to float freely. In recent years they have switched their focus to increasing domestic demand. This surplus has resulted in significant FDI by Chinese firms and the level of foreign asset ownership is high. Some can argue that a current account imbalance is not much of a problem as long as the capital and financial account is in surplus. BUT, 2008 financial crash dramatically reduced the amount of capital flowing around the global econ and showed how quickly the position of the capital account can change. EVAL- Today, deficits are less of a concern to countries: the US and UK have no problem financing their deficits and borrowing has not built up unsustainable debts.

Answer 29

measures the value of one country's currency relative to another currency.

Answer 30

where the value of a country's E.R is based on the market forces of supply and demand. -excess demand-price rises-appreciation. Excess supply-price falls-depreciation. -affected by level of X & M, investment and speculation

Answer 31

where the value of one country's currency is fixed against the value of another.

Answer 32

a mix of fixed & floating. -central bank determines preferred currency value and it is free to fluctuate within a certain upper and lower bound/range. If it goes above/below the central bank will intervene. E.g if it goes above they will sell/increase supply of their own currency in the forex market which decreases the value back in range. -if it goes below they will sell foreign currency reserves in order to buy their own currency-increased demand increases the value bringing it back in range. Interest rates can also be used e.g raising I.R-appreciates a currency as investment/saving becomes more attractive to foreign investors due to higher rates of return-increases demand for domestic currency. -decreasing I.R-depreciates a currency- returns on saving and investment become less attractive to foreign investors so they sell domestic currency and move their money elsewhere.

Answer 33

-revaluation- if the central bank decides to increase the value/strength of the currency relative to another. -devaluation- if they decide to decrease the value/ strength of their currency.

Answer 34

-to purchase imports which are bought in the currency where that good is produced. -rates of E.G drive changes in demand for X & M. High levels of growth in the UK =increased demand for imports from abroad. -Individuals or firms require foreign currency to buy financial assets denominated in that currency. E.g if I.Rs in the USA rose, investment funds in the UK may buy US$ in order to switch their savings to American bank accounts. -changes in monetary policy affect the E.R. Contractionary monetary policy increases the base rate, which increases demand for that currency, causing an appreciation -If a firm engages in FDI abroad: e.g British firm sets up a factory in Germany it needs euros to pay for FoP. -a large amount of foreign exchange is bought not to purchase but as a form of speculation or insurance. E.g speculators will increase demand for a currency where I.Rs are expected to rise.

Answer 35

-an appreciation in the value of your currency makes exports more expensive for foreigners to buy and imports cheaper. -a depreciation in the value of your currency makes exports cheaper for foreigners to buy and imports more expensive.

Answer 36

-where a country deliberately intervenes in foreign exchange markets to drive down the value of their currency to provide a competitive boost to their exporting industries. -weaker currency encourages exports & discourages imports which improves the BoP, assuming the Marshall-Lerner condition. BUT it can cause inflation which may reduce competitiveness, leading to a fall in the BoP. -other countries may follow and reduce their currency as well, but unlikely if there is a current account deficit. But if the country who devalues has a surplus, other countries are likely to retaliate.

Answer 37

the current account of the BoP -Marshall-Lerner condition states that the sum of the price elasticities of M & X must be >1 (i.e. elastic) if a currency devaluation is to have a +ve impact on the trade balance. - J-curve shows how the C.A will worsen before it improves. People will not immediately recognise that British X are cheaper and it will take a while to find a source for them, whilst UK consumers will not see that M are more expensive and may be unable to switch straight away. Demand tends to be inelastic in SR. So, the amount sold of each will stay the same but the price of X will fall, so the value will fall, and the price of M will rise, so the value will rise. However, in LT, the C.A deficit will fall as demand becomes more elastic. -E.G and unemployment- A weaker E.R is likely to increase X, as become cheaper, & decrease M so lead to an increase in AD.-increase employment & E.G. -Rate of inflation: Falls in E.R increases inflation as M-more expensive, causing a rise in prices and a fall in SRAS. Also, the net exports section of AD will increase and so inflation will rise further. -FDI: A fall in the currency may increase FDI because it becomes cheaper to invest. but, if currency continues falling then it's an indication that the econ has serious difficulties which will discourage investment.