4.1 International economics Flashcards
Globalisation
The ever increasing integration of the worlds local, regional and national economies into a single international markets
Characteristics of globalisation
Free trade across national boundaries of goods and services so that trade between countries becomes as straightforward as trade within a country
Free movement of labour (EU)
Free movement of capital (Microsoft can buy smaller local UK gaming company)
Free interchange of tech and intellectual capital
Globalisation cont
This world of perfect free movement and no barriers of trade doesn’t exist.
In reality, there is huge variety but most of the world exists on a spectrum between two extremes
COVID19 and Donald trump slowed globalisation
Causes of globalisation
Growth of trading blocs
Political shift towards open free market forces e.g end of Cold War
Decrease in transport/ communication costs
Reduction of barriers in world trade e.g WTO
Increased importance of transnational companies - these companies establish operations in other countries and when they do this to lessen operational costs which is known as offshoring
Incentive provided by international financial flows - FDI has been seen as key reason for massive growth in China and Malaysia, encouraging other countries to adopt less protectionist policies
Impact on consumers (adv)
More consumer choice
There is a variety of diff products available on high streets that have been shipped from globally.
Fall in prices as production has shifted to lost cost locations abroad
Raised incomes
Impact on consumers (disadv)
Goods have become more homogenised losing individual features
Raising global income in LR can lead to higher prices as there is higher demand
Some goods display worrying tendencies to vary significantly overtime in price e.g oil price increase will be felt more widely
Impact on workers (adv)
Structural unemployment can be a good thing as it can cause a longer term shift toward a relevantly trained labour force
Immigrants can fill labour gaps and bring enterprise creating new industries which creates new jobs
Demand for high skilled labour increases, wages
Lowering inequality gap in developing countries as they can demand similar wages
Multinational companies operating abroad create jobs in their countries of operation
Impact on workers (disadv)
Job losses
Immigration increases competition for jobs which causes lower wage rates
COVID19 has sped up shift in multimedia companies to increasingly hire foreign national who can work remote so workers are competing with global citizenry
Low skilled labour in developed countries have seen real wage drops as firms try to drive costs down
Increased inequality in developed countries as there is upward wage pressure on high skilled and downward pressure on low skilled
Multi nationals have been criticised for hiring labour abroad rather than domestically
Impact on producer (adv)
Companies can take advantage of specialism abroad e.g better shipping quality
Reduce risk as a greater number of supply chains can mean companies losses are mitigated if one international customer closes down
Costs reduce as suppliers can be chosen from wider area + companies can employ from abroad where wages are lower
Shift of production to power countries is raising living standards in developing world as there is influx of new jobs
Impact on producer (disadv)
Companies can become dependent on long supply chains if they collapse = business failure
Tax avoidance as tics use transfer pricing (shifting pricing to countries where the most tax will be saved), tax haven offices or just generally shift production to a low tax country
Impact on gov (adv)
Adapting to challenges with new and innovative policies inc increasing spending on eduction and R&D to give national workers an edge in a globalised market place
Impact on gov (disadv)
Shifts of production to developing countries leads to lower tax revenue, domestic jobs and potentially exports
Pressure from tax avoidance has led to some countries lowering tax rates which negatively impacts gov revenue
Rising corruption in developing world as large TNCS have overly influenced gov policy
Environmental impact (adv)
Large TNCS have better environmental records that smaller national companies as their actions are moron gov spotlights and they have financial resources and tech to minimise environmental destruction
Environmental disadvantages
Positive correlation between globalisation and increased environmental damage - as large portions of forest and farmland have been stripped for resources as global demand soars
Individual nations advantages
Rising incomes, more and better quality jobs, and more consumer choice
Individual nations disadvantage
Loss of industries = unemployment and lower ages
Urbanisation in poorer countries to keep pace with globalisation can have negative consequences
Non economic advantages
Increased multiculturalism/ cultural understanding and diversity
Decline in national sovereignty makes war less appealing
Non economic disadvantages
Weakens native cultures
Growth in trading blocs has led to some sacrifices regarding national sovereignty
Specialisation
When a country focuses on producing one or a narrow range of goods and services (mostly for export services)
Absolute advantage
An economy can produce a good for lower costs than another. It means that less resources are needed to produce the same amount of goods/ the same resources can produce a greater quantity of goods
Comparative advantage
Occurs when one country can produce a good or service at a lower opportunity cost than another. This means a country can produce a good relatively cheaper than other countries
Calculating opportunity cost
Opportunity cost of producing good A = Total units produced of good B / Total units produced of good A
Limitations of comparative advantage
Assumes there are no transport costs and these can lower/prevent CA
Assumes cots are constant and there are no EOS (which help to increase gains from specialisation
Goods are assumed to be homogenous which is unrealistic therefore countries product cannot be perfectly compared
Assumes FOPs are perfectly mobile, there are no trade barriers and there is perfect knowledge
Whether trade takes place will depend on the terms of trade between countries
Adv of specialisation and trade
Comparative advantage shows how world output can be increased if countries
specialise in what they are best at producing, this will increase global economic
growth.
Specialisation allows countries to benefit from economies of scale , which reduces
costs and therefore decrease prices globally.
Different countries have different factors of production and so trade allows countries to make use of factors of production, or the things produced by these factors, which they otherwise may have been unable to.
Trade enables consumers to have greater choice about the types of goods they buy,
and so there is greater consumer welfare.
Free trade between countries increases competition for firms, therefore there is
much greater focus on innovation.
Disadv of specialisation and trade
Trade can lead to over-dependence, where some countries become dependent on particular exports and imports.
It can cause structural unemployment, as jobs are lost to foreign firms who are more efficient and competitive. The less mobile the workforce, the higher the chance that changes in demand due to trade will reduce output and employment over long
periods of time.
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 trading blocs, for example in the EU.
Patterns of trade
Refers to the changing nature of trade between economics e.g UK-EU trade
Influences on POT
CA changing
More exporting of manufactured goods
Growing supply chains
Emerging economies
Trading blocs growing
Exchange rates changing
CA on patterns of trade
Countries tend to export g+s in which they have a CA and import those in which they have a comparative disadvantage
This principle is a fundamental driver of international trade patterns
Emerging economies on patterns of trade
Emerging economies often become major exporters of manufactured goods and services altering dynamics of global trade. They can both compete with and complement established economies
Trading blocs
These agreements can significantly impact trade flows. Within trading blocs, member countries often enjoy reduced tariffs and trade barriers, leading to increased trade among them.
Bilateral agreements can create preferential trading relationships between specific countries, boost trade in specific sectors
Exchange rates
Changes in the ER can have a direct impact on trade. A depreciation of a country’s currency can make its exports cheaper and more competitive on the international market, leading to increased exports.
Conversely, a stronger currency can reduce exports and increase imports
Terms of trade
The terms of trade of a country measures the price of a country’s exports relative to the price of its imports or the ratio between average export prices and average import prices
This concept is very important for developing nations who rely heavily on selling exports to purchase manufactured imports that cannot be produced in the country
Exports
An inflow of money into the economy
Imports
An outflow of money from the economy
TOT formula
Index of average export prices / index of average import prices x 100
It is measured in the form of an index because it is calculated from the weighted average of thousands of different export goods and import goods prices
Value of TOT increases
This means a country can purchase more imports with its level of exports. This could be because export prices increased or import prices decreased.
Deterioration in TOT
We can now buy less imports with our current level of imports. This could be because import prices increased and export prices decreased
Factors affecting TOT
Change in ER
a rise in ER = fall in price of imported goods = improvement in TOT
Inflation
Rise in inflation relative to other countries will improve the TOT as its x become more attractive to consumers
Productivity levels
Rise in productivity = lower COP = drop in price of x = deterioration in the TOT
Increasing demand
Rising demand for exports will increase the price of exports improving TOT
Rise in demand for imports = price increase of imports = deterioration
Increasing incomes
Led to increased demand for certain sectors e.g tourism = increased prices for holiday = improvement in TOT for countries with large tourism sectors
Improving TOT
leads to higher living standards
Country can import more for a given quantity of exports
Cost push inflation can also be brought under control
Improving TOT pt2
Leas to deteociatio in the current account of the balance of payments - declines competitiveness of countries goods and services can cause problems
Exports price elastic TOT
this leads to an improvement in the TOT but a decline in the current account balance as the value of a country’s exports declines
Export price inelastic TOT
The rise in export prices also leads to an improvement in the TOT,
but as export volumes remain steadier – the current account
position will still improve. A fall in export prices will cause the
reverse.
Imports price elastic TOT
Rising import prices will deteriorate the terms of trade, but as the
demand for that import falls away, the current account balance
will improve. A fall in import prices will cause the reverse.
