4.1 International Economics Flashcards
What does globalisation refer to?
The growing interdependence of countries and the rapid rate of change it brings about.
How does the OECD define globalisation?
As the geographic dispersion of industrial and service activities, including research and development, sourcing of inputs, and cross-border networking of companies.
What are the key characteristics of globalisation?
Increasing integration of local, regional, and national economies into a single international market, movement towards free trade, and free interchange of technology.
What factors contribute to globalisation?
- Improvements in transport infrastructure
- Improvements in IT and communication
- Trade liberalisation and reduced protectionism
- International financial markets
- TNCs aiming to increase profits
What are the impacts of globalisation on consumers?
- More choice of goods
- Potential for lower prices
- Rise in prices due to higher demand
- Concerns about loss of culture
What are the impacts of globalisation on workers?
- Job gains for some, losses for others
- Large scale job losses in manufacturing sectors
- Increased migration affecting wages
- Wage increases for high-skilled workers, increasing inequality
What are the impacts of globalisation on producers?
- Ability to source products globally
- Employment of cheaper low-skilled workers
- Risk for firms unable to compete internationally
How can globalisation affect governments?
- Potential for higher taxes from TNCs
- Risk of tax avoidance
- Power of TNCs to lobby governments
What environmental impacts does globalisation have?
- Increased demand for raw materials
- More emissions from increased trade
- Opportunity for global cooperation on climate change
What is the effect of globalisation on economic growth?
- Increases investment
- Encourages supply-side improvements
- Increases output through comparative advantage
- Potential for political instability
Define absolute advantage.
When a country can produce a good more cheaply in absolute terms than another country.
Define comparative advantage.
When a country is able to produce a good more cheaply relative to other goods produced.
What are the assumptions of the theory of comparative advantage?
- No transport costs
- Constant costs
- Homogenous goods
- Perfectly mobile factors of production
- No tariffs or trade barriers
List some advantages of specialisation and trade.
- Increases world output
- Benefits from economies of scale
- Greater consumer choice
- Encourages competition and innovation
List some disadvantages of specialisation and trade.
- Over-dependence on exports/imports
- Structural unemployment
- Environmental degradation
- Loss of sovereignty and culture
What historical change occurred in the UK’s trade pattern?
Deindustrialisation in the 1970s and 1980s, with a shift from goods to services.
What factors influence the pattern of trade?
- Comparative advantage
- Emerging economies
- Trading blocs and agreements
- Relative exchange rates
What do terms of trade measure?
The rate of exchange of one product for another when two countries trade.
What is a favourable movement in terms of trade?
An increase in terms of trade, allowing a country to buy more imports with the same level of exports.
How is the terms of trade calculated?
(average export price index / average import price index) x 100
What can cause an improvement in a country’s terms of trade?
- Rise in export prices
- Fall in import prices
What long-run factor can affect terms of trade?
Improvement in productivity compared to main trading partners.
What factors affect the terms of trade in the short run?
Exchange rates, inflation, and changes in demand/supply of imports or exports
These factors affect the relative prices of imports and exports.
In the long run, what happens to the terms of trade if a country’s productivity improves compared to its trading partners?
The terms of trade decrease as export prices fall relative to import prices
This can be caused by new technology, more efficient labor, etc.
How does a rise in world income affect the terms of trade for countries with strong tourism industries?
It increases demand for tourism, potentially raising prices in that industry and improving terms of trade
An example is Spain with its strong tourist industry.
What does the Prebisch-Singer hypothesis suggest about primary goods?
The long run price of primary goods declines in proportion to manufactured goods
This implies that countries dependent on primary exports will see a fall in their terms of trade.
What effect does an inelastic PED of exports and imports have on the current account during a favorable movement in terms of trade?
It improves the current account
Conversely, if PED is elastic, a favorable movement would worsen the current account.
What is the likely impact on GDP and unemployment if there is an improvement in the terms of trade?
A fall in GDP and a rise in unemployment
This occurs because higher export prices can lead to a decrease in exports, and lower import prices can lead to an increase in imports.
What is a regional trading bloc?
A group of countries within a geographical region that protect themselves from imports from non-members
They reduce or eliminate tariffs, quotas, and other protectionist barriers.
What are preferential trading areas (PTA)?
Areas where tariffs and trade barriers are reduced on some but not all goods traded between member countries
PTAs allow for selective trade benefits among members.
Define free trade areas (FTA).
Agreements where two or more countries reduce or eliminate trade barriers on all goods among themselves
Members can still impose tariffs on goods imported from outside the trading bloc.
What is a customs union?
A group where tariff barriers are removed between members and a common external tariff is accepted against non-members
This allows members to negotiate as a single bloc.
What characterizes a common market?
Free trade in all economic resources, removal of barriers to trade in goods, services, capital, and labor, and a common external tariff
Requires significant harmonization of micro-economic policies.
What is the role of the European Central Bank in the Eurozone?
Distributes notes and coins, sets interest rates, maintains financial stability, and manages foreign currency reserves
It plays a key role in monetary policy for the Eurozone.
What are the fiscal rules agreed upon by EU governments regarding deficits and national debt?
A fiscal deficit of no more than 3% and a national debt of no more than 60%
These rules are intended to ensure fiscal discipline within the Eurozone.
What are the advantages of monetary unions?
Fixed prices across the union, reduced exchange rate costs, easier price comparisons
However, they involve financial costs in starting a new currency.
What are the disadvantages of monetary unions?
Loss of policy independence, inability to change currency value, potential mismatches in economic needs among member countries
One country’s good may not be beneficial for another.
What are the two main types of benefits from trading blocs?
- Static benefits from specialization gains
- Dynamic benefits from increased competition and resource transfer
These benefits lead to increased output and lower prices.
What is trade creation?
When a country shifts consumption from a high-cost domestic producer to a lower-cost partner producer due to joining a trade union
This leads to welfare gain and higher consumer surplus.
What is trade diversion?
When consumption shifts from a lower-cost producer outside the trading bloc to a higher-cost producer within it
This can reduce worldwide efficiency.
What is the main aim of the World Trade Organisation (WTO)?
To bring about trade liberalisation and ensure countries adhere to their trade agreements
The WTO was established in 1995 to replace GATT.
What happens if a country fails to follow its trade agreements under WTO rules?
A complaint can be filed, leading to negotiations or a ruling from a panel of experts
If the ruling is rejected, the winning country may impose trade sanctions.
What is the infant industry argument?
Protection for newly established industries that cannot yet compete internationally due to higher average costs
This protection is intended to allow them to grow and become competitive.
What is dumping in international trade?
Selling surplus goods at very low prices in foreign markets, harming domestic producers
Governments may intervene to protect local industries from dumping.
List reasons for restrictions on free trade.
- Infant industry protection
- Job protection
- Protection from dumping
- Protection from unfair competition
- Improving terms of trade
- Danger of over-specialization
These reasons reflect economic and political considerations.
What happens to the price of a good when demand increases?
The price increases, which can worsen the terms of trade.
What is the danger of over-specialization in trade?
Countries could become too reliant on others for important products or materials.
What are tariffs?
Taxes placed on imported goods to make them more expensive.
What effect do tariffs have on domestic production and consumer demand?
Domestic producers produce more, while consumer demand for imports decreases.
What are quotas?
Limits placed on the level of imports allowed into a country.
How do subsidies to domestic products help producers?
They lower costs and enable cheaper prices, increasing competitiveness.
What are non-tariff barriers?
Restrictions on trade that do not involve tariffs, such as embargoes and import licensing.
What is the impact of protectionist policies on consumers?
Consumers face higher prices, less choice, and reduced competition.
How do protectionist policies affect domestic producers?
They benefit from less competition and can sell more goods at higher prices.
What is the short-term effect of protectionist policies on governments?
Governments gain tariff revenues and political popularity.
What is the long-term impact of protectionist policies on living standards?
They cause deadweight welfare loss and can lead to trade wars.
What are the components of the balance of payments?
The current account, capital account, and financial account.
What does the current account include?
Trade in goods, trade in services, income, and current transfers.
What are the main causes of a balance of payments deficit?
High consumer demand, strong exchange rate, and high relative inflation.
What is the significance of the capital and financial accounts?
They record investments, loans, and other financial transactions with foreign entities.
What are demand-side policies used to address balance of payments deficits?
Monetary or fiscal policy aimed at reducing aggregate demand.
What are supply-side policies that can help improve the balance of payments?
Measures to improve productivity, efficiency, and quality.
What is the Marshall-Lerner condition?
A theory stating that a currency depreciation will improve a trade balance if the sum of price elasticities of exports and imports is greater than one.
What is a current account surplus?
When a country exports more than it imports.
What is a current account deficit?
When a country imports more than it exports.
True or False: Countries with large deficits are always seen as problematic.
False, as countries like the US and UK can finance their deficits without issue.
What are the potential consequences of large current account imbalances?
Instability in the economy and issues with foreign debt repayment.
Fill in the blank: A _______ is a total ban on imported goods.
[embargo]
What are voluntary export restraint agreements?
Agreements to limit the volume of exports between countries.
What effect does inflation have on exports?
High inflation decreases exports by increasing their price relative to foreign goods.
What are some examples of supply-side deficiencies affecting the UK?
Low investment, skills shortages, and inefficient monopolies.
What is the role of the exchange rate in international trade?
It determines the purchasing power of a currency in terms of imports and exports.
What becomes a problem when governments can’t repay their foreign currency debts?
Imbalances
How are countries with large deficits perceived?
As having a problem
What is the perception of countries with large surpluses?
Seen as successful
What do current account surpluses cause for citizens in a country?
Losses in potential living standards
What is the exchange rate?
The purchasing power of a currency in terms of what it can buy of other currencies
What defines a free floating exchange rate system?
Value determined by market demand and supply with no government intervention
What is a managed floating exchange rate system?
Value determined by demand and supply but with Central Bank intervention to prevent large changes
What is an adjustable peg system?
Currencies fixed against another but the level can be changed
Define crawling peg systems.
A form of adjustable peg with a mechanism allowing value changes
What is a fixed exchange rate system?
A government sets their currency against another with no changes
What is an appreciation of a currency?
An increase in the value of the currency under floating exchange rates
What does depreciation of a currency refer to?
A fall in the value of the currency under floating exchange rates
What is revaluation of a currency?
An increase in the currency’s value against another under a fixed system
What is devaluation of a currency?
A decrease in the value of one currency against another under a fixed system
What factors determine floating exchange rates?
Demand and supply interaction
What determines the demand for pounds?
- British goods demand by foreigners
- Foreign investment in the UK
- Number of foreigners visiting or placing money in UK banks
- Speculation on the pound
What determines the supply of pounds?
- Foreign goods demand by UK residents
- British investment abroad
- British citizens going on holiday abroad
- Speculation on the pound
What is the most significant short-term determinant of currency value?
Speculation
What are the long-term determinants of currency value?
- Exports
- Imports
- Long-term capital flows
How can governments influence currency value?
- Interest rates
- Gold and foreign currency reserves
What is competitive devaluation?
Deliberate intervention to lower currency value to boost exports
What does the Marshall-Lerner condition state?
Sum of price elasticities of imports and exports must be more than one for positive trade balance impact after devaluation
What does the J-curve illustrate?
Current account worsens before it improves after currency devaluation
How does a weaker exchange rate affect economic growth?
Increases exports and decreases imports, leading to higher AD
What is the impact of a lower exchange rate on inflation?
Increases inflation as imports become more expensive
How does currency depreciation affect foreign direct investment (FDI)?
May increase FDI as investment becomes cheaper
What is international competitiveness?
The ability of a country to produce goods that meet the test of international markets
What are relative unit labour costs?
Total wages divided by real output, indicating cost of employing workers per unit
What do rising relative export prices indicate?
UK export prices are rising faster than competitors’, reducing competitiveness
Name factors influencing international competitiveness.
- Exchange rates
- Productivity
- Regulation
- Investment
- Taxation
- Inflation
- Economic stability
- Flexibility
- Competition and demand at home
- Factors of production
- Openness to trade
What are the benefits of international competitiveness?
- Current account surpluses
- Attracting foreign investment
- Increased employment
- Economic growth
What is a risk of being internationally competitive?
Competitiveness can be easily lost, leading to potential economic issues
True or False: A competitive economy is likely to attract inflows of foreign investment.
True
What can lead to a rise in the exchange rate for a competitive country?
A current account surplus
How does high taxation affect international competitiveness?
Reduces investment and innovation
