4.1. International Economics

Question 1

what are some of the causes of globalisation (include evaluation to these points)

Answer 1

• trade liberalisation i.e. through trade agreements -> reduces tariffs + quotas -> increased international trade -> increased comp. adv. -> more eocnomic integration
• technological advancement i.e. communication + transportation -> more feasible to trade -> less time and cost
• migration -> movement of labour across borders -> fills skills gaps -> fosters cultural exchange
• growth of MNCs -> they expand worldwide -> increased FDI -> firms source factors of production from diff. countries -> lower production costs -> consumers get cheaper goods

EVAL:
- limited by protectionist policies - non-member countries will suffer
- unequal access to technology
- limited by immigration policies + discrimination
- workers in low-income may get exploited as MNCs take advantage of weak labour laws; environmental concerns

Question 2

what are the costs + benefits of globalisation on individual countries?

Answer 2

BENEFITS:
- eco. growth -> larger market access -> increased exports and FDI
- law of comp. adv -> low opportunity cost -> increased efficiency + resource allocation
- increased FDI -> brings capital, technology + jobs

COSTS:
- uneven distribution of growth -> developing countries may struggle to compete w/ stronger economies -> increased income inequality
- loss of cultural identity
- dependent on global market -> economies are vulnerable to external shocks e.g. financial crises, supply chain disruptions

Question 3

what are the costs + benefits of globalisation on producers?

Answer 3

BENEFITS:
- increased profits -> lower production costs as firms can outsource to low-wage countries -> increased EoS (lower LRAC) -> access to global supply chains -> can use extra profits to reinvest into better resources, tech + efficiency
- increased competition -> incentive to innovate

COSTS:
- risk of supply chain disruptions e.g. pandemics, wars, etc. msy cause uncertainty
- increased competition -> small, domestic producers may struggle to compete -> go out of businesses
- exploitation of workers + environmental harm

Question 4

what are the costs + benefits of globalisation on consumers?

Answer 4

BENEFITS:
- greater variety -> increased choice due to global trade + more competition
- lower prices -> firms have lower production costs -> may be passed down
- higher SOL -> more affordable products -> increased purchasing power -> improved quality of life

COSTS:
- goods may be poor quality/safety standards
- if incomes rise in the LR, prices may rise as a result (‘wage-price spiral’ -> cost-push inflation)
- increased demand for goods + services creates inflationary pressures

Question 5

what are the costs + benefits of globalisation on the environment?

Answer 5

BENEFITS:
- increased green awareness -> technology transfer -> increased green innovation e.g. renewable energy
- APPL -> global agreements e.g. ‘Paris Agreement 2016’ encourage climate action

COSTS:
- increased environmental degradation -> increased demand for raw materials -> increased deforestation + resource depletion
- more trade can lead to increased carbon emissions -> increased pollution -> -ve production externalities -> welfare loss

Question 6

what are the costs + benefits of globalisation on the government?

Answer 6

BENEFITS:
- increased tax revenue -> gorwing businesses + FDI -> higher coporate tax revenue -> more funds available for public services
- stronger diplomatic + trade relationships

COSTS:
- gov. may reduce taxes to attract foreign investment -> reduces funds available for public services
- if taxes are too high -> businesses may engage in tax avoidance/evasion or may move their operations elsewhere
- repatriation of profits -> profits are sent back to the investor’s home country from the host country -> less tax revenue for the gov.

Question 7

what are the costs + benefits of globalisation on workers?

Answer 7

BENEFITS:
- job creation -> in growing industries -> increased demand for skilled labour may boost wages

COSTS:
- job losses in uncompetitive industries -> domestic workers may be replaced by automation or offhshoring
- poor working conditions in developing countries as MNCs exploit cheap labour

Question 8

what is a trading bloc?

Answer 8

group of countries that have signed an agreement to reduce/eliminate tariffs, quotas + other protectionist barriers between themselves

Question 9

types of trading blocs

Answer 9

preferential trading areas, free trade areas, customs union, common market, monetary union, economic union

Question 10

define free trading areas

Answer 10

when 2 or more countries in a region agree to reduce trade barriers on all goods

Question 11

characteristics of FTAs and examples

Answer 11

• each member can impose its own tariffs + quotas on goods it imports from outside the trading bloc
• e.g. NAFTA (North Atlantic Free Trade Agreement), AFTA (ASEAN Free Trade Agreement)

Question 12

define customs union

Answer 12

• involves removing tariff barriers between members + accepting a common/external tariff against non-members

Question 13

define common market (or single market)

Answer 13

when members trade freely in all economic resources so barriers to trade in goods, services, capital + labour are removed

Question 14

characteristics and examples of common markets

Answer 14

• imposes a common external tariff on imported goods from outside the markets
• e.g. EU, EAC (East African Community)

Question 15

define monetary union

Answer 15

2 or more countries with a SINGLE CURRENCY; exchange rate is monitored + controlled by one central bank OR several w/ closely coordinated monetary union

Question 16

examples of monetary union

Answer 16

Eurozone, African Economic + Monetary Union

Question 17

define economic union

Answer 17

agreement between 2 or more countries to remove barriers to trade; allow free flow of labour, capital + economic policies

Question 18

characteristics of economic union

Answer 18

• integration is more intense in an economic union, as member countries are required to harmonise their tax, monetary + fiscal policies and to create a common currency

Question 19

define trade creation

Answer 19

where trading blocs result in high cost domestic products being replaced by low cost + more efficient imports

Question 20

define trade diversion

Answer 20

when trade is diverted from a more efficient NON-MEMBER exporter to a less efficient MEMBER exporter rather than creating new trade

Question 21

what are the advantages of a free trade area?

Answer 21

ADV:
- increased trade creation - reduced/eliminated barriers -> easier to import/export -> boosts economic activity + growth -> more employment -> job creation
- increased specialisation - according to comparative advantage (specialise in goods with the lowest OC) -> firms benefit from EoS -> lower prices + costs -> more price competitive
- increased competition - removed barriers -> domestic firms face greater competition -> lower prices -> greater variety for consumers -> encourages innovation -> increased quality of services
- access to larger markets - expand consumer base -> increased revenue

Question 22

what are the disadvantages of a free trade area?

Answer 22

• trade diversion - trade is diverted from a more efficienct non-member exporter to a less efficient member exporter rather than creating new trade -> trade imbalances -> consumers may face higher prices (cheaper goods from outside the bloc are replaced)
• limitations of comparative advantage - assumes there’s no transport costs -> hard to find which good to specialise in -> risk of overspecialisation (dependent on producing a few goods + services) -> primary product dependency -> vulnerable to demand/supply shocks -> job losses
• cheaper imported goods -> overreliance on imports -> vulnerable to supply chain disruptions -> harms domestic producers (infant industries) -> may struggle to compete -> job losses

Question 23

pros and cons of a ‘common external tariff’ (seen in a customs union)

Answer 23

ADV:
- prevents trade deflection -> common external tariff on non-member countries -> dtops redirecting imports through a member country of a trade bloc with lower external tariffs to avoid paying higher tariffs in another member country -> prevents unfair cost advantages -> protects domestic industries
DISADV:
- high administrative costs - requires high regulatory oversight

Question 24

pros + cons of ‘factors & asset mobility’ (seen in a common/single market)

Answer 24

ADV:
- employment opportunities - people move to areas with a higher demand for labour -> more geographically mobile -> reduced unemployment + underemployment -> improved standard of living
- knowledge + technology transfer - innovation + productivity -> increased quality of the workforce -> increased LRAS -> price level down -> real GDP up -> potential eco. growth

DISADV:
- brain drain - more skilled workers seek better jobs/living standards in other countries -> limited quality of the workforce in host country
- workforce = occupationally immobile - lack of adequate skills/education -> unable to swtich jobs -> structural unemployment up

Question 25

what are the pros and cons of a 'common currency'? (monetary union)

Answer 25

ADV: - **increased business confidence** -> eliminates exchange rate fluctuations -> more predictable price changes -> firms are more likely to invest -> investment up -> AD up -> real GDP up -> actual eco. growth - **reduced transaction costs** - lower prices -> increase profitability - **price transparency** -> easier to compare prices across member countries DISADV: - loss of economic sovereignty - lose tool of adjusting to economic shocks (countries cannot set their own interest rates -

Question 26

What are the reasons for restrictions on free trade?

Answer 26

- infant industry - protectionism - unfair competition - job protection - dumping - danger of over-specialisation - terms of trade

Question 27

What is meant by 'infant industry'? How does it affect free trade?

Answer 27

- business that has just been established; meaning it needs to build a consumer base + reputation - needs to cover lots of sunk costs; higher AC compared to foriegn competitors due to lack of internal EoS -> may fail before becoming competitive if exposed to international competition too soon - gov. impose tariffs, subsidies + quotas -> restricts imports to allow domestic firms to grow -> lower AC -> can be ineffective as firms grow to be inefficient

Question 28

Why is protectionism important and how does it effect free trade?

Answer 28

- prevents firms and consumers from becoming too reliant on certain goods and services. - gov. imposes tariffs, quoatas, subsidies -> protects domestic firms -> less imports -> less competition = higher prices -> potential inefficiency - can lead to retaliation -> trade wars

Question 29

how does unfair competition affect free trade?

Answer 29

- foreign firms may benefit from: subsidies, lower unit labour costs, weaker regulation -> can sell at lower prices -> limits consumer choice -> may raise prices later on

Question 30

how does job protection affect free trade?

Answer 30

- free trade can causes domestic job losses in industries unable to compete with cheaper imports -> gov. impose tariffs/quotas -> protects domestic workers from structural unemployment -> restricts trade as it prevents movement of labour to more productive industries

Question 31

what is dumping and how does it restrict free trade?

Answer 31

- dumping: when a foreign firm sells goods below production costs to eliminate competition - gov. imposes tariffs to protect domestic producers -> restricts trade as it may prevent efficient firms from competing -> less consumer choice and reduced quality -> harms welfare

Question 32

how does overspecialisation restrict free trade?

Answer 32

- free trade encourages specialisation -> can produce at lower OC -> if economy relies too much on one industry -> vulnerable to external shocks - gov. support domestic firms in new sectors to diversify -> restricts trade in some areas``

Question 33

how does terms of trade restrict free trade?

Answer 33

- developing countries reliant on primary product exports may see falling export prices compared to expensive manufactured imports. - gov. intervene to stabilise export prices/reduce dependence on imported goods -> distorts market prices + limits flow of goods based on comp. adv. -> restricts free trade