4.1 - International Economics Flashcards
Globalisation
The process of increasing interconnectedness and interdependence between countries through trade, investment, technology, and cultural exchange
Factors contributing to globalisation
- Improvements in transport infrastructure and operations
- Improvements in IT and communication
- Trade liberalisation
- International financial markets
- Multinational Corporations
How improvements in transport infrastructure and operations contribute to globalisation
Means there are quick, reliable and cheap methods to allow production to be separated around the world
How improvements in IT and communication contribute to globalisation
The spread of IT has resulted in it becoming easier and cheaper to
communicate, which has led to the world being more interconnected
How trade liberalisation contributes to globalisation
The growing strength and influence of organisations such as the World Trade Organisation, which advocates free trade, has contributed to the decline in trade barriers
How international financial markets contribute to globalisation
Provided the ability to raise money and move money around the world, necessary for international trade
How Multinational Corporations contribute to globalisation
They have used marketing to become global, and by growing, they have been able to take advantage of economies of scale, such as risk-bearing economies of scale. The spread of technological knowledge and economies of scale has resulted in lower costs of production
Positive impacts of globalisation on consumers
- Consumers have more choice since there are a wider range of goods available from all around the world
- Can lead to lower prices as firms take advantage of comparative advantage and produce in countries with lower costs, for example low labour costs
Negative impacts of globalisation on consumers
- Can lead to a rise in prices since incomes are rising and so there
is higher demand for goods and services - Many consumers worry about the loss of culture.
Positive impacts of globalisation on workers
- TNCs tend to provide training for workers and create new jobs
- Workers can take advantage of job opportunities across the globe, rather than just in their home country
Negative impacts of globalisation on workers
- Increased migration may affect workers by lowering wages
- The wages for high skilled workers appear to be increasing, since there is more demand for their work, increasing inequality
- Large scale job losses in the western world in manufacturing sectors as these jobs have been transferred to countries such as China and Poland
Positive impacts of globalisation on producers
- Firms are able to 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 smaller impact on the business
- They are able to employ low skilled workers much cheaper in developing countries and can exploit comparative advantage and have larger markets, both of which can increase profits
Negative impacts of globalisation on producers
- Firms who are unable to compete internationally will lose out
- Increased competition, domestic firms face intense competition from international businesses, which can lead to lower market share and profitability
Positive impacts of globalisation on the government
- Higher tax revenues, increased international trade and foreign direct investment (FDI) lead to higher corporate and income tax revenues, allowing governments to fund public services
- Access to foreign investment, governments benefit from FDI, which can help develop infrastructure, industries, and public services
Negative impacts of globalisation on the government
- Economic vulnerability, global financial crises or economic downturns in other countries can negatively impact a nation’s economy, reducing government stability
- Tax avoidance and evasion, large multinational companies can shift profits to low-tax countries, reducing government tax revenues and limiting public spending
Absolute advantage
When a country, business, or individual can produce a good or service more efficiently (using fewer resources) than another entity
Comparative advantage
When a country, business, or individual can produce a good or service at a lower opportunity cost than another entity
Advantages of specialisation and trade
- Increased efficiency and productivity, specialisation allows countries and businesses to focus on producing goods where they have a comparative advantage, leading to more efficient resource use and higher output
- Lower costs and economies of scale, as firms or countries specialise, they can produce larger quantities at lower costs due to economies of scale
- Encourages innovation, exposure to global competition and markets incentivises firms to innovate and improve production methods
Disadvantages of specialisation and trade
- Overdependence on certain industries, if a country or business relies too heavily on one industry, economic downturns or demand shifts can lead to instability
- Risk of structural unemployment, workers in declining industries may struggle to find new jobs if their skills are not transferable
- Exploitation of workers and resources, some countries may exploit cheap labor or natural resources to remain competitive, leading to poor working conditions and environmental damage
Factors influencing the pattern of trade
- Comparative advantage
- Emerging economies
- Trading blocs and bilateral trading agreements
- Relative exchange rates
Terms of trade
Measures the rate of exchange 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
Formula for terms of trade
(Index of export prices / Index of import prices) * 100
Factors influencing a country’s terms of trade
- In the short run, exchange rates, inflation and changes in demand/supply of imports or exports affect the terms of trade since these affect the relative prices of imports and exports
- 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
Regional trading bloc
A group of countries within a geographical region that protect themselves from imports from non-members. They sign an agreement to reduce or eliminate tariffs, quotas and other protectionist barriers among themselves
Free trade areas
When two or more countries in a region agree to reduce or eliminate trade barriers on all goods coming from other members. Each member is able to impose its own tariffs and quotas on goods it imports from outside the trading bloc
Customs unions
Involves the removal of tariff barriers between members and the acceptance of a common external tariff against non-members. This means that members may negotiate as a single bloc with third parties such as other trading blocs or countries.
Common markets
When members trade freely in all economic resources so barriers to trade in goods, services, capital and labour are removed. They impose a common external tariff on imported goods from outside the markets
Monetary unions
Two or more countries with a single currency, with an exchange rate that is monitored and controlled by one central bank or several central banks with closely coordinated monetary policy
Static benefits
Immediate or short-term advantages that arise from economic activities such as trade, specialisation or market efficiency
Dynamic benefits
Long-term advantages that arise from economic activities such as trade, investment and innovation, leading to sustained economic growth and development over time
Trade creation
When the formation of a trade agreement (e.g., a free trade area or customs union) leads to a shift in production from a high-cost domestic producer to a lower-cost producer within the trade bloc, increasing overall economic efficiency
Trade diversion
When a trade agreement causes imports to shift from a more efficient, low-cost producer outside the trade bloc to a higher-cost producer within the bloc due to the imposition of tariffs on non-member countries
World Trade Organisation
An international body that regulates global trade, ensuring that it runs smoothly, freely and fairly among nations
Trade liberalisation
Process of reducing or removing trade barriers, such as tariffs, quotas and import restrictions, to encourage free trade between countries
Reasons for restrictions on free trade
- Infant industry argument
- Job protection
- Protection from potential dumping
- Protection from unfair competition
- Terms of trade
- Danger of over specialisation
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. Therefore, the industry would be unable to compete in the international market and so the government protect them until they are able to compete on an equal level
Dumping
When a country or company with surplus goods sells these goods off to other areas of the world at very low prices, harming domestic producers in those countries
Tariff
Tax imposed on imported goods and services, making them more expensive to consumers
Quota
Trade restriction that sets a physical limit on the quantity of a specific good that can be imported into a country over a given period
Subsidies to domestic producers
Financial grant or support provided by the government to domestic producers to lower production costs, making their goods or services more competitive against imports
Embargo
Government-imposed ban on trade with a specific country or the restriction of certain goods and services
Causes of a current account deficit
- Appreciation of the currency
- Economic growth
- Increase in competitiveness
- Deindustrialisation
- Membership of trade union
Measures to reduce a country’s imbalance on the current account
- Increase income tax, this will reduce disposable incomes reducing the quantity of imports
- Reduce government spending, this would reduce aggregate demand leading to less imports
- Increase spending on education and training, could help increase productivity making the country more internationally competitive causing an increase in exports
Exchange rate
Price of one currency in terms of another. It determines how much one currency can be exchanged for another in foreign exchange markets
Types of exchange rate systems
- Fixed exchange rate system
- Floating exchange rate system
- Managed exchange rate system
Fixed exchange rate system
When a country’s government or central bank pegs its currency to another currency (e.g., the US dollar) or a basket of currencies. The exchange rate remains constant, and the central bank intervenes in the foreign exchange market to maintain the fixed value
Floating exchange rate system
Where the value of a currency is determined by market force, (supply and demand) in the foreign exchange (forex) market without direct government intervention. The exchange rate fluctuates freely
Managed exchange rate system
Where a currency’s value is primarily determined by market forces (supply and demand) but with occasional government or central bank intervention to reduce excessive fluctuations
Appreciation
When the value of a currency rises in comparison to another currency in a floating or managed exchange rate system. This means that the currency can buy more of another currency
Depreciation
When the value of a currency falls in comparison to another currency in a floating or managed exchange rate system. This means the currency can buy less of another currency
Revaluation
When a government or central bank deliberately increases the value of its currency in a fixed or managed exchange rate system. This makes the currency stronger compared to other currencies
Devaluation
When a government or central bank deliberately decreases the value of its currency in a fixed or managed exchange rate system. This makes the currency weaker compared to other currencies
Factors affecting floating exchange rates
- Inflation
- Speculation
- Other currencies
- Government finances
- Balance of payments
- International competitiveness
Marshall-Lerner condition
A currency depreciation or devaluation will only lead to an improvement in the current account balance if the sum of the price elasticities of demand for exports and imports is greater than 1 (i.e., PEDx + PEDm > 1)
J-curve
Describes how a currency depreciation or devaluation initially worsens a country’s current account balance before improving it over time
Impact of changes in exchange rates
- Current account of balance of payments
- Economic growth and unemployment
- Rate of inflation
- Foreign Direct Investment
Measures of international competitiveness
- Relative unit labour costs
- Relative export prices
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
Benefits of international competitiveness
- Improvement in trade balance
- Lower unemployment
- Attraction of Foreign Direct Investment
Problems of international competitiveness
- Risk of over-reliance on exports
- Pressure on wages and working conditions
- Rising income inequality
