4.1 International Economicss Flashcards
1
Q
What is globalisation?
A
Globalisation is the interdependence and integration of countries and the rapid change it brings about.
2
Q
Factors contributing to globalisation
A
- Improvements in infrastructure e.g trade links
- Improvement in communication and technology
- Trade liberalisation and reduced protectionism
- TNCs based in multiple countries
3
Q
4 characteristics that show globalisation
A
- Increasing foreign ownership of companies
- Increasing movement of labour & technology
- Free trade
- Easy flows of capital across borders
4
Q
Impact of globalisation on consumers
A
- Consumer choice increases as products across the world are available
- Lower prices for products produced with comparative advantage and produce in countries with lower costs.
- Reduction in absolute poverty
- Better forms of technologies
- Concern of local cultures being overshadowed
5
Q
Impact of globalisation on workers
A
- Decrease in poverty
- Increased migration , increase in employment and skills in other countries & increase AD
- TNCs provide employment for developing countries
- Can create unemployment in developed countries, labour moved to cheaper countries to lower production cost
- Exploitation of workers in countries with less labour regulations.
6
Q
Impact of globalisation on firms.
A
Lower prices
- due to increased supply chain and decrease in cost of production
Reach more consumers
- in many other countries
Improved technology
- to enhance efficiency, reduce costs
Over-reliance make firms vulnerable to distruptions e.g natural disaster, COVID
- Increased competition makes it hard for smaller firms to compete
- Firms that can’t keep up with tech advancements fall behind
- Costs cut at expense of fair labour practices
7
Q
Impact of globalisation on government
A
- Governments where TNCs are based receive more tax
- Interconnection of tech increases chances of cyber threats
- Address issues of outsourcing jobs, and production
8
Q
Impact of globalisation on environment
A
- Interconnection means world can work together against climate change and share ideas and technology.
- Increase in emissions as globalisation causes increased production and consumption; more extraction and energy required
- Over-exploitation of Natural Resources
- Transportation of products may contribute to emissions.
9
Q
Impact of globalisation on economic growth
A
Investment of TNCs acts as injection
- AD/EG increase
Access to larger market
- reduce costs & increase efficiency
Specialised countries
- comparative advantage decreases price and increases efficiency
New capital transfer
- Tech, knowledge, skills transfer from TNCs
Attraction of FDI
Increased competition
- for firms, infant industries unable to compete
10
Q
What is comparative advantage?
A
Comparative advantage is when countries specialise in products that it can produce at lowest opportunity cost.
11
Q
What are the assumptions of comparative advantage?
A
- Transport costs are zero
- Perfect knowledge; all countries know what they have comparative advantage in
- Factor substitution is easy; economies quickly adjust from labour to capital, vice-versa
- Constant costs of production
12
Q
Advantages of comparative advantage
A
- World output increases as specialisation increases.
- Employment in countries with comparative advantage
- Traders have greater choice
- Greater competition, incentive to innovate new ways of productions
- Different FoPs from different countries utilised amongst the world.
13
Q
Disadvantages of comparative advantage
A
Over-dependence
- generates vulnerability, supply chain affect
Structural unemployment
- jobs lost to countries more efficient and competitive.
Environment suffers
- increase in demand for transport and resources, leads to emission and deforestation
14
Q
What is absolute advantage?
A
Absolute advantage is when a country can produce a product using fewer factors of production.
15
Q
What is a terms of trade?
A
Terms of trade refers to ratio of a country’s average price of exports to average price of imports.
16
Q
When is the terms of trade said to be favourable and infavourable?
A
Favourable when price of exports improved
Deteriorated when price of exports can buy less imports
17
Q
What factors affect terms of trade in SR?
A
- **Demand/supply for X/M **
- Inflation rates - Inflation increases price of products; prices more expensive to rest of world
- Exchange rates; SPICED
18
Q
What factors affect terms of trade in LR?
A
- Improvement in productivity/technology reduces costs and price; decreases terms of trades as exports get cheaper
- Anything that affects price of import/export will affect terms of trade
19
Q
Impacts of Terms of trade changes
A
- Favourable movement cause
20
Q
What is a trading bloc?
A
Trading bloc is a group of countries that come together to reduce/eliminate trade barriers between them
21
Q
What are the 4 types of trading blocs?
A
- Free trade areas
- Customs unions
- Common market
- Monetary unions
22
Q
What is free trade areas?
A
Free trade areas is a bloc where 2 or more countries abolish trade restrictions but operate their own barriers against non-members
23
Q
What is customs union?
A
Customs union is when members abolish trade barriers between themselves and have uniform barriers against non-members
24
Q
What is a common market?
A
Common market is a customs union but also have free movement of FoPs across national borders
25
What is a monetary union?
Monetary union is a common market of 2 or more countries with an exchange rate monitored and controlled by one central bank/ several central banks with similar monetary policies.
26
What is an economic union?
An economic union is the final step of economic integration where a common market with the same social, fiscal and monetary policies.
27
Advantages of trading blocs
**Free trade encourages specialisation**
- increasing output due to comparative advantage; firms benefit from EofS; causing lower prices/costs.
**Larger customer market**
- more countries to sell products to; output increases
**Greater competition for domestic firms**
- provides incentive for innovation and lower price/ increase quality/quantity of good; productive efficiency increases; output increases.
**Increased choice for customers**
28
Disadvantages for trading bloc
**Trade diversion**
countries switch to trading within their bloc instead of seeking most efficient/cost effective trading partners; reduces effect of specialisation; decreases EofS
**Retaliation**
- creation of one bloc may cause creation of others; trade disputes.
**Complex rules**
- may cost businesses more in administrative costs to comply with rules.
**Loss of sovereignty**
- countries surrender some control in terms of policies and regulations.
- Increased competition for infant industries
- Limited access for non-members; limits international trading
29
What is trade creation?
The formation of a free trade area or a customs union leads to an increase in trade between member countries
30
What is trade diversion?
Trade diversion is when a country moves from buying goods from a lower cost country to a higher cost.
31
What causes trade creation?
Trade is created by joining a trade union; removes tariffs and leads to higher welfare gain and higher consumer surplus. **Consumption shifts from a high cost domestic producer to a low cost partner producer.**
32
What causes trade diversion?
Trade shifts from more efficient exporter to less efficient one
Due to formation of a free trade agreement or customs union.
33
What is the WTO aim?
The world trade organisation was set up in 1995 and the aim was to reduce protectionism; to **bring trade liberalisation** and **ensure countries act according to the trade agreements**. They believe free trade is the best way to increase living standards, create jobs and improves lives.
34
What are the 2 roles of the WTO?
- Brings countries together at conferences & encourages to reduce trade barriers. E.g Doha round
- **Acts as adjudicating body**; member countries can file complaints if they believe another has violated trade agreements.
35
Why may restrictions on free trade benefit an infant industry and economy?
Restrictions decrease international competition for new firms; able to build up reputation/customer base; establish themselves in economy
36
Why may restrictions on free trade help job protection?
Decreases international competitiveness; Government worried that allowing imports will mean domestic producers lose out to international firms; leading to job losses; les employment.
37
How can restriction on free trade help potential dumping?
Dumping occurs when foreign firms sell products at unfairly low prices; lower than cost of production; domestic firms can't compete; harms domestic industries
38
How can restriction on free trade prevent danger of over-specialisation?
Protectionism increases price of imports; decreases imports; decreases complete reliance on other countries for specialised products.
39
How does restrictions on free trade prevent unfair competition?
Foreign countries may have different rules; foreign firms can produce at lower prices; their products priced lower than domestic products;
40
How does restrictions on free trade prevent over specialisation?
Prevents over reliance on other countries; prevents economic disaster
41
What are the 4 types of restrictions on free trade?
**Tariffs**
- Taxes placed on imported goods; increases price for imported goods; decreases demand
**Quotas**
- Limits level of imports allowed into a country
**Embargo**
- Total ban on certain products
**Subsidies to domestic firms**
- Decrease cost of production; decrease price to consumers; encourages switching
42
Impact of protectionism on **consumers**
**Higher prices**
- unable to import cheaper products
**Less choice**
43
Impact of protectionism on **domestic firms**
**Higher profits**
- Less competition, more demand
**Inefficiency**
- Without international comp, firms may get complacent and have less incentive to be efficient
**Increased CoP**
- Imported raw materials expensive, increase price
**Higher prices**
- Lower comp means firms can push up price
44
Impact of protectionism on **international firms**
**Smaller size of market**
- Demand in country decreases, missing out opportunity in international markets
45
Impact of protectionism on **workers**
**Job creation**
- Domestic demand increase; increased firm output, more employment to meet increased demand
**Higher wages**
- Increased domestic demand; increased profits; increased wages
46
Impact of protectionism on **governments**
**Tariff gains**
- Extra revenue
**Retaliation**
- Causes strained relations between countries
47
Impact of protectionism on **living standards**
**Trade wars**
- Introduction of restrictions may cause retaliation from affected countries; causes *reduction in trade and growth*
**Higher prices**
- Domestic and international good prices increase; less purchasing power; lower living standards
48
What is balance of payments?
Balance of payments shows all flows into and out of country
49
What is the balance of payments components?
**Current account**
- Trade in goods/services
- Income/current transfers
**Financial accounts**
- FDI, portfolio investments
**Capital accounts**
50
What is deindustrialisation?
Deindustrialisation is process of decline in industrial activity in an economy.
51
How does deindustrialisation cause balance of payment deficit?
**Reduction in manufactured goods**
- Industries shrink; production of manufactured goods decrease
- Manufactured goods usually big portion of exports; so decline in exports
- BoP deficit
**Increased imports**
- Fall in domestic industrial production; consumers turn to imported goods to meet demand
52
Causes of balance of payments deficit?
**High levels of consumer demand**
- If spending grows quicker than what supply side can deliver, meeting this demand requires imports; imports increase; more money leaving economy.
**Strong exchange rate**
- SPICED; valuable currency, domestic consumers can buy imported goods at cheaper price, imports increase
**Inflation**
- foreign goods and services may become cheaper in comparison
**Loss of comparative advantage**
- People transfer their purchases to other countries for cheaper prices
**Lack of capital investment**
- Out of date tech, lower productivity, less quality products, less exports
**Deindustrialisation**
- In 1980s, UK deindustrialised; caused lower exports; higher exports
53
Causes of balance of payments surplus?
**Natural resources**
- Increased exports; potential current account surplus
**More competitive**
- High labour productivity/ high quality; more people importing their goods; exports increase
**High Interest rates**
- More foreign investment into savings; more money inflow
**Weak currency**
- SPICED/WPIDEC; exports cheaper, demand increase
54
Demand side policy to reduce balance of payments imbalance
**Reduction in income**
- Less demand for imports
**Increase in interest rates**
- MPC decreases, less consumption, less import demand
**Tariffs**
- Increased price for imports, less imports; expenditure switching to domestic goods.
55
Supply side policy to reduce balance of payments imbalance
**Subsidies to domestic firms**
- Reduces CoP, more competitive, increased international competitiveness
**Improvements to productivity/efficiency**
- More international competitive, more demand
**Investment in education/training**
- Skilled workforce, increased productivity, Q of goods, Increased international comp, increased exports
**Investment in infrasturucture**
- Efficient transport networks decreases logistic costs, improve ease of exporting
56
Long-term solutions to balance of payments imbalance?
**Quotas/tariffs**
**Devalue currency**
- Exports cheaper, imports dearer
57
What is an exchange rate?
Purchasing power / price of one currency in the form of another.
58
What are the 3 diff exchange rate systems?
**Free floating system**
- Value determined by market supply and demand of currency
**Managed floating**
- Currency determined by demand and supply but CB will prevent large changes in rate; by buying/selling currency or changing interest rates
**Fixed system**
- Government sets their currency against another and rate does not change
59
Factors affecting floating exchange rates (demand)
**Level of exports**
- More exports, more demand for currency, higher value
**Foreigners willing to invest in currency**
- Speculation; if currency speculates increase, demand increase, value increase
**Tourism**
- Foreigners exchange currencies to domestic currency; increase value
**Inflation**
- Higher demstic price; switch to imports, increased supply of currency' depreciation
60
Factors affecting floating exchange rates (supply)
**Level of imports**
- More imports; more supply of currency, decrease value
**Domestic firms willing to invest abroad**
- Exchange money into other currency; supply increase, value decrease
**Tourism in international countries**
- Exchange domestic currency; supply increase; value decreases
**Speculation**
61
What are the general factors of value of a currency?
**Level of exports/imports**
**Level of investment**
**Consumers on holiday**
**Speculation**
62
How can a government use interest rates to increase/decrease demand for their currnecy?
Government increase interest rates
Saving more attractive
Foreign investors convert money to pounds to put into their banks
Demand increases
Value of currency increases
MPC decreases, less people import
63
How can a government use gold and foreign currency reserves to change value of currency?
Government buys gold/foreign currencies
Supply of currency increases.
64
What is competitive devaluation
**Economy intervenes in FX market to drive down value of currency**
- Weaker currency encourages exports and discourages imports
- Ineffective if other countries follow
65
What is the marshall learner condition?
**Sum of elasticity of import/export > 1**
for devaluation to have positive impact on trade balance
66
What is the J-curve?
Trade balance worsens before improving.
Consumers immediately aren't aware of cheaper exports
Will take time to find a source of the exporters
Consumers aren't immediately aware of more expensive imports
67
Why is international competitiveness important for countries?
Lower levels may mean country faces current account deficit
68
Factors influencing international competitiveness
**Exchange rates**
- SPICED
**Productivity**
- Costs lower; prices lower; more competitive
**Regulation**
-
**Investment**
- Education/training/infrasturcture make it easier to produce and lower costs; more competitive
**Taxation**
- High taxation can be passed onto consumer price; less competitive
**Domestic demand**
- High Dd means firms alr producing in large numbers; EoS, low AC curve, low price, increased comp
69
Benefits of being internationally competitive
**Current account surplus**
**Foreign investment**
- Establishing new companies; transfer of knowledge ,skills and tech
**Increased Employment**
- More products sold; more labour needed, better wages too
**Economic growth**
- AD increase due to increased exports
70
Negatives of being internationally competitive
**Dependency on exports for growth**
