4.1 International Economies Flashcards
What’s Globalisation?
Ever-increasing integration of the world’s economies into a single international market
What are the 4 main areas of globalisation?
Free trade across boundaries
Free movement of labour
Free movement of capital
Free interchange of technology
What are the causes of globalisation?
Trade in goods
Trade in services
Trade liberalisation
Multinational companies
International financial flows
Foreign ownership
Communications and IT
What’s Trade liberalisation?
Process of eliminating barriers to trade
e.g removing quotas and tariffs
What impacts does globalisation have on consumers?
Greater consumer choice
Greater quality products
Lower prices
Rise in incomes for high skilled
Decrease in incomes for low skilled
What impacts does globalisation have on workers?
Employment as new exposure to new jobs
Unemployment as some jobs taken over by developing countries
Increased migration
- creates jobs, fills skill gaps
- But lowers wages, strains on housing, healthcare and social security
Decreased wages for low skilled
Increased wages for high skilled
Multinationals create jobs
- also bring high skilled training
What impacts does globalisation have on producers?
Specialisation and economic dependancy increases
- increases efficiency
Lower costs
Opens markets
- Uk firms can sell elsewhere
Footloose capitalism
- lowers costs, higher profit
- increased efficiency
- job losses
- countries may lower taxes to keep them
Tax avoidance
What is footloose capitalism?
Highly mobile multinationals who easily can relocate across borders
What are the 3 ways tax avoidance can occur?
Transfer pricing
- selling a product to a high tax country for a very high artificial notional price, making the profits in the low tax country
Setup an office in low tax country like Ireland, making them assign the production of a patent, copyright or sales
Transfer production factories to a low tax country
What are artificial notional prices?
Prices that are ‘fake’ which don’t reflect the actual market values
What impacts does globalisation have on Govs?
Big firms leaving is a negative impact
- so policies are adopted, like lowering taxes, and subsidies
May lead to corruption
What are the 4 reasons for international trade?
Differences in factor endowments (resources, assets, etc a country possesses)
Price
Product differentiation
Political reasons
- may sign trade deals or opposite
What are the different factors affecting/ influencing patterns of trade?
Comparative advantage
Impact of emerging economies
Growth of trading blocs and bilateral trading agreements
Changes in relative exchange rates
What’s absolute advantage?
The ability of a country to produce a good/ service more efficiently/ cheaply (by absolute costs) than the other
What are absolute costs?
The total amount of resources (money, time, labour or materials) required to produce
Doesn’t take opp. cost into consideration
So ignores whether these resources could’ve been used in better ways
What’s comparative advantage?
The ability of a country producing a good/ service at the lowest opp. cost compared to the other country
Country should specialise in a product A if they have a lower exchange rate with product B compared to the other country
So, may produce 3B for A
But other country may produce 2B for A
So country should specialise in A
Other should invest in B
How do you draw the opportunity cost ratios of the 2 countries?
Make one of the good produced =1
Then make it into proportions of the country to see how much they can produce instead of this 1 other product
Should end up with 2 lines with diff gradients
The country furthest to the right has comparative advantage in that one, other country has the other
What are the 7 assumptions of the theory of comparative advantage?
- No transport costs
- Costs are constant and no economies of scale
- Only 2 economies producing 2 goods
- Traded goods are homogeneous (identical)
- All wine is identical etc - Factors of production are perfectly mobile
- no costs of changing factories to different countries - No tariffs/ trade barriers
- Perfect knowledge
- so all buyers/ sellers know where cheapest goods can be found internationally
What’s the labour theory of value?
The theory suggesting the labour input is the key factor to setting price of a commodity
David Ricardo believed in this
- so believed labour is the ultimate cost
Theory suggests high labour productivity countries have a competitive advantage in production of high technology goods
What’s preference similarity theory?
Suggests many goods are imported because of the better consumer choice instead of price
What are the benefits of trade?
Specialisation
Economies of scale
- as countries buy in bulk
Choice
Innovation
- the increased competition increases incentive to innovate
What are the costs of trade?
Overdependance
Jobs lost
- structural unemployment on low skilled jobs in developed countries
Distribution of income
Environment
Loss of culture
Loss of sovereignty
- through trade agreements etc
What’s sovereignty?
The power of the state
The supreme authority of a state to govern itself without external interference
What’s Terms of Trade (TOT)?
The ratio between average price of exports and average price of imports
Measured as an index
Index of TOT = (Index of export prices/ Index of import prices) X100
What does measuring in index form mean?
‘Index’ is a statistical measure that tracks changes over time in the relative prices
- so just tracks the average prices changes
- from thousands of prices
e.g 2020 is a base year of £100 for imports
in 2021 prices are £120 for imports
so the index price is 120/100 x 100
= 120 for imports
What are the 3 short run factors influencing TOT?
Changes in exchange rates
Inflation in the economy
Changes in demand for imports/ exports
What are the 2 long run factors influencing TOT?
Rise in productivity
- leads to more production for cheaper, so cheaper import prices, deteriorating TOT
Changes in incomes
- rise = higher price imports = lower TOT
How does PED on exports and imports effect the current account balance?
Exports and imports can be either elastic or inelastic
Higher total value of exports = better current account
Higher total value of imports = worse current account
e.g
If exports rise in price and they’re inelastic:
- TOT increases, as avg price of exports are higher
- Current account improves as higher value of exports
What is a Trading Bloc?
A group of countries who signed an agreement to reduce or eliminate protectionist barriers, like quotas or tariffs, between themselves
What is a regional trade agreement?
The agreement countries make to create a trading bloc
What’s a tariff?
A tax imposed on imported goods
- makes imports coming in more expensive which lowers their demand
So it’s more expensive for domestics to buy foreign goods, to give domestic producers the edge
- leads to less imports
- higher current account
remember ‘ta’ for tax
What’s a quota?
A limit of the amount of imports allowed to be imported into a country
- Restrict imports to protect domestic producers or control the supply of foreign goods
Leads to less imports, so higher current account
remember ‘qu’ for quantity
What are the 5 main types of trading blocs? (from lowest integration to highest)
Preferential trading areas
Free trade areas
Custom unions
Common markets
Economic unions
What are preferential trading areas?
Where protectionist barriers are reduced on some but not all goods
Members sign a Preferential Trade Agreement (PTA) to create this area
What are free trade areas?
Where all tariffs and quotas are removed on trade in goods between member countries
Members can impose their own tariffs/ quotas on goods they import from outside trading bloc
What are custom unions?
Free trade within the trading bloc members
However, the group decides how all the countries trade with non-member countries
- they impose a common external tariff (CET) for all members
What’s a common external tariff (CET)?
A common tariff set by the group of members of a custom union, common market, or an economic union on their non-members
- so all members have the same tariff imposed
What are common markets?
Custom unions but allow free movement of factors of production:
- labour
- capital
So deeper integration than custom unions through integrating markets for labour and capital
Product standards and laws concerning free movement of goods/ services are common between countries
What are economic unions?
Highest level of economic integration
Countries are as fully integrated as different unions within a country
Has all traits of common markets + more
Has a degree of fiscal union
Has monetary union
The EU is an economic union, but not a perfect economic union
There are no perfect economic unions
What is fiscal union?
Countries sharing fiscal policies within a trading bloc
- taxation
- gov spending
- possibly a common budget
What is monetary union?
Where countries within a trade bloc share a currency, or share monetary polices at least
e.g the EU share Euros
or a central monetary authority (like a central bank) may manage the monetary policy for the entire union
What are static benefits?
Immediate, short-term gains achieved from better allocation of resources due to trade or integration
E.g
- Specialisation
- Increased efficiency due to specialisation
- Access to cheaper imports
What are dynamic benefits?
Long term benefits achieved by changes in technology, innovation, and economic growth driven by market expansion
E.g
- Economies of scale
- technology transfer
- investment growth
- productivity improvements
What is harmonisation?
Establishing common rules on everything
- from safety hazards to tariffs, taxes, currencies
E.g - harmonise tax policies to prevent tax competition
Harmonisation of economic polices are:
- Always in economic union
- Desirable in common markets
- Possible in custom unions
Not in Free and preferential trade
Fiscal and monetary union can’t exist without harmonisation
What’s a political union?
Most advanced form of integration between countries
Where they unify their political systems, decision making and often have a central government
Only real example was the Soviet Union, the proposed African Union which hasn’t happened and the real one today is the United Kingdom (close to perfect)
What’s Trade Creation?
The switch from high cost producers to low cost producers
Seen in most integration of countries
What’s Trade Diversion?
The switch from low cost producers to high cost producers
E.g - The uk buying foods for cheaper before EU then more expensive after EU from USA and New Zealand, due to high common external tariffs (CETs)
What are the different dynamic benefits?
Economies of scale (EOS)
- from companies expanding with foreign companies
Increased competition on domestic firms
What’s the European Central Bank (ECB)?
The central bank of the EU which has control over the Economic and Monetary Union (EMU) to set monetary and exchange rate policies
They have several functions:
- distributes euros throughout eurozone
- sets interest rates
- maintain stable financial system
- manages currencies vs the Euro in Fx markets
What’s the EU’s “Growth and Stability Pact (GSP)”
The risk of countries in the EU going into too much debt or fiscal deficit could inflate the euro
So the ECB set the GSP
- becoming more flexible in 2025
There’s 2 main rules:
- Not exceeding fiscal deficit more than 3% of GDP
- Not exceeding national debt of more than 60% of GDP
What are the 6 advantages of a monetary union?
Fixed prices
No exchange rate costs
Greater price transparency
- no imperfect information of consumers of prices
Inward investment
Price stability
Closer to economic union
What are the 5 disadvantages of a monetary union?
Transition costs starting monetary union
Transition costs stopping monetary union
Loss of policy independence
Inability of change value of currency
Structural problems
- structure of different economies make it difficult to implement one-size-fits-all policies, e.g different employment rates
What’s the theory of optimum currency area?
A group of countries where efficiency would be maximised by sharing a common currency
What judges is an optimum currency area is created?
Should be free movement of labour
Should have free flow of financial capital
Should be automatic fiscal transfers
- to help other countries
should share same trade cycle
What’s the General Agreement on Tariffs and Trade (GATT)?
In 1947, 23 countries signed the GATT and was replaced by the WTO in 1995 for deeper integration
GATTs rules were:
- Countries couldn’t increase degree of protection
- A country cutting taxes on one country had to do the same for all
- Nothing on reducing protectionism
What are rounds?
Negotiations from countries aimed to reduce tariffs and quotas
What’s the World Trade Organisation (WTO)?
The Uruguay round, 1986-1994 (8th round of world trade) expanded international trade rules, successfully promoting the establishment of WTO in 1995
WTO has 2 main functions
- Encourage trade liberalisation
- Ensure countries act according to trade agreements, and any complaints can go to an international court
Why might the WTO become irrelevant in lowering trade barriers
Due to the rise of regional trade agreements (RTAs) and bilateral deals, which often involve deeper integration and faster progress than global WTO negotiations
What are Regional Trade Agreements (RTAs)?
RTAs don’t need approval from WTO
Type of trading bloc
Don’t produce anywhere near the economic gains that can be achieved by the WTO
What are the criticisms of the WTO?
Allows rich countries to exploit developing countries’ workers
Poorer countries struggle as not given as much back in return
Destroys native cultures for materialistic American lifestyle
Why do world producers have elastic supply curves?
As there is a significant amount of supply they can have compared to one domestic firm, so its said they can produce as much as possible at a given price
What happens to welfare when a tariff and quotas are in place?
There is a deadweight welfare loss, as the decrease of consumer surplus is greater than increase of producer surplus
Who gets the first bit of supply in the market, on the diagram?
Domestic producers are assumed to get the share before where the 2 supplies meet
What are administrative barriers?
Policies by the gov to restrict imports which aren’t tariffs
Imposing product standards
licences to import
custom delays
quotas
What are the reasons for protectionist barriers/ restrictions of free trade?
Infant industry arguments
- new domestic firms cant compete
Job protection
Dumping
- may increase prices after exploiting unfair competition
Cheap labour
Terms of Trade
- may reduce demand for imports, bringing their prices down, increasing TOT
What’s dumping?
Selling goods at a lower price than the cost price by foreign producers in domestic markets
Bad as firms may increase prices after exploiting unfair competition
Or cause trouble repaying debts
What are the impacts of protectionist policies?
Consumers
- cant buy imported goods cheaper
- restricted choice
Producers
- domestic producers gain output, sales and profits
- but have higher costs and lower efficiencies
Workers
- loose jobs short term
Govs
- Benefit short term due to higher tax rev from tariffs and protected jobs
- may loose long term as less efficient and less competition, with higher costs, leading to less innovation and lower growth, increasing unemployment
Living standards
- may protect in short run as no loss of jobs
- decrease rate of increase as less growth in long term
Why is free trade preferred to restriction of it?
More efficient allocation of resources
Encourages competition
Maximises welfare as no tariffs or quotas in place
What is speculation?
The act of making high-risk investments in financial markets with the hope of making short-term profits from price fluctuations
not typically invest for long-term growth or income but seek to profit from market volatility, such as changes in:
Stocks
Currencies
Commodities
Real estate
Speculators are individuals or groups who engage in speculation
What does reducing AS do to balance of payments?
Exports increase, as its cheaper to produce goods domestically, leading to more exports being produced
Imports decrease, as domestic goods are more competitive and cheap, so more proportion of demand goes to domestics instead of imports
Hence, balance of payments improve
What do the financial and capital accounts make up of?
Financial and capital accounts are associated with saving, investment, speculation and currency stabilisation are recorded
What’s the financial account?
Records almost all flows of financial capital In and out of the uk
Split into 3 main parts
- FDI
-Foreign Portfolio investment (FPI)
- other investments such as trade credit, loans, purchases of currency and bank deposits
What’s Foreign Direct Investment (FDI)?
When a firm or individual invests in business interests in another country
Only FDI when purchasing/ controlling 10% or over the firm
What’s Foreign portfolio Investment (FPI)?
Flows of money to purchases foreign shares where it’s less than 10% of the company
Over 90% of uk’s FPI is debt securities like bonds and long term loans issued by the gov
What’s the capital account?
Records the transfer of assets and capital between countries.
Focuses on one-off asset transfers and non-produced assets
Relatively unimportant
largest recorded are from immigrants and emigrants bringing financial capital to the uk or abroad
Why does the current account need to balance with the financial and capital account?
If a country is in currency account deficit, it must borrow money or attract investments, which are recorded in the financial and capital accounts
So the total flow should equal
If the don’t, the remaining is the balancing item, which is the sum of the failed transactions bro be officially recorded
What are the different ways the gov can affect the current account?
Expenditure switching policy
Expenditure reducing policy
Supply side policies
Protectionism
What are the 2 ways global trade imbalances can be measured?
Imbalances on current account of balance of payments
Imbalances in assets owned abroad or borrowing from abroad
What are 3 different ways of measuring international competitiveness?
Relative unit labour costs
- in index form with a base year of 100
Relative export prices
Export prices vs import prices
What makes a country competitive internationally?
The cheaper it is for them to produce goods, they are more internationally competitive
What factors influence international competitiveness?
Exchange rates
- high exchange rates lead to lower import prices and higher export prices, overall reducing competitiveness
Productivity
Wage and non-wage costs
Regulation
- less regulation, possibly meaning cheaper to produce, increasing competitiveness
Research and Development (R&D)
- More R&D, the better influence for long term international competitiveness
Taxation
What benefits come being internationally competitive?
Current account surplus
- leads to higher national income, more growth and employment
Increased investment
Employment
Wage growth
Higher domestic purchasing power
- higher incomes leads to more power to buy abroad
- however, changes when exchange rates adjust, leading to increased import prices, decreasing competitive advantage
What gov policies influence international competitiveness?
Supply side policies
- increases competition domestically and internationally
Exchange rate policies
- low exchange rates increase competitiveness
- not many countries do this however
Control inflation and macroeconomic stability
- low, steady inflation keeps import quantity lower and doesn’t change exchange rates
