4.1 interntional economics Flashcards
What is globalisation
Globalisation refers to the growing interdependence of countries and the rapid rate of change it brings about
Another definition for globalisation
The increasing integration of the world’s local, regional and national economies amino a single international market.
What are there movements towards with globalisation
Free trade of goods and services, free movement of labour and capital and free interchange of technology and intellectual capital
Factors contributing to globalisation
• improvements in transport infrastructure and operations
• improvements in IT and communication
• trade liberalisation and reduced protectionism
• international finance markets allows movement of money around the world
• TNC’s
Impact of globalisation on consumers
• Have more choice since wider range of goods available
• can lead to lower prices as firms can take advantage of comparative advantage
• leading to a rise in prices
• many worry about the loss of culture
Impact of globalisation on workers
• some have gained employment whilst others have lost it
• increased migration may affect workers by lowering wages
• international competition has led to a fall in wages
• increasing inequality
Impact of globalisation of producers
• firms are able to source products from more countries and sell them in more
• can exploit comparative advantage
• able to employ low skilled workers much cheaper in developed countries
• firms who are unable to compete internationally will lose out
Impact of globalisation on the government
• May be able to receive higher taxes since TNC’s pay taxes
• TNC’s have the power to bride and lobby governments
Impact of globalisation on the environment
• increase in world production has led to an increased demand for raw materials
• increased trade has led to more emissions
• means world can work together and tackle climate change
Impact of globalisation on economic growth
• Increased investment within countries
• TNC’s may bring world class management techniques and technology
• Trade will increase output since it allows exploitation of comparative advantage
• power of TNC’s can cause political instability
What is the theory of comparative advantage
The theory of comparative advantage states that countries find specialisation mutually advantageous if the opportunity cost of productions are different.
It is when a country is able to produce a good more cheaply relative to other goods produced
What is absolute advantage
Exists when a country can produce a good more cheaply in absolute terms than another country
Assumptions that are also limitations of the theory of comparative advantage
• assumes no transport costs
• also assumes costs are constants and that there are no economies of scale.
• goods are assumed to be homogenous, which is unlikely in real life.
• also assumes the FOP are perfectly mobile, there are no tariffs etc…
• whether trade takes place will depend on the terms of trade between the countries
Advantages of specialisation and trade
• comparative advantage shows how the world output can be increased
• trading and specialising allows countries to benefit from economies of scale.
• different countries have different FOP’s and so allows countries to make use of different ones
• enables greater customer choice
• greater competition
Disadvantages of specialisation and trade
• can lead to over dependence where some countries become dependent on particular exports
• can cause structural unemployment as jobs are lost to foreign firms
• Environment will suffer due to problems of transport and increased demand for resources
• Countries may suffer loss of sovereignty, EU example
• may see a loss of culture as trade brings foreign ideas
Factors influencing the pattern of trade
• Comparative advantage - countries will produce products in which they have a comparative advantage
• emerging economies - countries grow at different rates when they grow, they are likely to need to import more goods and services than before to pay for this. Emerging economies shift they trade pattern by taking up a larger proportion of a countries imports and exports than they had before
• trading blocs - increase the level of trade between countries and so influence the pattern of trade because trade increases between these countries and decreases between others
• relative exchange rates - the exchange rate affects the relative prices of goods between countries. Prices are an important factor in determining whether consumers buy goods and so change in price will affect the pattern of trade
What is the terms of trade
The terms of trade measure 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.
What is an improvement in the terms of trade
Terms of trade are favourable when the terms of trade increase as the country can buy more imports with the same level of output.
What is a deterioration of the terms of trade
Terms of trade are unfavourable if they decrease, when export prices fall or import prices rise.
Equation for terms of trade
Average export price
—————————— X 100
Average import prices
Factors influencing a country’s terms of trade
An improvement will be caused by a rise in export prices or a fall in import prices
A deterioration will be caused by a fall in export prices or a rise in import prices
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 X and M
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
Another long run factor is changing incomes as it effects the demand for goods and services
In general, anything that affects the price of a country’s imports or exports will affect its terms of trade
Impacts of changes of terms of trade
If PED of exports and imports is inelastkx, a favourable movement in terms of trade would improve the current account, vice verda with elastic
An improvement in the terms of trade is likely to lead to a fall of GDP and a rise in unemployment since if it is caused by a rise in the price of export, exports will fall and if it is caused by import prices, imports will rise.
What is a regional trading bloc
regional trading bloc is a group of countries within a geographical location that protect themselves fr imports from non-members. They sign an agreement to reduce or eliminate tariffs, quotas and other protectionist barriers.
What’s a preferential trading area
These are where tarifff and other trade barriers are reduced in some but not all goods between member countries
Free trade area
Occur when two or more countries in a region agree to reduce or eliminate trade barriers on all goods coming from other members of the
Customs union
Involves the removal of tariffs between members and the acceptance of a common external tariff
Common markets
First step towards full economic integration and occurs when members trade freely in all economic resources so barriers to trade in goods, services, capital and labour are removed
Common external tariff
Must be a significant level of harmonisation of micro-economic policies, common rules regarding monopoly power and anti-competitive practices.
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. EU example
Advantages of trading blocs
Free trade encourages specialisation, and this increases output, according to comparative advantage. Also helps to benefit from economies of scale.
Firms may be able to grow much larger by creating a larger customer market, but this may be difficult given different customer markets in different countries
Firms in the bloc are protected from cheaper imports outside. Those in EU protected from Chinese imports.
More competition due to removal of trade barriers
May create more jobs
Increased choice for consumers.
Disadvantages of trading blocs
Countries are no longer able to benefit from trade with countries in other blocs and the blocs are likely to distort world trade, reducing benefits of specialisation.
May be a reduction in competition as inefficient firms are driven out of the market as it becomes oligopolistic.
May be loss of resources, as the most successful countries will attract capital and labour and so this heightens regional inequalities.
Could also be retaliation as the creation of one bloc will lead to the creation of others.
Weaken sovereignty.
What is trade creation
Is when trade is created by the joining of a trade union. Diagram is opposite of a tariff diagram, since it removes the tariffs and leads to welfare gains and higher consumer surplus.
What is trade diversion
Example
Occurs when consumption shifts from a lower cost producer outside the trading bloc to a higher cost producer within it.
For example, the UK switching from buying New Zealand butter, which is the cheapest, to European butter when they joined the EU.
What is the role of the WTO
Set up 1995, replacing GATT, which was set up to reduce protectionism.
Two main aims to bring about trade liberalisation and to ensure countries act according to the trade agreements they have signed.
They hold series of talks called rounds, most recent is Doha round in 2001 which aims to cut protectionism on agricultural goods.
Problem of the WTO
All countries must agree to it and so any country is able to veto.
Possible conflicts with the WTO
• regional trade agreements contradict the WTO’s principles as common external tariffs introduced protectionism
They can complement the trading system and the WTO strives to ensure non-members can trade freely and easily with members of a trade bloc
Some might argue the WTO is too powerful or that it ignores the developing countries
Protectionist approach of USA and China provides a threat to the WTO
What is the infant industry argument (reasons for restrictions for free trade)
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 go cover a lot of sunk costs, meaning their AC will be higher
Therefore, the industry will not be able to compete in the international market and so the government protect them until they are able to compete on an equal level
Job protection (reasons for restrictions for free trade)
Governments may be concerned that allowing imports will mean domestic producers will lose out to international firms, and so there will be job losses within the country. Would be politically unpopular
Protection from potential dumping (reasons for restrictions for free trade)
Dumping is when a company or country with surplus goods sells these goods off to other areas of the world at very low prices, harming domestic producers in those countries. The government may need to intervene to protect domestic producers who are unable to compete with firms that are willing to make a losss
What’s a tariff
Taxes placed on imports
What is a Quotas
A quote is a Limit placed on the level of imports allowed into a country, meaning people are forced to buy domestic goods if they want that food and the quota is already used up.
What are subsidies to domestic products
These are payments to domestic producers which lower their costs and help them to be more competitive by enabling cheaper prices.
Sometimes purely given to goods that are exported whilst other times they are given to firms that have a large proportion of their sales as exports
What are non tariff barriers
Countries can introduce an embargo, which is a total ban on imported goods
They can introduce import licensing when countries need a lisence to be able to import.
The use of legal and technical standards means that some products cannot be sold in the country, for example specific specification can be imposed for goods or intellectual property laws over patents and copyrights can be introduced.
Impact of protectionist policies on consumers pi
There are higher prices for consumed as they are unable to buy imports at the cheaper price. It tends to rise price of domestic producers since goods and services are needed for the production of these goods and import controls may effect the raw material prices
Less choice
Impact of protectionist policies on producers
Domestic producers tend to benefit from import controls since they have less competition so can sell more goods at a higher price than otherwise and they will benefit from measures to increased exports
However, they may suffer from higher costs if there are controls on the imports they need for production
Foreign producers will lose out as they are limited in where they can sell their goods
Impact of protectionist policies on workers
Little difference to employment figures
Can be argued that allowing inefficient firms to close would be better for workers in the long run.
Impact of protectionist policies on governments
In short run, governments benefit from protectionist policies as they gain tax revenues and they are politically popular
However, can lead to inefficient economy.
Impact of protectionist policies on living standards
As the tariff diagram shows, the imposition of import controls results in deadweight welfare loss
It also causes trade wars since the introduction of restrictions often leads to retaliation by other countries.
Impact of protectionist policies on equity
It has a regressive effect on the distribution of income as the rise in prices affects the poorer members of society far more than the well off as it is they are no longer able to afford the products.
What is the balance of payments
A record of all the economic transactions that take place between a country and the rest of the world over a specific period
What is the current account
The current account itself is split into different parts: trade in goods, trade in services, income, transfers
What is the capital and financial account
Relatively unimportant as it mainly records transfers of immigrants and emigrants taking money abroad or bribing to the uk
What is FDI
Example
The flow of money to purchase part of a foreign firm.
BT buying a 15% share in a telecoms company in Brazil
What are portfolio investments.
The same thing as FDI but less than 10% of the company.
Short terms causes of deficits and surpluses current count
High levels of consumer demand. If household spending grows more quickly than the supply side of the economy can deliver, the only way of meeting demand is by importing goods and services.
Can be caused by a strong exchange rate which reduced the UK price of immports and leads to expenditure switching effect away from domestically produced output
A high level of relative inflation will decrease exports since it will increase their price compared to goods produced by other countries
Medium causes of a deficit or surplus on the current account
As a country loses its comparative advantage, people will transfer their purchases to other countries and the UK will need to switch to resources to production of other things.
Long term causes of deficits and surpluses in the current account
Lack of capital investment means firms use more older and out of date tech
DeIndustrialisation
Countries with large amount of natural resources tend to export more and if they have a small population, they tend to have a surplus
Demand side policies to reduce deficit
Plus eval/however
Monetary or fiscal policy can be used to reduce AD. This reduces income so reduces demand for imports.
However, they are only short term and limit output of the economy, causing a reduction in living standards and growth.
Supply side policies to reduce imbalance on current account
Could use measures to improve productivity and efficiency or improve quality.
Can seek and encourage industries to exploit opportunities in the export market overseas and focus where UK has a comparative advantage.
Types of expenditure switching policies
Tariffs or quotas will reduce the attractiveness of the import. However likely to cause trade wars
Could attempt to control inflation. Problem is that it will lead to a fall in demand for domestic goods and so therefore could cause unemployment and a fall in growth.
Can depreciate the pound to make exports cheaper and imports more expensive. However not always works due to Marshall Lerner / J curve.
Significance of global trade imbalances.
Argued that a CA imbalance is not much of a problem as long as the capital and financial account is in surplus.
Problems arise if foreign investors refuse to lend to a country - but it is an individual or institution which takes the loan and not the country.
Deficits not a concern for countries.
Not a problem when governments cannot repay their foreign debt
What is an exchange rate
The purchasing power of a currency in terms of what it can buy of other currencies.
What’s a free floating exchange rate
Where the value of the currency is determined purely by market demand and supply of the currency, with no target set by the government and no official intervention in the currency markets.
Arguments for a floating exchange rate
Central bank does not need to try to maintain a particular exchange rate and therefore will not need to use reserves to buy pounds in the market to keep it at the target.
What is managed floating
Examples.
Where the value of the currency is determined by demand and supply but the central bank will try to prevent large changes in the exchange rate on a day to day basis
Brazil, Switzerland, Japan
What’s a fixed exchange rate
When a government sets their currency against another and that exchange rate doesn’t change. The country can decide to devalue its currency overnight to improve international competitiveness of its industry.
Arguments for a fixed exchange rate
Good because it avoids currency fluctuations, which encourages trade and investment as firms know the true costs of the deal.
Reduces the cost associated with trade, as firms have less to spend on currency
A stable exchange rate may reduce inflation as there is not a sudden reduction in the value of the currency leading to a rise in imports and then inflation.
What’s an appreciation of an exchange rate
An increase in the value of the currency using floating exchange tates
What’s a depreciation of exacted rate
An decrease in the value of the currency using floating exchange rates
What’s a revaluation of currency
When the currency is increased against the value of another under a fixed shstem
What’s a devaluation of currency
When the currency is decreased against the value of another under a fixed system
Factors effecting floating exchange rates
Determined by interaction of demand and supply
The demand for pounds is determined by the amount of British goods that foreigners want to buy; the number of foreigners wanting to invest in the UK, visit the
UK or place their money in British banks; and the amount of speculation on the pound.
The supply of pounds is determined by: the amount of foreign goods people in the UK want to buy; the number of British firms that want to invest abroad, the amount of
British people wanting to go on holiday abroad or place their money in foreign banks; and the amount of speculation on the pound.
Therefore, in general, the currency is affected by the level of exports and imports ,
the level of investment, those going on holiday and speculation.
the two main methods governments can use to influence the value of the currency.
If they want to increase or decrease demand for their currency, a government can use interest rates. An increase in interest rates will strengthen the pound as people will convert their money to pounds to put them in English banks, so demand for pounds will rise. Falls in interest rates will decrease demand for the pound so weaken the currency.
Also, governments can use gold and foreign currency reserves to manipulate the
value of their currency. If the value of the pound is too high and they want to weaken it, they can increase supply by buying foreign currency or gold with pounds. To
strengthen the pound, they can increase demand by selling their foreign currency or
gold in exchange for pounds.
what is competitive devaluation / depreciation
problems / eval
This is where a country deliberately intervenes in foreign exchange markets to drive down the value of their currency to provide a competitive boost to their
exporting industries. A weaker currency will encourage exports and discourage imports and therefore the balance of payments should improve assuming the
Marshall-Lerner condition.
One problem is that other countries may follow and reduce their currency as well. This is unlikely if there is a current account deficit but if the country who devalues has a surplus, other countries are likely to retaliate.
impacts of changes in exchange rates
The Marshall-Lerner condition states that the sum of the price elasticities of imports and exports must be more than one (i.e. elastic) if a currency devaluation is to have a positive impact on the trade balance.
The J-curve (shown in the diagram) shows how the current account will
worsen before it improves. People will not immediately recognise that British exports are cheaper and it will take a while to find a source for them, whilst UK consumers will not see that imports are more expensive and may be
unable to switch straight away
Economic growth and unemployment: A weaker exchange rate is likely to
increase exports, since they become cheaper, and decrease imports so lead to an increase in AD. This will increase employment and economic growth.
Rate of inflation: Falls in the exchange rate will increase inflation as imports become more expensive, causing a rise in prices and a fall in SRAS. Also, the net exports section of AD will increase and so inflation will rise further.
FDI: A fall in the currency may increase FDI because it becomes cheaper to invest. However, if the currency is continuing to fall then this is an indication that an
economy has serious economic difficulties which will discourage investment.
measures of international competitiveness.
Relative unit labour costs: Unit labour costs are total wages divided by real output: the cost of employing workers for each unit of good. These are measured in an index number with one year chosen as a base year.
Relative export prices: This is the price of UK exports compared to the exports of the UK’s main trading partners. A rise in relative export prices means UK export prices have risen more than other countries’ export prices and so the UK has become less competitive.
factors influencing international competitiveness
Exchange rates: A rise in the pound will cause exports to become more expensive, and thus make UK goods less competitive as their price changes. However, this depends on the elasticity the good and the reaction of the firms
Productivity: A rise in productivity will cause a rise in the UK’s competitiveness
because costs are lower and so prices will fall. Labour productivity is important.
Regulation: High levels of regulation slow down business decisions, making them less adaptable to changes in the global market. It also increases their cost of
production. Therefore, regulation reduces competitiveness because of higher costs and slow decision making.
Investment: Investment in infrastructure improves productivity and ensures firms can deliver and produce their product reliably, cheaply and efficiently. Investment in research and development allows firms to develop new products, which increases
competitiveness as other countries won’t have these products, and new technology, which reduces costs and increases efficiency.
taxation
inflation
economic stability
flexibility
competition and demand at home
factors of production
openness to trade
benefits of being internationally competitive
By being competitive, a country will experience current account surpluses
A competitive economy is likely to attract inflows of foreign investment, whether this be by establishing new companies (creating jobs) or buying domestic firms. This will lead to a transfer of knowledge, skills and technology to firms.
Employment is likely to increase because more goods are being produced, since
more goods are exported and less are imported, so more are sold internationally and
domestically. A rise in demand for labour will lead to a rise in wages.
There will be economic growth, both by supply side improvements due to efficiency
and investment and by demand side improvements relating to X-M.
drawbacks of international competitiveness
However, the problem with being internationally competitive is that this
competitiveness can be easily lost. Developing countries who have benefits due to lower costs of labour and costs of materials etc. could see this eroded when they
experience export led growth due to their competitiveness.
A current account surplus
may lead to a rise in the exchange rate , reducing their competitiveness.
Countries who are competitive may become more dependent on overseas countries
and so this may mean they suffer from larger issues if there is a global recession.
