4.1.3,4.1.6,4.1.8 Flashcards
1
Q
what are the factors that affect world trade?
A
comparative advantage, emerging economies, trading blocs and trading agreements, relative exchange rate
2
Q
how does the comparative advantage affect world trade?
A
a country will trade if they have a comparative advantage, so changes in comparative advantage will affect the trade pattern
3
Q
why has there been an increase in exports of manufactured goods from the developing to developed?
A
there has been an increase due to the fact the lower labour costs in these developing countries giving them a greater comparative advantage, this has lead to the industrialization of countries such as china and India and deindustrialization of UK
4
Q
why is china becoming less competitive?
A
they are becoming less competitive due to an aging population caused by one child policys and also a rising middle class which is demanding higher wages
5
Q
what do developed countrys usually have a comparative advantage in?
A
capital intensive or high tech products
6
Q
what does capital intensive mean?
A
Capital Intensive refers to those industries or companies that require large upfront capital investments in machinery, plant & equipment in order to produce goods or services in high volumes and maintain higher levels of profit margins and return on investments.
7
Q
what do devoloping countries usually have a comparative advantage in?
A
labour intensive or land intensive
8
Q
what does labour intensive mean?
A
Labor intensive refers to a process or industry that requires a large amount of labor to produce its goods or services.
9
Q
how has the collapse of communism affected the pattern of trade
A
the collapse of communism has meant that more countries are now participating in trade
10
Q
what sectors has the uk shifted to?
A
they have shifted into the service sector especially the financial and professional services
11
Q
how has emerging economies affected trade
A
as countrys grow they require more imports and they export more to fund the growth.
12
Q
how much does international trade make up for on average for devoloping countries economies?
A
it makes up around 20% of the developing countries economy
13
Q
how much does international trade account for the US economy?
A
it makes up around 8% of US economy
14
Q
how do trading blocs affect trade?
A
countries inside trading blocs will tend to trade with other countries in the bloc due to the free trade areas making it cheaper, therefore new trade may be created however there may be a trade diversion from countries outside the bloc to countries within
15
Q
define a trading bloc?
A
A Trading bloc is a group of countries that have reduced or removed trade barriers for its participants.
16
Q
define absolute advantage?
A
Absolute advantage exists when a country can produce a good more cheaply in absolute terms than another country
17
Q
define comparative advantage?
A
Comparative advantage exists when a country is able to produce a good at a lower opportunity cost then other countries
18
Q
how is an absolute advantage shown on a PPF?
A
if one country can produce more of product ie PPF stands further out
19
Q
how is a comparative advantage shown on a PPF?
A
the comparative advantage is represented by a gradient of PPF
20
Q
how can you tell when trade is not suitable on a PPF?
A
if the gradients are the same then they will not benefit from trade
21
Q
what are the assumptions and limitations of the theory of comparative advantage?
A
it assumes there is no transport costs which could lower or remove comparative advantage.
assumes costs are constant and there are no economies of scale ( straight line gradient)
goods are assumed to be homogenous (quality may differ)
22
Q
what is the advantage of growth from trade and specialization?
A
-If country’s specialize in what they have the highest comparative advantage then they will increase global economic growth
23
Q
what is the advantage of growth from trade and specialization?
A
-If country’s specialize in what they have the highest comparative advantage then they will increase global economic growth
24
Q
what is the advantage about choice from trade and specialization
A
-trade enables greater choice as there are more goods to buy , so greater consumer welfare
25
what is the advantage about choice from trade and specialization
-trade enables greater choice as there are more goods to buy , so greater consumer welfare
26
what is the advantage about competition from trade and specialisation?
greater trade means more competition so therefore firms will have more of an incentive to innovate which will lower costs and prices
27
what is the disadvantage of trade and specialization that relates to dependence on goods?
if a country is dependent on the exports or imports of goods then they become more vulnerable to changes in prices
28
what is the disadvantage of trade and specialization that relates to employment ?
it may cause structural unemployment if jobs are lost to foreign firms who are more efficient, this occurred when the UK deindustrialized and the low skilled workers couldn't find new jobs
29
how do relative exchange rates alter the pattern of trade?
if you have a strong currency your imports are going to be cheaper relative prices so you are likely to import, if your currency is weaker then you are likely to export more
30
how does the relative exchange rate affect the UK?
the uk has a strong pound which may be one reason for the deficit of the uk due to its importing from the EU
31
how does the relative exchange rate affect china?
china has artificially kept their exchange rates low to have export led growth
32
what is the gravity theory of trade?
the gravity theory of trade says an economy will gravitate towards trading with its closest neighbors and economies which are similar in terms of size, cultural preferences and stage of development.
33
what are the factors that affect gravity theory?
size of a economy, geographical proximity, similarity of consumer preferences
34
what are the reasons for restrictions on free trade?
infant industry argument, job protection, protection against dumping, protection from unfair competition, terms of trade and the danger of overspecialisation
35
what is the infant industry arguement?
infant industry will need time in order to grow a customer base and reputation and will have to cover the high sunk costs (entry costs that cant be recovered) meaning Average Costs will be higher. they may not be able to compete on global market so governments may subsidize them until they can survive
36
what is an infant industry?
an industry that is newly established within a country
37
what is the problem with the infant industry argument?
the firms usually become inefficient under the governments so the infant industry never becomes able to compete by itself, may also cause tit for tat responses from other countries
38
why is job protection a reason for restrictions on free trade?
if governments allow too many imports in to the country then this may threaten the domestic firms profitability which will lead to greater unemployment
39
what is dumping?
Dumping is 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.
40
how has china intervened to protect against dumping?
In China, tariffs are placed on stainless steel tubes from the EU and Japan to prevent from dumping.
41
why does the government need to intervene against dumping?
The government may need to intervene to protect domestic producers who are unable to compete with firms that are willing to make a loss
42
why do governments need to intervene against unfair competition?
Across the world, different rules apply and this means that producers in different countries can produce at different prices. Domestic producers may be unable to compete with a firm that has very low labour costs or very low health and safety costs due to regulation or with a firm that is heavily subsidized by the government. Some will argue the government should
intervene to protect domestic producers from this
43
define the terms of trade?
the index of export prices/ the index of import prices
| measures countrys export prices in relation to import prices
44
why are the terms of trade a reason for restriction?
If a country buys a large amount of imports for a certain good, this will increase demand for that good and hence increase the price. This will worsen the terms of trade and so therefore they can buy less imports with the amount of exports.
Restrictions will reduce supply of the good and lead to a fall in the price received by the importer, so improve the terms of trade.
45
What is a sunset industry?
A sunset industry is an industry that is past its peak and is now declining
46
What is a sunrise industry
An industry that is emerging often using new innovative technology
47
Why it important for government to intervene with sunset industry
Governments may need to intervene to slow down the decline in sun set industrys , although this may be at a loss to government it will reduce frictional unemployement as workers can gradually find new jobs in other industrys
48
why might a government need to intervene when a country is becoming over specialised?
if a country becomes to reliant on one and other for important products as if an issue occurs in one of these countries then all the countries will be affected so some government intervention may be neccersary in order to keep a domestic production of goods. this is vital for industrys such as agriculture
49
what is the EUs common agriculture policy?
it is a policy to ensures the EU's supply of food, the EU supports farmers by income support this helps maintain a domestic supply of food. it also promotes agricultural jobs
50
what are tariffs?
They are taxes placed on imported goods which make them more expensive to buy, making people more likely to buy domestic goods.
51
what are quotas?
They are limits placed on the level of imports allowed into a country , meaning people are forced to buy domestic goods if they want that good and the quota is already used up.
52
what are the effects of a tariff?
they increase the quantity supplied by domestic firms (producer surplus), they increase government revenue, reduced withdrawals from imports, it causes deadweight loss, increase in price for consumer (decrease in consumer surplus)
53
are tariffs efficent?
they are not efficient as they cause a deadweight loss to society so resources aren't being used effectively
54
what are subsidies to domestic producers?
These are payments to domestic producers which lower their costs and help them to be more price competitive
55
why might subsidies be given to firms?
to increase the number of exports by allowing them to be more competitive in global market. they may also be used to compete with imports by making domestic goods cheaper
56
what is an example of a subsidy to domestic industrys?
china subsidies their car industry,
57
what are the drawbacks to government subsidies to industry?
the industry may become reliant on the subsidy so they may not be able to retract the subsidy, they may also become inefficient under the subsidy and it could also end up with tit for tat responses from other countries
58
what is an example of a tit for tat response due to a subsidy?
after the United States subsidised Boeing to try and become more competitive, the EU responded with a subsidy for airbus
59
what is an example of a subsidy being removed that caused decrease in demand?
china reducing the subsidy in its car industry resulted in a 18.6% decrease in sales for new energy vehicles
60
what are other non tariff barriers?
introduction of an embargo ( total ban on imported goods), import licenses ( imports are limited to the amount of licenses given out), setting legal and technical standards that imports need to pass, they could also implement volunatary export restrictions to one an other
61
what are the impacts of protectionist barriers on consumers?
they have less choice
import prices will increase due to higher costs from tariff
domestic prices will increase as some of the goods necessary for production may be imported in, so as imports costs increase so does domestic production costs, also there is less competition for domestic producers so they will become inefficient increasing the price
62
what are the impacts of protectionist barriers on producers?
domestic firms have less competition so will become more inefficient and they can benefit from higher prices increasing there revenue. they may suffer higher costs however do to import costs increasing
foreign producers however will suffer as they are limited to where they can sell there products
63
what are the impacts of protectionist barriers on workers?
evidence suggest there is little difference in employment, It can be argued that allowing inefficient firms to close would be better for workers in
the long run. The market would reallocate resources and create new jobs, with
greater security.
64
what was the impact of the tarifs on the steel industry in 2018 in the USA according to the economist?
Following the steel tariffs imposed in America in 2018, it is estimated that 16 jobs will
be lost elsewhere for every job gained in the steel industry. (The Economist)
65
what are the impacts of protectionist barriers on governments?
the governments will benefit in the short run from gains in tariff revenue and they are popular with the population, however it can lead to an inefficient economy which stifles growth
66
what are the impacts of protectionist barriers on living standards?
tariffs cause a deadweight loss as the price increased therefore quantity has decreased
also restrictions can cause trade wars as other countries retaliate
67
what are trade wars?
a situation in which countries try to damage each other's trade, typically by the imposition of tariffs or quota restrictions.
68
what is an example of a trade war?
the us china trade war as they keep increasing tariffs to each other which causes a reduction in trade and growth for bot countries
69
what are the impacts of protectionist barriers on equity?
It has a regressive effect on the distribution of income as the rise in price affects the poorer members of society far more than the well off as it is they are no longer able to afford the products.
70
why is it difficult for countries to reduce protectionist barriers?
it is difficult because they always expect reciprocity, for example the UK would not lower barriers on US goods if the US were not willing to do the same.
71
what has been the effect of the financial crisis and recession?
they have created distrust in globalization so countries begin to put self interest over anything else and implement more protectionist barriers
72
define the exchange rate?
the purchasing power of a currency in terms of what it can buy of other currencies.
73
what is the spot exchange rate?
the actual exchange rate for a currency at current prices, can change minute to minute
74
what is a forward exchange rate?
agreed rate at which currencys will be exchanged within the future, it is used by company's to reduce uncertainty and know the actual cost they will pay
75
what is the bilateral exchange rate?
the value of one currency against another eg £1=$2
76
what is the exchange rate index (ERI)
it shows the value of one currency against a basket of currencies weighted by the proportion of trade that the country does with each currency and gives an estimate of the relative strength of a currency in a market
77
what currencies would be heavily weighted in the basket for the UK pound sterling?
the US dollar and the Euro would be heavily weighted
78
what is a free floating exchange rate?
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.
79
arguments for a free floating exchange rate?
- interest rates are reserved for domestic monetary policy can be used to control inflation rather than exchange rate
-does not try to reach specific target so doesn't use the central banks reserves to buy pounds to stay within target
-
80
what is the argument of monetary policy for a floating exchange rate?
- interest rates are reserved for domestic monetary policy can be used to control inflation rather than exchange rate
81
what is the argument of no specific target for a floating exchange rate?
-does not try to reach a particular exchange rate so doesn't use the central banks reserves to buy pounds to stay within the target
82
what is the argument of the trade deficit for a floating exchange rate?
the free floating exchange rate can partially solve a trade deficit due to the fact if a country has trade deficit then the value of the currency will decrease. this will make exports relatively cheaper and imports relatively more expensive reducing the trade defecit assuming the Marshall Lerner condition
83
what is the Marshall Lerner condition?
The condition states that the current account will improve, after a depreciation, if the sum of the price elasticities of demand for imports and exports is greater than 1.
84
what is the argument of the speculation for a floating exchange rate?
this will reduce the risk of speculative attacks on a currency as these usually occur when a currency is overvalue or undervalued, this is reduced by floating exchange rate as the value is decided by the market
85
what is a managed floating exchange rate?
Managed floating is 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
86
what countries use a managed floating exchange rate?
the Japanese yen and the swiss franc
87
how can a country control its exchange rate?
they can control it by buying and selling currencies and also through the use of interest rates
88
what is an adjustable peg system?
An adjustable peg system is where currencies are fixed against another but the level at which they are fixed can be changed.
89
what is a crawling peg system?
Crawling peg systems are a form of this but have a mechanism which allows the value to change.
90
what is a managed float?
Managed float is where the government intervenes to improve macroeconomic stability. governement allows exchange rate to fluctuate between a min and a maxinum
91
what is a fixed exchange rate?
A fixed system is when a government sets their currency against another and that exchange rate does not change
92
why might a country devalue a fixed exchange rate?
The country may devalue its currency overnight to improve international competitiveness of its industry.
93
what was the gold standard?
it was when all major trading countries fixed their currency to the value of gold
94
arguments for a fixed exchange rate?
- it avoids currency fluctuations which encouraged trade and investment as its makes the cost more predictable
- it reduces cost for firms as they dont have to spend money on currency hedging ( agreeing on forward exchange rate)
- a stable exchange rate will reduce inflation as there wont be rises in import prices causing inflation
95
what are the arguments against a fixed exchange rate?
- if currency is falling below set level then the government have to raise interest to encourage hot money into the country, or they could use reserves to buy their currency increasing the demand, the rise of interest rates will slow growth
- less flexible so difficult to respond to shocks
- government may set at wrong level- if too low then it may cause inflation due to high imports, if too high then become uncompetitive
96
what does appreciation mean?
An appreciation of the currency is an increase in the value of the currency using floating exchange rates
97
what does depreciation mean?
depreciation is a fall in the value of the currency under floating exchange rates.
98
what is a revaluation mean?
A revaluation of the currency is when the currency is increased against the value of another under a fixed system
99
what is a devaluation mean?
devaluation of the currency is a decrease in the value of one currency against another under a fixed system
100
what factors affects the floating exchange rate?
the currency is affected by the level of exports and imports ,the level of investment, those going on holiday and speculation.
101
what affects the floating exchange rate the most in the short run?
speculation, if a speculator fears a fall in the value of the pound then they will sell their pounds creating a fall themselves, meaning their predictions fluctuate the value
102
what factors affect the floating exchange rate in the long run?
in the long term, the currency is determined by economic fundamentals: exports, imports and long-term capital flows.
103
what is the purchasing power parity theory?
it states that in the long run, exchange rates will change in line with changes in prices between countries
104
what are the two main ways of government intervention to influence exchange rates?
interest rates- makes it more desirable to save money in British banks as you make more money through interest
- they could use foreign currency and gold supplys to manipulate the value of their country (little impact in the long run)
105
what is competitive depreciation/devaluation?
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.
106
why would a country purposely devalue or depreciate a currency?
they would do this to reduce the trade deficit of a country , recucing the value of a currency would make exports relatively cheaper and imports relatively expensive
107
why might purposely devaluing/depreciating a country not reduce a trade deficit?
devaluing/ depreciating a currency may cause an increase in inflation which could reduce competitiveness therefore increasing the deficit
108
what is a problem with devaluing a currency to make them more competitive?
other countries may follow and try to devalue their currencies, this will most likely occur if the initial country that has devalued, had a surplus originally
109
what is the J curve?
a diagram that shows how the current account will worsen before it improves after a fall in exchange rate. it is a j shaped curve on a current account - time diagram
110
why does the current account worsen before it improve?
this is due to fact people will not realize straight away that British exports are cheaper and will need to find a source, and imports, while they also wont see imports have become more expensive so as demand is inelastic we are spending more money on imports but less money is spent on exports meaning an increase in deficit in short run. In long run demand becomes more elastic meaning there is decrease in deficit
111
what is the effect of changes in an exchange rate on economic growth?
a weaker exchange rate is likely to increase export and decrease imports so increasing AD . this will increase employment and economic growth
112
what is the effect of changes in an exchange rate on the 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.
113
what is the effect of changes in an exchange rate on the level of Foreign Direct Investment?
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.
114
what may reduce the impact of a change in exchange rate?
changes in currencies will have different impacts depending on the reactions of firms. Following a depreciation of a currency, companies may decide to keep the price it charges its customers the same. For example, the pound may fall but a UK company selling goods in the US may decide to charge the same price in US dollars to its customers- this means the value of the exports in British pounds has risen.
