4.2.6 international economics Flashcards
state 5 causes of globalisation
containerisation
technological advances
tax system differences
removal of capital controls
trade liberalisation
explain how containerisation causes globalisation
containerisation is freight transport for sea shipping
it has decreased shipping costs making trade easier
explain how technological advances causes globalisation
improvements in communication makes the world more interconnected
makes business and thus trade easier
explain how tax system differences causes globalisation
countries may decrease corporation tax to attract inflows of FDI
explain how removal of capital controls causes globalisation
leads to international financial flows between countries
can make investment or trade easier
explain how trade liberalisation causes globalisation
WTO advocates for liberalisation which has contributed to the decline in trade barriers, promoting trade
state the key characteristics of globalisation (5)
increased fdi across borders
deeper specialisation of labour
global supply chains
high levels of labour migration
reduced trade barrietrs
define globalisation
the growing interdependence of countries and the rapid rate of change it brings about
define less developed economies
countries considered behind based on their economy, capital, infrastructure, etc
negative impacts of globalisation on less developed economies (4)
low paid workers in sweatshops
dominance of usa corporate culture (cocacolonisation)
brain drain to the more developed economies
overreliance on global markets will increase vulnerability to shocks
positive impacts of globalisation on less developed economies (4)
promotes trade, export led growth
transfers of tech or knowledge from devloped economies
developmental aid
more access to goods and services increasing standard of living
define developed economies
high economic development, high gdp per capita, high standard of living and high investment
negative impacts of globalisation on developed economies (4)
tax avoidance from mnc’s
structural unemployment due to specialisation
environmental degradation
competition, low prices, low profit, less investment
positive impacts of globalisation on developed economies (3)
economic growth from exports
more production leads economies of scale
migration to fill skills gap
what is a mnc
a mnc is a business that operates in several countries
an example of mnc
microsoft
how have mnc used division of labour
mc’s have built global supply chains by taking advantage of the global division of labour, increasing economic integration and thus globalisation
how have mnc’s used long term investment
mnc’s have undertaken lt investment flows which have seen technology transferred from developed economies to ldc’s helping to shift economic power and increasing economic integrate
how have mnc’s impacted employment
manufacturing has shifted to emerging economies in south east asia (due to cheap labour) which has resulted in structural unemployment in north america and europe however it has created jobs for china and india which has reduced absolute poverty
what is absolute advantage
the country can produce more of a good than other countries from the same resources
what may make complete specialisation not beneficial
if transport costs exceed the increase in output
what is comparative advantage
country with the lowest oppurtunity cost when producing the good
most productiveky efficient
how would you calculate the oppurtunity cost of Y when producing one more X
y/x of y
what is the difference between absolute advantage and comparative advantage
absolute is where you can produce more whereas comparative is at a lower oppurtunity cost
assumptions of comparative advantage (4)
factors of production are fixed and immobile between countries but perfectly mobile between industries
constant returns to scale
demand and cost conditions are stable
no barriers to trade
benefits of trade (5)
specilaisation increases efficiency
job creation H/E structural unemployment
peace creating less economic friction
choice for consumers
dynamic efficiency as competition drives innovation
define patterns of trade
the way in which goods and services are traded between countries
state 4 factors impacting the pattern of trade
comparative advantage
emerging economies
trading blocs
exchange rates
explain how comparative advantage influences the pattern of trade
countries will trade if they or another country has a comparative advantage
for example extreme whether conditions may impact the comparative advantage of a country with a large agricultural sector which will impact their pattern of trade
explain how emerging economies influences the pattern of trade
countries grow at different rates so their will be differences in their pattern of trade
more growth, more imports (eg machinery to develop)
AND more exports to finance the imports
EG: China imported a lot of capital when they were emerging and are now in a trade surplus
explain how trading blocs influences the pattern of trade
trading blocs increase trade within the bloc
however decreases with non members
eg EU members trade a lot with members but not a lot with non members eg Australia
explain how exchange rates influences the pattern of trade
ER affects the prices of goods between countries which massuvely impacts imporrts and thus impacts pattern of trade
prodcutive efficiency
prdocuing for lowest cost
allocative efficiency
distributing resources according to consumer preference P=MC
what is a tariff
a tax on imports allowed into the country
what is a quota
a restriction on the number of imports allowed into a country
what is an export subsidy
payments to domestic producers to reduce costs and thus increase competitiveness
3 strengths of tariff
more domestic supply increases employment
better CA balance
prevents dumping
2 weaknesses of tariff
deadweight loss
loss of efficiency
4 causes of protectionism
response to allegations of export dumping
reposnse to peristent large trade deficit
employment protection
raise tax revenues to help with fiscal balance
what is dumping
exporting a product at a price lower in the foreign market than in the exporters domestic market
EG China dumping steel
what is an infant industry
new industry struggling to compete
EG 19th century steel
what is a sunset industry
industry in decline
EG UK shipbuilding
5 disadvantages of protectionism
loss of allocative/productive efficiency
retaliation, trade war, less growth, decreased SoL
high prices has a regressive impact
higher costs decreases competitiveness
increased barriers for domestic firms
3 advantages of protectionism
higher domestic wages due to less low cost labour
less structural unemployment in infant/sunset
less competition, high prices, high profits- more invetsment and higher wages
what is a customs union
a free trade area with a common external barrier
example of a customs union
EU customs union
what can customs union lead to (2)
trade creation
trade diversion
what is trade creation
when consumption shifts from a high cost producer to a low cost producer
leads to an efficiency gain and lower prices for consumer
eg of trade creation
WINE- uk joining the EU, Italy/france
what is trade diversion
where consumption shifts from a low cost producer to a high cost producer
eg of trade diversion
FOOD- uk bought food from USA, joined EU
what is a single market
eliminate all barriers between each other and harmonize rules and regulations
goods services capital and labour can move freely across national borders
when and how was the eu established
established via the maastricht treaty in 1993
what is the largest single market
THE EU!!
gdp of eu single market
13 trillion euros
#wtf
what is the eu currency and how many members use it
euro
20 members
what is the free travel area in the eu and how many members
schegen area
26 members
5 benefits of the eu single market
import tariff free access to a single market of 500 mill people
easy access to eu fdi
access to eu structural funds
access to eu capital markets, makes borrowing easier
more competition , innovation
richest eu country
germany
poorest eu country
malta
when was the wto established
1995
what came before the wto
General Agreement of Tariff and Trade
role of wto
make sure other countries follow their trade agreements and solve trade disagreements through negoitiation
example of legal sanction
emabargo on russia after ukraine war from eu
conflicts of the wto
regional agreements contradict wto principles
wto strives to ensure non members can trade freeky and easily with bloc members
3 accounts of balance of payments
current account
capital account
financial account
4 sections of current account
trade in goods
trade in services
net primary income/investment incomr
net secondary income/current transfers
eg of net primary income
dividends
eg of net secondary income
foreign aid
remitances
2 sections of capital account
capital transfers
non produced transactions
eg of capital transfers
migrant transfers of assetts
4 sections of the financial account
direct investment
portfolio investment
other investments
reserve assetts
eg of non produced assetts
patents
eg of direct investment
FDI
eg of portfolio investment
bonds
eg of other investments
loan s
what is a current account deficit
value of countries exported goods and services, investment inflows and transfer inflows are less than the value of imported goods and services, investment income outflows and outward transfers
what is a current account surplus
value of countries exported goods and services, investment inflows and transfer inflows are more than the value of imported goods and services, investment income outflows and outward transfers
4 causes of CA deficit (structural)
underinvestment
inadequate r and d
low productivity
low cost competition
5 causes of CA deficit (cyclical)
overvalued exchange rate
boom in domestic demand
recession in key export market
slump in global export prices
increased demand for imported technology
benefits of investment flows between countries (4)
increased trend growth, increased per capita income, less absolute poverty
investment in physical productive capacity will increase the size of capital stock, which will increase productivity
increased productivity, more competitive, more exports, increased AD
FDI can create jobs and reduce unemployment
consequences of investment flows between countries (3)
MNCs may take advatage of weak environemntal laws
MNCs have been criticised for poor working conditions
profits often go to shareholders in host countr (outflow from circular flow)
policies to correct a CA deficit (5)
contractionary fiscal/monetary to reduce AD
devaluation of the pound
subsidise businesses to increase exports
supply side policies
protectionism
explain the marshall lerner condition when DEVALUEING TO REDUCE CA DEFICIT
PED for exports and imports combined must exceed 1
currency devalued, demand is inelastic due to a time lag and consumers not reacting immediately
as the prices have increased but demand hasn’t this will first worsen the CA deficit
however consumers will then react to the price changes and demand will be elastic, decreasing the CA deficit
what is the difference between expenditure switching and expenditure reducing policies
expenditure reducing aim to reduce ad and reduce overall spending, eg contractionary monetary policy
expenditure switching policies aim to switch spending towards domestic firms, eg protectionism
policies to reduce CA deficit impact on UNEMPLOYMENT
less demand, “labour is derived demand”, unemployment
policies to reduce CA deficit impact on INFLATION
less spending, less demand pull inflation
increased productivity, less demand pull
protectionism could lead to commodities being more expesnive, cost push inflation
policies to reduce CA deficit impact on fiscal balance
spending on export subsidies, worsen
import tariffs, better
more domestic businesses, more corp tax income
less demand, less income, less income tax
disadvantages of CA deficit (4)
fall in AD as (X-M) is negative
downward pressure on exchange rate
reflects supply side weakness
loss of output and employment
advantages of CA defict (3)
cyclical causes reflect booming demand
can be financed by other accounts
CA surplus could lead to friction (eg USA-China)
evaluation of CA deficit (4)
can it be financed
size
persistence
if capital is imported it can lead to future surplus (eg China)
define exchange rate
the price of one currency in terms of another
external value of the currency
how are floating exchange rates determined
by demand and supply
where is the value of the currency determined
in the FOREX market
in a floating exchange rate what is it called when currency gets stronger/weaker
appreciate/depreciate
in a flixed exchange rate what is it called when currency gets stronger/weaker
revalue/devalue
who demands pounds
foreigners
who supplies pounds
domestic citizens (eg gov consumers bank producers)
factors influencing demand for £ (increase)
interest rates increase
low corp tax leading to FDI
more exports due to export subsidy
speculation
tourism (eg olympics)
low domestic inflation
good macro performance
factors influencing supply of £ (increase)
removal of tariffs, increasing imports
bad macro performance domestically
fall in interest rates
better corp tax abroad (ourtwards investment)
speculation
QE
increased IR overseas
impact on £ if uk inflation rises
increased supply as uk citizens want to import cheaper goods and so will sell their pounds
dcreased demand as uk exports are less competitive
therefore £ dpereciates
impact of currency depreciation oninflation
increased import prices, increased cost of production, increasd prices, inflation (cost push),
impact of currency depreciation on economic growth
less imports more exports leading to increased AD
H/E dependent on PED
impact of currency depreciation on unemployment
increased exports so more deomestic production meaning more jobs
foreign currency reserves
bought by government to manipulate the exchange rate
eg if the pound is overvalued the government will buy up foreign currency reserves or gold with pounds which will increase the supply of the pound devaluing it
competitive devaluation
country deliberately intervenes in the FOREX market to drive down the value of their currency to boost export competitiveness
eg china did this
what is a fixed exchange rate
typically pegged against another currency or gold
used to stabilise the currency its pegged against making trade between two countries easier
means there is less risk to big fluctuations or speculation
if the £ is too strong in a fixed ER
Fixed: £1= $1.50
but ER1= £1= $1.60
thus £ is too strong
BoE needs to buy up foreign currency reserves to increase supply of pound and thus devalue back to fixed amount
if the £ is too weak in a fixed ER
fixed: £1= $1.50
but ER1= £1= $1.40
pound is undervalued
authorities will use foreign currency reserves to buy up the £ in the market increasing demand and thus revalue back to fixed amoount
managed exchange rate
exchange rate can change but past a certain point the government will intervene
eg China
if Yuan is above upper bound in managed exchange rate
due to increased demand eg tourism
authorities will buy up foreign currency reserves increasing supply of pound devalue it back within bounds
advantages of a free floating exchange rate
adjusts easier to economic shocks
more freedom to focus monetary policy on domestic objectives
less sepculative attacks as ER is determined by market forces
can help self correct trade balance
no need for central bank to hold large currency reserves
disadvantages of a free floating exchange rate
potential for exchange rate volatility which can lead to uncertainity for businesses and less FDI
exchange rate changing can lead to changes in import prices and thus reducing SRAS and causing cost push inflation
cannot be used to deliberately icrease competitiveness
advantages of a fixed exchange rate
price stability due to less fluctuations which makes a more predictable environment for firms
less uncertainty can increase FDI
discipline on monetary policy can prevent excessive money supply growth
disadvantages of a fixed exchange rate
lack of flexibility on monetary policy
trade balance must be maintained by other means such as through fiscal policy
vulnerable to speculative attacks
need to hold large currency reserves
advantages for a country of joining a currency union
eliminates exchange rate fluctuations between member countries encouraging trade
single currency makes it easier for consumers and businesses to compare prices across the member countries leading to more comp and efficiency of firms
credibility of a central monetary authority (e.g., the European Central Bank for the Eurozone). This can result in lower inflation rates and more stable interest rates, promoting economic stability.
stability and predictability of a shared currency can attract foreign investment
disadvantages for a country of joining a currency union
Countries within a currency union must adhere to the policies set by the central authority, so may not beable to use MP in times of inflation/recession
In a currency union, countries cannot adjust their exchange rates to restore competitiveness. If a country’s economy is underperforming, it cannot devalue its currency to boost exports and reduce imports.
constraints can limit a country’s ability to use fiscal policy (e.g., government spending or tax cuts) to stimulate the economy during a recession or to address social or infrastructure needs.
A country within a currency union is somewhat dependent on the economic performance and fiscal health of the other members. If a more dominant member experiences an economic crisis, the entire currency union could face difficulties, even if other members are performing well.
difference between economic growth and development
growth is measured purely by real gdp and productive potential whereas development is about standard of living
characteristics of less developed countries
low gdp per capita
low per average incomes
high percentage of people in primary industries
low life expectancy
conflict and weak governance
low quality of life
amartya sen said
development is about improving peoples freedom and capabilities
HDI
created by amartya sen
geometric mean looks at
income (GNI per capita)
health (life expectancy at birth)
education (mean years of schooling and expected years of schooling)
doesnt consider longevity or inequality
3 other measures of development
inequality adjusted HDI
multidimensional poverty index
genuine progress indicator
barriers to development
primary product dependency
savings gap
foreign currency gap
external debt
financial barriers
human capital
property rights
corruption
infrastructure
primary product dependency
extracting and exporting a narrow range of primary commodities
2/5 PPD countries are located in sub saharan africa
prebisch singer hypothesis
over the long run real prices of primary commodities
such as coffee and cocoa decline relative to the prices of manufactured goods
exports are income inelastic ( for developed countries) as they are necessities
imports increase supply due to tech advances
so overall price of commodities fall reducing terms of trade
however could be challenged as commodities prices can fluctuate and manufactured goods can get cheaper due to globalisation
terms of trade
index of X prices/ index of M prices x100
dutch disease
find natural resources
world price is high
investment into that sector and thus less investment into other sectors, increasing exports
appreciating exchange rate
less price competitive
infant manufacturing industries cant compete so decline
premature deindustrialiation
savings gap
less developed countries with extreme poverty having less savings to fund investment projects
thus they must rely on overseas borrowing
rate of gdp growth
savings ratio/ capital output ratio
harrod domar model
increased national savings
increase in net capital investment
increased capital stock available
increased productivity
increase in real GDP
increased per capita income
and so on
foreign currency gap
currency outflows persistently exceed currency inflows
due to persisent CA deficit, capital flight, reduced inflows of remittances
can lead to not enough foreign currency to pay for imports such as medicine or capital
can lead to capital flight
capital flight
rapid outflows or large scale movement of capital (money/assetts) from one country to another as a response to instability
effects are less domestic investment, weakened currency, less tax revenues (leading to less infrastructure)
external debt as a barrier to development
the money that a country owes to foreign creditors
eg loans or bonds
effects:
have to make regular principal payments so budget is diverted from infrastructure
macroeconomic instability as they may use EMP, fiscal austerity or currency devaluation to fix
lower credit rating so harder to invest in the future
financial barriers
such as access to bank accounts, loan finance and insurance
poor people rely on informal loans with high interest rates so they have lower real incomes reducing standard of living
human capital as a barrier to economic development
knowledge skills and experiences possessed by individuals in a population that add economic value
effects of low human capital:
less productivity and efficiency
less technological advancements
less likely to engage in entreupereship
less attractive to FDI
property rights as a barrier to economic development
why theyre important:
- stimulated investment in farmland, increasing standard of living in rural areas
- gov can generate land based tax which can help fund infrastructure projects
- help protect environment
- people with land can use it as collateral when borrowing which can help entreuperenership
corruption as a barrier to economic development
deters FDI
leads to allocative inefficiencys
increased poverty
infrastructure as a barrier to economic development
importance of infrastructure:
- reduces supply costs, lower prices, higher real incomes
- geographical mobility of labour reduces structural unemployment
- more attractive for FDI
- less vulnerable to natural disasters
market based strategies for growth and development
trade liberalisation
promotion of FDI
removal of subsidies
floating exchange rates
microfinance privatisation
trade liberalisation to promote economic development
promoting export led growth through the removal of tariffs, quotas or joining a trade bloc
it allows for more free trade so businesses are able to import products to help them grow
can lead to trade creation
h/e infant manufacturing industries may be undercut by international firms , other countries may reciprocate by reducing tariffs
promotion of FDI to promote economic development
FDI is investment by a private comopany in one country into another private comoany in another country such as setting up factories or accquiring local businesses
gov can provide tax breaks to businesses setting up in their country to encourage investment
h/e can appreciate exchange rate, exploitation, tax avoidance, bring their skilled workers
EG vietnam had FDI from nike
removal of subsidies to promote economic development
adam smiths invisible hand suggests that the market is the most efficient mechanism and intervention will lead to inefficient allocation of scarce resources
thus increased efficency helps LT growth
h/e small businesses may not be able to set up without subsidies in a developing economy as small businesses lack availability to credit which is needed to set up especially when sunk costs are high
h/e increased prices for consumer is regressive
floating exchange rate to promote economic development
will remove the need for government reserves and allows for more spending in the local economy
h/e can lead to uncertainty for businesses, thus less FDI, and fluctuates M and X prices leading to unstable AD
microfinance to promote economic development
schemes aim to give poor households access to financial services promoting consumption and investment leading to higher AD
also can give people oppurtunity to start up businesses
privatisation to promote economic development
where previously nationalised firm is sold off to multiple small investors
can end corruption in a government owned firm and promotes competition which gives efficiency
h/e consumers may be exploited by profit maximising private firms
interventionist policies to promote economic development
improving human capital
protectionism
managed exchange rate
infrastructure
promoting joint ventures with global companies
buffer stock systems
improving human capital to promote economic development
funding trainibg courses and investing in education to increase productivity which can improve efficiency and increase the LRAS
h/e takes a while to show the impact and developing economies may not have the funds
protectionism to promote economic development
allows domestic industries to grow by protecting them from efficient, foreign competition
especially important when growing infant industries
h/e retaliation could limit exports
eg US-China trade war
managed exchange rate to promote economic development
less uncertainty which encourages FDI
could devalue to boost competitiveness
h/e requires a large amount of currency reserves which developing countries may not have access to
eg China
infrastructure projects to promote economic development
investment in roads and cities will allow for more economic growth
it can increase LRAS
h/e government may not have the money to finance investment
eg China: good transport and major cities
promoting joint ventures with global companies to promote economic development
government may insist firms setting up production plants in their country find a local partner to create a jointly owned company with
creates jobs and stimulates AD
h/e could mean big companies have power over the economy and threaten the government
buffer stock systems to promote economic development
attempt by government to keep agricultural market prices fair as they are volatile
they have to stay within a bound
making sure consumers aren’t exploited but businesses remain profitable
h/e expensive and requires large reserves
eg ivory coast and ghana with cocoa
