4.2.6 — International Economy Flashcards
Define globalisation
The process of an ever increasing integration of the worlds local, regional and National economies into a single international market (time-space compression)
What does globalisation encompass?
- free trade of goods and services
- free movement of capital and Labour - free interchange of technology and intellectual capital
What has the spread of globalisation caused for countries?
- more trade
- more transfer of capital including FDI
- brands developed globally
- Labour divided between several countries
- more migration
- more countries participating in global trade i.e China
- countries are more interdependent
What factors have contributed towards globalisation is the past 50 years?
-
trade in goods:
Developing nations have acquired capital and knowledge to manufacture goods making it more efficient to transfer goods across international borders — offshoring / outsourcing to cheaper labour -
trade in services:
I.e trade of tourism, call centre services etc had increased from developing countries to developed countries -
trade liberalisation:
The growing strength and influence of organisations i.e WTO (who advocates free trade) has contributed to the decline in trade barrier -
multinational corporations (MNC’s):
Organisations which own or control the production of goods / services have used marketing to become global. They have been able to take advantage of EOS which lowers cost of production -
international financial flows:
The flow of FDI over international borders has increased; more investment in factories abroad -
communications and IT:
The spread of IT has resulted in faster communications and increased interconnectedness -
containerisation:
It has become cheaper to ship goods across the globe — causes lower, competitive prices. Containerisation means goods are distributed in standard sized containers making it easier to transport. MNC’s can exploit this -
Tech change:
Reduced cost of transmitting and communicating info
What are some of consequences of globalisation? (Think individual countries, governments, producers + consumers, workers and the environment)
-
Individual countries
- There may be trade imbalances I.e between US runs a large current account deficit with China
- There could be imbalances and inequalities in access to health, education and markets.
- culture erosion
- inequality gaps -
Governments
-some govs may lose sovereignty due to increase in international treaties -
Producers and consumers
- consumers and producers can earn the benefits of specialisation and EOS
- firms operate in a more competitive environment — lowers costs and more competitive. Firms can offshore / outsource
- globalisation leads to higher GDP: increases living standards and lifts people out of absolute poverty
- wider range of goods and services for consumers -
Workers
- can take advantage of employment opportunities across the globe
- may result in structural unemployment
- shift from primary / secondary to tertiary / quaternary jobs
-TNC’s could exploit workers -
The environment
- higher pollution levels
- consumers may become more environmentally conscious
- deforestation, water scarcity, land degradation etc
What has globalisation led to?
- outsourcing
- brands
- exploitation
- growth
- poverty
- monopoly power
- exploitation
- terrorism
What are the benefits and drawbacks of globalisation?
Benefits
- easier communications
- faster delivery — containerisation
- travel and tourism
- easier access to info online and education for all
- free trade
- EOS
- increased competition: lower prices
- remittances
Drawbacks
- pandemic
- terrorism
- proxy war
- cyber crime
- cultural erosion: homogenous markets
- exploitation of workers
- environmental impact
- tax competition and avoidance
What is the role of TNC’s in globalisation?
- spread westernisation
- relocate and manufacture in developing countries providing jobs and training etc
- innovating and inventing
- increase employment — driving economic development and activity
- encourage trade
- have global reach
- competition from TNC’s acts as incentive to domestic firms
What does comparative advantage enable countries to do?
Specialise in production — increases economic welfare
What is the model of the comparative advantage?
When countries give up producing less of another good than another country, using the same resources
What are the negatives for the host countries of TNC’s?
- domestic businesses may not be able to compete and could fail
- TNC’s may not feel the need to meet the host countries expectations for acting ethically
- could impose their culture / ideologies onto the host country
- may mislead people into consuming demerit goods / goods with negative externalities
- profits may be remitted back to the TNC’s base country
- tax avoidance
What are the economic benefits of free trade?
- countries can exploit their comparative advantage
> higher output using fewer resources and increased world GDP: improves living standards - increased economic efficiency
> established competitive markets — lowers production costs + increases output - there is trade creation because there are fewer barriers
> more consumption and large increases in economic welfare - more exports: higher rates of economic growth
- by specialising countries can exploit EOS
> lowers average costs - increased competition
What are some drawbacks of international trade?
- free trade has resulted in job losses
> outsourcing means cheaper alternatives - free trade may have contributed to environmental damage
> increase in pollution from manufacturing
What are some reasons for a change in the pattern of trade between the UK and other countries?
-
Comparative advantage:
Recent growth in exports of manufactured goods from developing nations to developed nations; cheaper foreign alternatives and decline in industrial sector in the UK -
Impact of emerging economies:
The collapse of communism has meant more countries are participating in world trade (particularly developing ones)
China and India invest heavily in Africa in return for natural resources -
Growth of trade blocs and bilateral trade agreements:
Heightened trade between members of blocs -
Changes in relative exchange rates:
UK’s current account deficit could be down to the strength of the pound compared to the euro
Define trade creation
This occurs when a country consumes more imports from a low cost producer, and fewer from a high cost producer
Define trade diversion
This occurs when trade shifts to a less efficient producer
Define protectionism
The act of guarding a countries industries from foreign competition
List the 5 methods of protectionism and their impact: (import controls)
-
Tariffs:
Taxes on imports to a country would likely see that the quantity demanded for domestic goods increases -
Quotas:
A limit on the quantity of foreign produced goods that are sold on the domestic market may lead to a price rise for domestic consumers (less supply) so they become worse off -
Export subsidies:
This form of government intervention may encourage goods to be exported rather than sold on domestic markets resulting in the Gov using tax relief, cheap access to credit etc -
Embargoes:
This complete ban on trade with a particular country may politically influence relations and suppress nations who have opposing ideologies -
Excessive administrative burdens (‘Red Tape’)
The increased cost of trading discourages imports — makes it difficult to trade with countries imposing red tape (particularly harmful to developing countries)
What are the main causes for countries adopting protectionist policies?
If a country were to impose several protectionist measures, their trade deficit would reduce as they will be importing less due to tariffs etc
> infant industries may need protecting in the short term until the industry develops
> could be used to correct market failure by dealing with demerit goods
> could be used to protect domestic jobs
> could be imposed to improve the current account deficit
What are the main consequences of countries adopting protectionist policies?
> could distort markets and lead to a loss of allocative efficiency — prevents industries from competing and so there is a loss of consumer welfare
> imposes an extra cost on exporters, which could lower output and damage the economy
> tariffs are regressive and most damaging to those on low incomes
> could lead to Gov failure
What are the main features of a customs union?
- countries in a customs union have established a common trade policy with the rest of the world
- free trade between members i.e EU
- common markets establish free trade in goods and services, a common external tariff and allow free movement of capital / Labour across borders
- common trade policy
- safety measures for imported goods i.e for food
What are the main characteristics of a single European market (SEM)?
- free movement of goods, services, capital and Labour between nations
- administrative provisions, laws and regulators are approximated between member nations
- competition policy is common across the whole of the EU
- common external tariffs
List and describe some of the consequences for the UK for its membership of the EU
-
Trade creation and trade diversion:
With more trade blocs, trade has been created between members but diverted from elsewhere
> usually, a country might stop importing from a cheaper producer outside a trading bloc to a more expensive one inside the bloc
> protectionist barriers are often imposed on countries who are not members, meaning trade is diverted from members outside the bloc to producers within the trading bloc -
Reduced transaction costs:
Since there are no barriers to trade or no border controls, it is cheaper and simpler to trade -
EOS:
Firms can take advantage of a larger potential market in which to trade
> by specialising, firms and countries can exploit their comparative advantage so the gains of efficiency and advanced technology can be reaped -
Enhanced competition:
Since firms operate in a more competitive environment, they become more efficient and there is better allocation of resources -
Migration:
By being a member of a customs union, the supply of labour is increased
> could help fill labour shortages although it may mean some countries lose their best workers
What is the role of the WTO in trade liberalisation?
The WTO promotes world trade via reducing trade barriers and policing existing agreements. It also settles disputes by acting as the judge and organises trade negotiations.
- Every member of the WTO must follow the rules (161 member states as of 2015).
> if rules are broken sanctions must follow
Explain some possible conflicts between regional trade agreements and the WTO
- trading blocs might distort world trade or adversely affect those who don’t belong to them
> could be an inefficient allocation of resources - conflicts between blocs could lead to a rise in protectionism. A common external tariff contradicts the WTO’s principles: protectionist barriers are imposed on those who aren’t members
- some countries may argue the WTO is too powerful, or that it ignores problems of developing countries
- setting up a customs union or a free trade area could be seen to violate the WTO’s principle of having all trade partners treated equally
What is the impact of investment flows between countries on the balance of payments?
Investment from abroad could lead to:
- higher wages
- improved working conditions
- increased demand for the currency in the receiving country
> raises exchange rate, improving the current account balance
Investment in other countries:
- deficit increases as money flows out of the economy
What is the significance of deficits and surpluses for an individual economy?
- if imported raw materials are expensive, there could be cost push inflation
How could the 3 macro policies be used to correct a balance of payments deficit or surplus?
-
Fiscal policy;
- If there is a deficit on the current account, income tax could be increased
> reduce the amount of disposable income
> Govs could reduce spending — reduce AD
> fiscal policy only effective in the short term
> if green taxes are implemented, competitiveness of domestic firms could be compromised: could reduce exports -
Monetary Policy;
Expenditure-reducing and expenditure-switching:
Expenditure reducing policies aim to reduce demand in the economy
Expenditure switching policies aim to switch consumer spending towards domestic goods
> if there is a current account deficit, bank might lower IR to cause depreciation in the currency
> changing the exchange rate could be a Gov expenditure-switching policy, however it is hard to control the supply of money in reality -
Supply side policies;
> could help to increase productivity as there is more spending on education and training — more internationally competitive
> rise in exports, however there is a time lag
> could help to make the domestic economy attractive to investors
> domestic economy becomes more competitive via deregulation and privatisation which forces firms to lower average costs
> if govs provide subsidies to some industries there could be retaliation from foreign countries
Define economic integration
Process by which different countries agree to remove trade barriers between them
> blurs boundaries that separate economic activity in one nation state from another
Why could expensive, imported raw materials cause cost push inflation?
Since firms face higher production costs
What is the significance of deficits and surpluses for an individual economy?
- international trade has meant countries have become interdependent
> economic conditions in one country affects others as the quantity they export or import will change - surpluses or deficits could indicate an unbalanced economy, as it could mean the country is too reliant on other countries for their own growth
- it could be difficult to attract sufficient financial flows in order to finance a current account deficit — may make it unsustainable in the long run
What are some of the global implications when a major economy / economies with imbalances decides to take corrective action? (Consider US China example, Eurozone)
- it could become difficult to finance deficits in the long run
> in the US, the current account deficit is financed by Chinese investors buying US securities at low IR. — if the Chinese lose confidence they would stop buying US debt, causing IR increase - in the Eurozone, current account deficits are of greater concern because the countries have fixed exchange rates — they can’t devalue the currency to restore their level of competitiveness
- since 2006 the US deficit with China narrowed and China’s surplus also fell. — a surplus indicates low consumer spending and low savings ratio putting China at risk of having unsustainable economic growth
> now Gov aims to grow the economy using domestic spending rather than exports
Define the exchange rate of a currency
The weight of one currency relative to another
What is a floating system and how does it influence an exchange rate?
Floating: the value of the exchange rate in a floating system is determined by the forces of supply and demand
I.e when demand increases D1 to D2, the exchange rate appreciates from P1 to P2
How can we calculate the demand for a currency?
Exports plus capital inflows
How can we calculate the supply of a currency?
Imports plus capital outflows
