4.2.6 International Economy Flashcards
Globalisation
The ever increasing integration of local, regional and national economies into a single international market
Characteristics of globalisation
- more trade between nations
- more FDI
- labour divided between several countries
- more migration
- countries are more interdependent
Causes of globalisation
- trade in goods
- trade liberalisation
- international financial flows
- better technology
- containerisation
Consequences of globalisation on countries
- trade imbalances between countries (USA run a large current account deficit with China)
- inequalities in consumers and countries access to health, education and markets
- income inequality if the benefit of globalisation isn’t spread evenly
Consequences of globalisation on the government
•governments may lose their sovereignty due to the increase in international treaties, if countries join treaties they must follow their rules
Consequences of globalisation on producers and consumers
- can earn the benefits of specialisation and economies of scale
- firms operate in a more competitive environment which encourages efficiency
- producers can lower costs by switching production to places with cheap labour (shell in Nigeria)
- general rise in GDP
- consumers have more goods and services available to them
Consequences of globalisation on workers
- can take advantage of job opportunities across the globe
- could be structural unemployment because it may be more easy to manufacture elsewhere
- MNC’s could be exploiting their labour
Consequences of globalisation on the environment
- more pollution due to industrialisation and travel
* as average incomes rise people become more concerned about society
Absolute advantage
When a country can produce a good using fewer resources and at a lower cost than another country
Competitive advantage
When a country can produce a good at a lower opportunity cost than another country. This means they have to give up producing less of another good than another country
Free trade
Trade between nations without protectionist barriers such as tariffs, quote or regulations
Free trade benefits
✅countries can exploit their competitive advantage which leads to a higher output using fewer resources and increases world gdp, improving living standards
✅increased economic efficiency by establishing a competitive market, this lowers cost of production
✅more consumption and increase in economic welfare
✅more exports could lead to higher rates of economic growth
✅specialising means countries can exploit economies of scale which lowers average costs
Free trade negatives
❌results in job losses since countries with lower labour costs have entered the labour market
❌an increase in manufacturing leads to environmental damage
Reasons for changes in the pattern of trade between the uk and the rest of the world
- competitive advantage
- deindustrialisation
- emerging economies
- growth of trading blocs
- changes in relative exchange rates
Methods of protectionism
•tariffs •quotas •export subsidies •embargoes Excess administrative burdens (red tape)
How do tariffs work?
They tax imports into a country so price of imported good increases. This causes a contraction in quantity demanded. Therefore domestic products become more popular as they are a direct substitute
Explain the tariff diagram
- price of good is raised which effectively creates a price floor
- revenue gained from government is growing rectangle between the tariff price and pre tariff price
- either side of the rectangle is a triangle which is a deadweight loss of welfare to society
Quotas
Sets a physical limit on a specific good imported in a set amount of time. It leads to a rise in the price of the good for domestic consumers so they become worse off
Export subsidies
A form of intervention to encourage goods to be exported rather than sold to the domestic market. The government might use direct payments, tax relief or provide cheap access to credits.
Embargoes
This is the complete ban on trade with a particular country (Canada and Venezuela)
Excess administrative burdens (red tape)
Increases the cost of trading and hence discourages imports. It is particularly harmful for developing countries which are unable to access these markets. This is often used because it’s harder to notice.
Causes and consequences of countries adopting protectionist policies
- protectionist measures reduce a trade deficit as imports decrease
- protectionism helps protect infant industries
- protectionism can correct market failure
- can help protect domestic jobs
- protectionism prevents industries from competing so there is a loss in consumer welfare as prices increase and there is less society
- it imposes an extra cost on exporters which could could lower output and damage the economy
- tariffs are regressive
- retaliation from other countries
- protectionism could lead to government failure
Customs union
Common markets establish free trade in goods and services, a common external tariff and allow free lovely of capital and labour across borders. (EU)
Features of a customs union
- safety measures for imported goods, such as food
- common rules and procedures
- structure for the combined administration of nations
- common trade policy
Characteristics of 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
Consequences of uk being in the eu
- trade creation and trade diversion
- reduces transaction costs- no barriers to trade so it’s cheaper
- economies of scale
- enhances competition- more efficient
- migration- some countries (Poland) lose their best workers
Role of the WTO in trade liberalisation
Promotes world trade through reducing trade barriers and policing existing agreements. Settles trade disputes by acting as a judge. Any member that breaks the WTO rules face trade sanctions
Possible conflicts in WTO
- trading blocs might distort world trade or adversely those who do not belong them
- inefficient allocation of resources
- conflicts between blocs could lead to a rise in protection
- they effectively place a common external tariff on anyone not in the WTO
- the WTO may be too powerful and ignore problems of developing countries
- the WTO may clash with customs unions such as the EU
Balance of payments
A record of all financial transactions made between consumers, firms and the governments from one country with other countries
Exports
Goods and services sold to foreign countries, they are an inflow of money
Imports
Goods and services bought from foreign countries, they are an outflow of money
What is the balance of payments made up of?
The current account
The capital and financial account
Balancing item
Current account
Includes all economic transactions between countries. This mainly includes trade of goods, services, income and current transfers
Capital and financial account
Capital transfers involve transfers of the ownership of fixed assets. Financial account involves investments such as direct and portfolio investment
