4.4 Trade policies Flashcards
What is protectionism?
Protectionism is the economic policy of restraining trade between countries through methods such as tariffs, quotas, and subsidies.
What are the types of economic integration?
- Free trade areas
- Customs unions
- Monetary unions
- Economic unions
What is the impact of tariffs on trade?
Tariffs can create trade by making domestic goods more competitive and divert trade by increasing the cost of imports.
What are the advantages of protectionism?
- Protects domestic industries
- Preserves jobs
- Reduces trade deficits
- Promotes infant industries
What are the disadvantages of protectionism?
- Higher prices for consumers
- Retaliation from other countries
- Inefficiency in domestic industries
- Limited choices for consumers
What is the role of the World Trade Organisation (WTO)?
- Facilitate trade negotiations
- Settle trade disputes
- Co-operate with other international organisations
- Create global trade rules
What does LRAS represent?
LRAS represents Long-Run Aggregate Supply, indicating the total output an economy can produce when resources are fully employed.
What does SRAS represent?
SRAS represents Short-Run Aggregate Supply, showing the total production of goods and services at different price levels in the short term.
What are the components of AD?
- Consumer spending
- Investment
- Government spending
- Net exports
What is a formula for calculating the multiplier?
Multiplier = 1 / (1 - MPC)
What does MPW stand for?
MPW stands for Marginal Propensity to Withdraw.
What is a negative output gap?
A negative output gap occurs when actual economic output is less than potential output.
What does globalisation mean?
Globalisation refers to the process of increased interconnectedness and interdependence of economies, cultures, and populations.
What are the parts of the current account on the Balance of Payments?
- Trade balance
- Income balance
- Current transfers
What is recorded on the financial account?
The financial account records transactions that involve the purchase and sale of assets, including investments.
What does the Marshall-Lerner condition tell you?
The Marshall-Lerner condition states that a depreciation of a currency will only improve the trade balance if the sum of the price elasticities of demand for imports and exports is greater than one.
How do countries decide to allocate resources in the theory of comparative advantage?
Countries allocate resources based on the lowest opportunity cost of producing goods.
Name two assumptions underlying the theory of comparative advantage.
- Resources are immobile between countries
- Perfect competition exists
What is FDI?
FDI stands for Foreign Direct Investment, which is an investment made by a company or individual in one country in business interests in another country.
Give a benefit to a developing country from globalisation.
Globalisation can lead to increased foreign investment and access to international markets.
What are the three main types of protectionist policies or barriers?
- Tariffs
- Import quotas
- Export subsidies
What are the benefits of a tariff?
- Increases government revenue
- Protects domestic industries
- Reduces trade deficits
What are the costs of a tariff?
- Higher prices for consumers
- Possible retaliation from trading partners
- Inefficiency in domestic production
What are the benefits of a quota?
- Protects domestic producers
- Helps stabilise prices
- Ensures supply of domestic goods
What are the costs of a quota?
- Higher prices for consumers
- Limited availability of goods
- Inefficiencies of swapping to a domestic producer
What are the benefits of an export subsidy?
- Increases competitiveness of domestic products
- Supports domestic employment
- Helps balance trade deficits
What are the costs of an export subsidy?
- Can lead to trade disputes
- Distorts market prices
- Opportunity cost to the government of spending on sbisidies rather than on another policy.
What is the definition of free trade?
Free trade refers to the absence of trade barriers or restrictions on foreign trade.
What is trade creation?
Trade creation occurs when a country shifts its consumption from a higher-cost producer to a lower-cost producer within a trading bloc.
What is trade diversion?
Trade diversion occurs when a country shifts its consumption from a lower-cost producer outside a trading bloc to a higher-cost producer within the bloc.
What is a regional trading bloc?
A regional trading bloc is a group of countries within a geographical region that protect themselves from imports from non-members.
What is a preferential trading area (PTA)?
A PTA is an agreement where tariff and trade barriers are reduced on some but not all goods traded between member countries.
What is a customs union?
A customs union involves the removal of tariff barriers between members and the acceptance of a common external tariff against non-members.
What is a common market?
A common market allows free trade in all economic resources and imposes a common external tariff on imports.
What is a monetary union?
A monetary union is a group of countries that adopt a single currency and coordinate their monetary policies.
What are the advantages of trading blocs?
- Increased specialisation
- Economies of scale
- Protection from external competition
- Greater market access
What are the disadvantages of trading blocs?
- Trade diversion
- Protection of inefficient industries
- Potential retaliation
- Loss of national sovereignty
What is the General Agreement on Tariffs and Trade (GATT)?
GATT was established to encourage countries to reduce tariffs and provide a forum for trade negotiations.
What is the World Trade Organisation (WTO)?
The WTO is an international organization that replaced GATT in 1995, facilitating trade negotiations and settling disputes.
What are the perceived disadvantages of the WTO?
- Perceived as undermining sovereignty
- Long negotiations
- Environmental concerns
What is a currency union?
A currency union is when member countries adopt a single currency and harmonise their monetary policies.
What are the advantages of a currency union?
- Reduced exchange rate risks
- Easier price comparison
- Increased trade
What are the disadvantages of a currency union?
- Loss of monetary policy independence
- Costs of transitioning to a new currency
- Economic disparities among member countries
What is an example of deepening economic integration?
The links between member countries in the EZ area
What major event raised questions about the viability of currency unions?
The 2008 Global Financial Crisis (GFC)
What do some economists argue is necessary before a monetary union?
Fiscal union
What are the advantages of a currency union?
- Certainty of prices
- Price transparency
- No conversion costs
What does ‘certainty of prices’ in a currency union imply?
No concerns over exchange rate fluctuations
How does a currency union benefit firms?
It allows them to benefit from economies of scale
What is a requirement for the benefits of a currency union to be realised?
Monetary policies within members having similar inflation rates
What is a disadvantage of a currency union?
Loss of control over domestic monetary policy
Who sets interest rates for the Euro area?
The European Central Bank (ECB)
What can high interest rates during a recession cause?
Worsening of the economic situation
What do countries rely on more when they cannot implement monetary policy?
Fiscal policy to stimulate the economy
What is a consequence of increased government borrowing?
Crowding out private investment
What does ‘moral hazard’ refer to in the context of stronger economies supporting weaker ones?
Higher taxes in stronger economies due to paying for government deficit in weaker economies.
What is important when joining a currency union regarding exchange rates?
Joining at the right exchange rate to ensure competitiveness
What can happen to UK firms if the UK is outside the EZ?
Loss of competitiveness and potential fall in aggregate demand (AD)
What does loss of sovereignty mean for national governments in a currency union?
Less control over their own economies
What is one argument against protectionism?
It may not always reduce unemployment
Why could the adoption of the Euro cause problems for member countries?
It prevents independent monetary policy
What role does the World Trade Organisation play?
Promoting freer world trade
