5. Globalisation and Trade Flashcards
Who came up with the theory of comparative advantage?
David Ricardo
What is comparative advantage?
A country has lower opportunity costs when deciding to specialise in a good or service
What are some criticisms of comparative advantage?
Assumes constant returns to scale, assumes perfect knowledge, transport costs distort PPF, rate of inflation is ignored, goods are assumed to be homogenous (non-price competitiveness is ignored, assumes factors of production are perfectly mobile (and no trade barriers)
What happens to comparative advantage if relative inflation is high?
Comparative advantage is eroded
What is globalisation?
Process by which national economies have become increasingly integrated and interdependent
What is the world’s most globalised country 2022?
Switzerland
What caused high globalisation up until 2008?
communication advancements, transport advancements (containerisation), formation of multi-lateral organisations (IMF), differences in relative quality of factors of production, business growth incentives
From 2007/8 the world entered a period of deglobalisation… why?
Western nations suffering from secular stagnation,slowing pace of liberalisation (cutting import tarrifs have already happened), non-tarrif barriers have grown, rising prosperity (large GDp % spent on services rather than manufactured products), technological improvements within countries
What are the benefits of specialisation and trade?
Increase in total world output (theory of comparative advantage), increased exports - higher AD leads to growth (multiplier and accelerator effects), provides revenues and jobs in exporting firms, increased imports - goods of better quality and lower cost, higher consumer surplus, competition for domestic firms drives efficiency
What are some evaluation points for specialisation and trade?
assumes factors of production are perfectly mobile, over-specialisation = vulnerability to international shocks, increased imports- infant industries close down leading to structural unemployment. ‘Dumping’ of goods on the world market
What is a countries terms of trade?
ratio of the price index for exports of goods and services to the ratio for imports
How to calculate terms of trade?
export price/ import price x 100
What is a trade of terms improvement?
export prices rise relative to import prices
What is it called when import prices rise relative to export prices?
terms of trade deterioration
How does high relative inflation affect terms of trade?
export prices are rising faster than import prices hence ToT improvement
What is economic integration?
countries coordinate to reduce trade barriers and potentially harmonise monetary and fiscal policy
What is a preferential trading area?
countries reduce tariffs/ quotas but only on certain goods and services
What is a free trade area?
all trade barriers are eliminated, but free to trade how they like with external countries
What is an example of a preferential trading area?
India and Pakistan
What is an example of a free trade area?
ASEAN
Why was the ASEAN free trade area created in 1992?
The ASEAN Free Trade Area eliminate tariff barriers among the Southeast Asian countries with a view to integrating the ASEAN economies into a single production base and creating a regional market of 500 million people.
What is the economic size of the ASEAN free trade area?
$2.3 trillion
What is a customs union?
free trade within the trading bloc and common external tariffs on goods imported from outside the bloc
What is the most famous example of a customs union?
The European Union
What are common markets?
free trade within the trading bloc and common external tariffs on goods imported from outside the bloc
additionally the four freedoms - capital, people, goods and services.
product standards and laws are common between all nations
What is an example of a common market?
the EU single market
What is a monetary union?
free trade within the trading bloc and common external tariffs on goods imported from outside the bloc
additionally the four freedoms - capital, people, goods and services.
product standards and laws are common between all nations
same central bank and same currency
What is an example of a monetary union?
the eurozone
What are the six stages of economic intergration?
PTA, FTA, customs union, common market, monetary union, full economic intergration
What is the main advantage of a monetary union?
stability - currency is more stable against fluctuation, lack of volatility of exchange rate, increased international trade as a result
What is the main disadvantage of a monetary union?
lack of monetary policy autonomy
What are the main causes of globalisation?
1) Technological advancements (containerisation)
2) TNC and global corporation power
3) Liberalisation as an ideology
What is a pattern of trade?
Mix of goods and services that a country imports/ exports
What are two key changes in global patterns of trade?
The G7 world share in manufacturing has fallen dramatically.
Flows with emerging economies have increased significantly
How are patterns of trade discussed?
Geographical - gravity theory (tend to trade with closest partners)
Commodity (types of products traded)
What is vertical specialisation?
Specialisation in particular stages of production - unbalanced gains from trade
What are the dynamic gains from free trade?
Diffusion of knowledge and technology, economies of scale, increased competition access to cheaper inputs
What are the benefits to a monetary union?
Reduction in exchange rate uncertainty, increased FDI, elimination of
What is an optimal currency area?
Geopolitical area over which a unified currency acts providing the best economies of scale to a currency and effectiveness of policy to promote growth and stability
Why is there potential conflict between trade blocs and the WTO?
Trade blocs can lead to trade diversion - diverging from the aim of promoting fair competition
Why do trade blocs support the role of the WTO?
They lead to trade creation (through specialisation/ reduced transactionsl costs etc)
Why might countries enlist protectionist measures?
Protection of infant industries, protect domestic employment, retaliation, self-sufficiency, retaliation, dumpling protect strategic industries
What are quotas?
A physical limit on the quantity of imports (no tax revenue is raised and shortages are created)
What is an example of the infant industry arguement from Bad Samaritans?
Rise of Toyota a very successful Japanese car industry - heavy protectionism banned ford and General Motors and lead to a Toyota bailout
What is Friedmans Golden Straitjacket?
What is international competitiveness?
The ability of a country to sell its goods and services abroad - determined by price and or quality of the service
What are the factors that influence international competitiveness?
Relative unit labour costs (dependent on productivity), wages and non wage costs relative to competitors, rate of inflation relative to competitors, regulation relative to competitors
