6. International economic issues Flashcards
What is the meaning of protectionism in the context of international trade?
Protectionism refers to the act of guarding a country’s industries from foreign competition
What are some of the different methods of protectionism?
o Tariffs
o Quotas
o Export Subsidies
o Embargoes
o Red tape
What is a tariff?
Taxes on imports
What is a quota?
Government-imposed trade restriction that limits the quantity of foreign goods that can be imported
What is an export subsidy?
Export subsidies are when the government rewards the firm with a subsidy for every unit they export, thus incentivising firms to export
How do subsidies protect domestic firms from foreign competition?
o Low cost of production
o Low cost for consumers
o Consumers are incentivised to purchase domestic good
What are embargoes?
Embargoes are complete bans on trade with a particular country
What is red tape?
Red tape refers to excessive administration, which increases the cost of trading and discourages imports
What are the 3 main arguments for protectionism?
o Protects infant and sunset industries
o Protects against, ‘dumping’
o Could employ protectionist measures to improve current account deficit
Bonus arguments:
Protects local jobs. Raises government revenue through some forms like tariffs.
Knowledge, (AO1) and Analyse, (AO2)
Protects infant and sunset industries as a argument for protectionism.
o Infant industries haven’t had the time to grow like international rival firms
o This means that the firm may struggle to compete with these larger firms, (MNCs), who can benefit from economies of scale and have a low cost of production
o Government could intervene using protectionism to give these industries time to grow, so that they can later compete internationally –> Which would lead to economic growth
o If the firms grow in size, they will also hire more people, to meet the demand –> Therefore, more individuals will be making incomes which they can then re-invest back into the economy, in the form of purchasing goods or services, which will then trigger a multiplier effect
o Sunset industries are at the end of their life and protecting them might give them a chance to extend their life and contribute more to the economy
Evaluate, (AO3)
Protects infant and sunset industries as an argument for protectionism?
o Reduces consumer choice
o Ex: Embargoes from a nation that produces the same good as infant firms
Ex: Goods produced by infant firms may not be as high quality as they have less financial resources to invest into production, meaning consumers are being limited to a lower quality product
What is, ‘dumping’?
When a country decides to sell a certain good or service below their cost of production in other countries
Knowledge, (AO1), and Analyse, (AO2)
Protects against, ‘dumping,’ as an argument for protectionism.
o Dumping involves a country selling a certain good or service below cost of production to other countries
o The countries that import these goods really suffer
o As domestic firms cannot compete with prices below cost of production
o Therefore, if protectionist measures are not applied, then the unemployment rate will increase
o Therefore the government may impose protectionist policies to protect against dumping
o If the unemployment rate increases, due to firms having to make workers redundant, then consumers job prospects and job security should be affected, which may lead to an increase in savings –> Causing a decrease in consumption, thus shifting AD inwards, which indicates a recession
Evaluate, (AO3)
Protects against, ‘dumping,’ as an argument for protectionism.
o Dumping is very hard to prove
o If you protect against dumping and it is not taking place, then the government who imposed the protectionist policies may face backlash
+ Trade talks are therefore an appropriate way to solve disputes on dumping
Knowledge, (AO1)
What are the arguments against protectionism and therefore for free trade?
o Protectionist measures can reduce consumer choices
o The nations protectionist measures have been placed on may retaliate –> This retaliation may be more severe and the costs therefore outweigh the benefits
What is meant by the balance of payments?
A record of all financial transactions made between one country and the rest of the world over a given period of time
***Usually 1 year
What is the main component of the balance of payments that we need to know?
The current account
What components make up the current account?
o Primary income
o Secondary income
o Imports of goods/services
o Exports of goods/services
What is meant by a current account defecit?
This is when more is being spent on imports than is being generated from export revenue
***And therefore there is more money leaking out of the economy, than there is being injected back in, (Circular flow)
What are the 2 categories of causes of current account defecits?
o Cyclical causes, (Demand)
o Structural causes, (Supply)
Give an example of a cyclical cause of a current account deficit?
o Strong exchange rates
Knowledge, (AO1) and evaluate, (AO3)
Why do strong exchange rates cause a current account deficit?
o Strong exchange rates mean SPICED, therefore showing imports are cheap
o And our exports are more expensive
o Assuming the imports are price elastic, this means that economic agents will have a greater marginal propensity to import, due to cheap prices
o If exports are more expensive then they will be less competitive
o Leading to more money leaking out of the economy, than being injected into it
Give an example of a structural cause of a current account deficit?
o High unit labour costs, leading to cost-push inflation
Knowledge, (AO1), Analyse, (AO2), and evaluate, (AO3)
High unit labour costs as a cause of a current account deficit?
o If cost of production rises
o Firms will have to pass higher costs onto consumers
o This leads to cost-push inflation, causing our SRAS to shift inwards
o Leading to an increase in domestic prices, which incentives consumers to purchase goods abroad, causing money to leave the economy, (greater marginal propensity to import)
o The high prices passed onto consumers will also cause export revenue to decrease, as the goods will be less competitive internationally, due to high prices ***Assuming the exports are price elastic –> If the goods are price inelastic, then this change in price will have little impact on the amount of goods the country exports
Evaluate, (AO3)
Are structural, (Supply), reasons for a current account deficit more harmful than cyclical, (Demand), reasons?
o Structural reasons are more negatively impactful
o Structural reasons can be long-term
o Ex: Exchange rates will always change with time
o But unless there is intervention high unit labour costs will not change
o Structural causes require intervention
Knowledge, (AO1), and analyse, (AO2)
Why a deficit leads to a decrease in AD and what the impacts of this are.
Tip: Draw a diagram of a decrease in AD
o If there is a deficit, then assuming ceteris paribus, M should be greater than X
o Therefore AD is shifting inwards
o This inward shift leads to increased prices and a reduction in output
o This also leads to an increase in unemployment, as we move further from YFE
***Visualise by drawing a diagram using a LRAS curve
Evaluate, (AO3)
AD shifting inwards as a consequence of current account deficit.
o Assuming ceteris paribus, a deficit means that AD should shift inwards
o However, when discussing the impact of this shift, we make the assumption that the deficit is substantial and would have drastic effects on the economy
o However, the consequences depend on the size of the deficit
o As it may be so small, that it hardly impacts AD
What is a current account surplus?
o More money is being generated from exports than the expenditure on imports
o This means that there is more money being injected into the economy, through the 4 components of this account than is leaking out
Draw an exchange rate diagram.
Doesn’t matter what it represents, just make sure the axis and everything else is labelled correctly, so that you could draw it in an essay
