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Economics > 6. International trade and globalisation > Flashcards

6. International trade and globalisation Flashcards

1
Q

Specialisation

A

A process of concentrating on one specific skill or task within the production line.

Can occur on an individual level, regional level, national level or international level.

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2
Q

Individual specialistion

A

Specialising in a chosen progession to become more efficient in their tasks + improve the quality/ qunatity of their output

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3
Q

Firm specialisation

A

Firms can gain a reputation for their highly specialised product.

Eg. apple iphones

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4
Q

Regional specialisation

A

Regions can become famous for their specialisation in particular products.

eg. vineyards in Bordeaux, France

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5
Q

Country specialisation

A

Countries too can specialise in the production of goods and services and then export these to the world.

Eg. France - Cheese and wine

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6
Q

International specialisation

A

Occurs when countries have an advantage in the quantity or quality of their resources.

High quantity = able to export at competitive prices.

Quality of resources high = Able to export them at higher prices than competitors

Countr may also be able to produce products at a lower price than competitors. eg. due to lower labour costs in the country due to excess labour supply. (Bangladesh clothing industry)

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7
Q

Advantages of specialisation

A

Increase in investment - Countries who need the product produced byt he specialised country qill often provide investment.

Improvements in efficiency - Less wastage of resources, lowering costs + increasing profits.

Improvements in productivity - Specialised equipment + workers used.

Economies of scale - Possible due to increased demand from an international market.

Increase in innovation - Have to remain competitive to hold on to market share.

Increased competitiveness - All of the above points, help a firm enter/ consolidate its place in the international market.

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8
Q

Disadvantages of specialisation

A

Labour turnover - Production line labour = very boring.

Replacing capital for labour - Done to improve competitiveness –> leads to structural unemployment.

Overspecialisation - If countries wealth is dependent on production of one product, fluctuations in market price = detrimental.

Decrease in choice - Specialisation –> eliminates competition –> monopoly

Decrease in innovation - (Monopoly)

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9
Q

Advantages of specialisation at the national level

A

Greater output - bc of higher productivity due to ‘production lines’ (specialisation)

Lower per-unit costs/ capital investment - Greater output reduces per-unit costs. The higher profits can be reinvested into capital + research/ development

Economies of scale - Lower product prices + higher profits + more investment bc of lower per-unit costs.

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10
Q

Disadvantages of specialisation at the national level

A

Infant industry - Difficult for new industries to establish themselves and outcompete specialised firms.

Interdependence - Supply chain could be disrupted by pandemic/ natural disaster –> No alternatives

Lack of diversification - Means more people are affected if prices slump

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11
Q

Globalisation

A

The interconnectedness of countries throughout the world through the trade of products and services, and the sharing of technology, information and jobs across national borders and cultures.

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12
Q

Causes of globalisation

A
  • Transportation and the use of massive cargo ships
  • International cooperation (eg. free trade agreements)
  • Technoloyg and digital revolution - Faster to share information
  • Communication and the speed/ cost of transmitting information - Internet
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13
Q

Advantages of globalisation

A
  • Countries can beenfit from an inflow of foreign direct investment, attracting TNCs –> improving economy
  • Global peace more common bc countries trading with each other = less likely to go to war
  • Technological sharing leads to increased innovations throughout the world
  • More efficient use of resources + new tech –> increased productivity –> global economic growth
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14
Q

Disadvantages of globalisation

A
  • Investment isn’t constant. If prices being rising in country –> investment is lost.
  • MNCs home country where production once took place may experience unemployment.
  • MNC companies may bankrupt + drive out local business bc they can’t compete with economies of scale
  • Without interantional standards, MNCs may produce too much without taking into full account environmental + labour standards.
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15
Q

Advantages of MNCs

A

MNCs bring foreign investment in countries

MNCs relocate production to areas with high resources –> increases efficiency

Lower product prices caused by efficiency

Higher profits bc of lower production costs

Greater consumer choice bc need to compete in international market

Tech transfer bc MNCs share tech with host countries –> improving their productivity and economic growth.

Competition - MNCs create a more competitive environment –> increasing innovation, imporiving efficiency etc.

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16
Q

Disadvantages of MNCs

A

Losing investment –> MNCs always transfer investment to countries with lowest costs

Environmental standards in host countries are usually more lenient –> causing more pollution + global environment issues

Exploitation of resources - Deplete scarce resources at low prices eg. sweatshop labour

Transfer of production causes unemployment in home country.

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17
Q

Benefits of free trade for producers

A

Economies of scale –> larger customer base

Specialisation –> reduces costs

Efficient use of resources bc larger market

Increased competition –> enhances efficiency + tech innovations.

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18
Q

Benefits of free trade for consumers

A

Lower prices bc of efficient production processes

Greater choice bc of importation

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19
Q

Benefits of free trade for countries

A

Foreign exchange bc of trade increases currency reserves –> greater exchange rate stability.

Tax revenue increases bc of larger economic growth.

Economic growth in host countries bc of FDI (foreign direct investment)

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20
Q

Trade protectionism

A

When government policies are used to protect domestic industries from international trade.

  • Import tariffs, quotas, subsidies and emabargoes
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21
Q

Import tariffs

A

Tax on import of goods and services.

Tax pad by firms / households doing the importing (not the foreign producer)

–> makes domestic products cheaper than foreign products.

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22
Q

Import quota

A

A trade protection limiting the physical quantity of a foreign product allowed into a country.

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23
Q

Subsidies - International trade

A

A government monetary benefit given to a domestic producer

–> Lowers their cost of production and thus their price

–> makes them more competitive with foreign producers

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24
Q

Embargo

A

A complete prohibition on trade with a country or a specific product. (mainly for political reasons, eg. Cuba)

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25
Q

Reasons for trade protectionism

A
  • Protecting infant industries
  • Supporting declining industry (eg. gov. wants to stop unemployment)

Protecting strategic industries (eg. energy, water, steel, military, food) –> these industries are needed for national security.

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26
Q

Consequences of protectionism on consumers

A
  • Face higher prices + less consumer satisfaction
  • Market will also be underproducing the product/price the consumer most desires.
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27
Q

Consequences of protectionism on infant + declining industries

A
  • High oppurtunity cost of protecting infant/ declining industries bc other industries cannot be support + may begin to decline
  • May promote inefficiencies bc resources are moved away from suceeding industries with competitive advantages, to failing inustries.
  • These industries may never grow up / always need assistance.
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28
Q

Trade war

A

A trade protection contest between two countries.

  • Results in higher import costs which negatively affects the economy.
29
Q

Foreign exchange rates

A

The value of one currency in terms of another, which is determined by the foreign exchange rate market.

30
Q

Foreign exchange market

A

Place for buying and selling national currencies.

Made up of thousands of banks and other financial intermediaries around the world

31
Q

Floating exchange rate system

A

A system where exchange rates are set by the market forces of demand and supply.

Causes them to often fluctuate but eventually self-correct due to demand for exports etc.

32
Q

Fixed exchange rate system

A

A system where the exchange rate remains fixed relative to other currencies.

Eg. Argentinian peso fixed to the US dollar.

33
Q

Floating exchange rate - Causes for fluctuations in the exchange rate

A

Currency prices are set by the free market, based on the current demand and supply.

eg. When visiting a country you have to sell your currency to buy their currency –> increased demand for their currecy.

If currency of country A is low compared to country B. Country A’s exports will be in higher demand –> higher demand for currency –> increases value of currency eventually.

34
Q

Equilibrium exchange rate

A

The rate where quantity demanded and quantity supplied is equal for one currency relative to another.

35
Q

How the exchange rate is determined (in a floating exchange rate)

A

The equilibrium exchange rate is the rate where quantity demanded and quantity supplied is equal for one currency relative to another.

Determined by the world market of buyers and sellers

36
Q

Exchange rate - Diagram (US dollars in terms of Chinese yuans)

A

y-axis = Price of USD in terms of Chinese Yuan

x-axis - Quantity of US dollars

Supply + demand lines. + equilibrium.

37
Q

Appreciation

A

The value of a currency rising relative to another, which occurs from increased demand or decreased supply of the currency.

38
Q

Depreciation

A

The value of a currency falling relative to another, which occurs from decreased demand or increased supply of the currency.

39
Q

Determinants of exchange rate demand and supply - List

A

Income
Consumer tastes
Speculation

40
Q

Determinants of exchange rate demand and supply - Income

A

Income rises –> demand for imported goods increases

–> demand for foreign currencies rises, decreasing demand for countries currency.

–> Foreign countries value of currency relative to home country increases.

–> Home countries value of currency relative to foreign country decreases.

41
Q

Determinants of exchange rate demand and supply - Tastes

A

Consumer tastes = constantly changing

–> eg. higher demand for tourism in Thailand –> increases demand for currency –> increases value.

–> If country’s goods/ services go out of fashion = value of currency falls + vice versa.

42
Q

Determinants of exchange rate demand and supply - Speculation

A

Speculators trade currencies by betting on the direciton of the market.

If speculators think a market will increase, they will buy more of that currency –> which ends up increasing its value.

+ vice versa.

eg. during covid speculators belived the US market would appreciate then depreciate.

Bought a lot of USD and then sold it –> strengthened then weakened the currency.

43
Q

Speculation

A

Trading high-risk financial assets with the hopes of earning high returns.

eg. buying lots of a foreign currency to push up the value, only to sell it, psuhing it down.

Speculators believe a markets currency will increase –> meaning they buy more of it –> increasing value of currency.

44
Q

Causes of foreign exchange rate fluctuations - List

A
  • Interest rates
  • Inflation
  • Multinational corporations
45
Q

Causes of foreign exchange rate fluctuations - Interest rates

A

Interest rates in a country rise –> attract foreign savings

  • Foreign savings –> lead to greater demand for foreign currency –> increases countries currency value
  • Decreasing interest rates has the opposite effect.
46
Q

Causes of foreign exchange rate fluctuations - Inflation

A

Inflation –> causes price of goods / services to rise

  • Means demand for cheap imported goods rise.
  • Means demand demand for the countries exports decreases.
  • Foreign currencies values rise, home country’s currency value decreases.
47
Q

Causes of foreign exchange rate fluctuations - MNC’s

A
  • Multinational corporations beginning to produce in a foreign country –> increased investment into country.

Increased capital inflow causes the host country’s currency to appreciate.

(when a MNC leaves a host country, the host countries currency will fall in value.)

48
Q

Appreciation of a currency - Impacts on imports

A

Consumers

  • More disposable income + savings –> imports = cheaper –> increase. (more disposable income –> can save more money)

Businesses

  • Cost of production falls bc can import cheap factors of production. –> increased profits –> increased future capital expenditurs.
49
Q

Appreciation of a currency - Effects on exports

A
  • More expensive for other countries to buy the countries exports -> foreign consumers have to pay more for goods / substitute cheaper/ less quality goods.
  • Countries business suffer bc sale of exports decrease –> decreased profits, employment + future growth
50
Q

Depreciation

A

Occurs when demand for a currency decreases / supply of it increases.

–> Decreases the cost of exports for other countries

–> Increases the cost of imports

51
Q

Balance of payments

A

A record of all money flowing into and out of a country from trade during a specific period of time.

52
Q

Primary commodities

A

Products that are produced in the primary sector, such as agricultural goods, forestry, fishing, etc.

53
Q

Debit

A

An outflow of money from an import.

(Debit on your bank account is when you spend money on goods or services)

Debit for the balance of payments is when a country spends money on goods or services (imports).

54
Q

Credit

A

An inflow of money from an export.

(Credit on your bank account is when you recieve money)

A credit for the balance of payments is when a country recieves money from foreign countries for goods and services sold (these are called exports)

55
Q

Current account

A

Section of the balance of payments that includes trade, services, income and unilateral transfers.

Balance of payments is (x-m).

Current account is how we measure it.

–> businesses report whats bought abroad and sold abroad (governments collect data + record it –> add up everything sold abroad + everything bought abroad. –> goods divided up into types (eg. primary commodities) and then show (x-m).

–> Always a bit of an estimate bc not everyone reports accurately.

56
Q

Four subdivision in the current account

A
  • Goods
  • Services
  • Primary income
  • Secondary income
57
Q

Balance of trade in goods

A
  • This subdivision is called the visible balance. (exports / imports)

eg. country importing goods –> money leaves country + is recorded as a debit on the current account.

58
Q

Balance of trade in services

A
  • Services are intangible –> value generated by human skills.

(As a nation becomes more developed, the services balance grows in size)

  • Sometimes referred to as invisible balance

Eg. paying for a hotel room in Japan –> activity is credited in the service section of Japan, but debited in the service section of Sweden.

59
Q

Inelastic products –> Appreciation

A

Imports

  • Cost of imported medicine will fall (wuantity consumed won’t change)
  • If price reduction is passed onto consumer –> they will benefit.

Exports

  • Price of exported medicine would rise + revenue rises bc consumption doesn’t fall bc inelastic.
60
Q

Inelastic products - Depreciation

A

Imports

  • Price of impors rises –> increases total revenue for foreign exporters bc quantity stays the same.

Exports

  • Price of exported mdeicien falls –> (Doesn’t impact quantity sold bc inelastic –> so total revenue falls)
61
Q

Elastic products - Appreaciation

A

Imports

  • Consumers + retailers benefit bc cost of improted handabgs fall –> sales + profits rise bc quantity bought increases –> larger revenue

Exports

  • Cost to purchase exported cars increase –> reduces quantity sold –> lower sales + profits.
62
Q

Elastic products - Depreciation

A

Imports

  • Cost of imported handbags rises –> sales + profits will fall.

Exports

  • Cost of exported cars decreases –> increase quantity sold –> increasing sales + profits.
63
Q

Fixed exchange rate - Advantages

A

Export-driven economies benefit from fixed exchange rates.

–> The currency appreciating –> which causes exports to cost more (This won’t happen if the currency is fixed)

-> Creates business confidence, boosting sales

64
Q

Fixed exchange rate - Disadvantages

A

Appreciating currency

  • Government needs to maintain fixed exchange rate when the currency is appreciating
  • This is done by selling more of its currency on the foreign exchange market + buying up the currency of the country it faces a current account surplus with
  • Central bank could also lower interest rates –> leads to capital outflow + depreciates the currency.

(These things could however cause inflationary pressures)

Depreciating currency

  • Government needs to maintain the fixed exchange rate by buying its own currency in the foreign exchange market with its supply of gold / major foreign reserve currencies (eg. USD) –> WIll prop up the ecnomy
  • However, reduced gold + foreign reserves –> leaves economy at risk of financial crisis
  • Banks could also raise interst rates –> leads to capital inflows (But would also slowdown the investment spedning bc of higher business costs bc less disposable income of people –> less money spent)
65
Q

Floating exchane rate - Advantages

A
  • By using demand and supply –> can self-correct a merchandise trade defecit + stabilise the exchange rate

(Done by fluctuations in demand and supply –> over time always self-correcting)

66
Q

Merchandise trade defecit

A

When imports are greater than exports for a nation, - i.e. when a country is buying more goods from other countries than other countries are buying from it.

67
Q

Floating exchange rate - Disadvantages

A
  • Country can’t keep currency from appreciating.

(Bad if you’re an export driven economy)

68
Q

Primary income current account

A
  • Flow of profits, interest and dividends from investments in other countries
  • Net remittances from migrant workers
69
Q

Secondary income current account

A

Overseas aid /debt relief for poor countries

Eg. Countries paying aid to Ukraine during the war

Economics (8 decks)

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