7.1: A Global Perspective: Globalisation and Trade Flashcards
Globalisation
The ever increasing integration of the world’s local, regional and national economies into a single, international market
Factor’s contributing to globalisation
Trade in goods/services
Improved transport
Liberalisation of trade
MNCs
International flow of capital/financial markets
Communications and IT
End of Cold War -> emerging economies
Characteristics of globalisaltion
MNCs
Trade blocs
Dilution of culture
Inrease in international trade
Benefits of globalisation for consumers:
Cheaper price
More choice
Higher incomes
Drawbacks of globalisation for consumers:
Homogernised goods
Increase in price of commodities
Benefits of globalisation for producers:
Economies of scale -> lower costs
Specialisation
Increase target market
Drawbacks of globalisation for producers:
More competition
Dependence for trade
‘Footloose’ capitalism
Benefits of globalisation for workers:
Inrease in employment
Increased migration
Drawbacks of globalisation for workers:
Exploitation
Increase in structural unemployment
Geographical immobility
Benefits of globalisation for governments:
Tax benefits
Increase in FDI
Drawbacks of globalisation for governments:
Corruption
Tax avoidance
Benefits of globalisation for a country:
Reduce poverty
Immigration -> fill job shortages
Drawbacks of globalisation for a country:
Localised job loss
Dilution of culture
Current account deficit
Benefits of globalisation for the environment:
Dynamic efficiency by MNCs -> innovation + improved environmental practices
Consequences of globalisation evaluated (adavantages)
Costs fall -> price fall (micro)
Competition -> economic welfare (micro)
Reduced poverty
Balance of payments
Drawbacks of globalisation for the environment:
Diminishing resources (tragedy of the commons)
Pollution
Consequences of globalisation evaluated (disadavantages)
Pollution -> negative externalities (micro)
Harm to local/small producers -> loss of culture -> structural unemployment -> loose employment
Absolute advantage
When a country can produce a good or sevice in greater quantity for the same cost or the same quantity at a lower cost than another country
Comparative advantage
Exists when a country is able to produce a good more cheaply relative to other goods produced domestically than another country
Theory of comparative advantage
Countries will find it mutually advantageous to trade if the opportunity cost of production of goods differs
Net output gains
Increase in output comparative advantage exists + countries specialise
Advantages of trade in an international context:
Greater world output -> gain in economic welfare
A greater variety of goods and services could be produced
Outward shift in PPF curve
Disadvanatges of trade in an international context:
Over reliance of export of one good
Over use of non-renewable resources (tragedy of the commons)
Real world comparative advantage examples:
Saudi Arabia and oil
New Zealand and butter
Germany and cars
Gravity theory
Countries tend to trade with similiar countries with close geographical proximity
Pattern of trade
How we trade between countries and how these trade flows change
Factors influencing patterns of trade:
- Compartive advantage i.e. developing countries have gained an advantage in the production of manufactured goods due to low labour costs
- Emerging economies - due to collapse of communism, more countries involved in world trade
- Growth of trading blocs and bilateral trading agreements -> trade creation - occurs when a country consumes more imports from a low cost producer, and fewer from a high cost producer
trade diversion - occurs when trade shifts to a less efficient producer
Changes in exchnage rates - SPICED, WPIDEC
Terms of trade
Measures the relative price of exports to imports in an economy
Balance of trade
The difference between the total value of exports compared to the total value of imports
Terms of trade (index) =
(index of export prices / index of import prices) x 100
What happens if the terms of trade index deteriorates?
Terms of trade have worsened
What happens if the terms of trade index improves?
Terms of trade improved -> export price rises -> demand + comeptitiveness fall -> worsens balance of payments
Why might terms of trade improve?
Specialisation in higher value exports
World real income levels may chnage in favour of this countries exports
Exchange rate appreciates causing import prices to fall
Fall in the world price of imported technology
Trade deal which lowers import tariffs or increases import quotas
Why might terms of trade fall?
Can’t specialise in higher value exports
World real income levels may change against a countries exports
Exchange rate depreciates cauisng import prices to rise
Rise in world price of imported technology
Trade deal which rises import tariffs or decreases import quotas
What can terms of trade be used to measure?
Welfare of an economy -> a fall in terms of trade may lead to a fall in living standards
Free trade areas
A group of countries who agree to trade without barriers but mantain their own individual barriers with countries outside that area
Customs union
A free trade area but uses a common external tariff (CET) against the rest of the world
Pros of regional tarde agreements
Encourages specialisation based upon comparative advantage
Tarde creation
Cons of regional trade agreements
Trade diversion
Ineffecient producers in the bloc are protected
Monetary union
Countries use the same currency (EURO)
Conditions for the success of a monetary union
Economically integrated
ECB regulates the rate of interest and monetary policy
Use the same interest rate i.e. aim of inflation to be below 1.5%
Bilateral trade agreement
A regional trade agreement between two countries
Trading bloc
A group of countries that have signed an agreement to reduce or eliminate tariffs, quotas and other protectionist barriers between themselves
Regional trade agreement
An agreement between at least two countries to reduce or eliminate tariffs, quotas and other protectionist barriers between themselves
Common market
A customs union where in addition both labour and capital have freedom of movement whithin the area and where product standards and laws concering free movement of goods and services are common between countries
Trade creation
The replacement of more expensive domestic production or imports with cheaper output from a partner within the trading bloc
Trade diversion
The replacement of cheaper imported goods by goods from aless efficient trading partner within a bloc
Non-tariff barriers
Measures imposed by a government that have the effect of inhibiting international trade
World Trade Organisation (WTO)
Promotes world trade through reducing trade barriers and policing existing agreements -> settles trade disputes by acting as a judge
Conflicts between WTO and Regional Trade Agreements (RTA)
- Trading blocs might distort world trade or adversely affect those who do not belong to them
- Setting up a customs union or a free trade area could be seen to violate the WTO’s principle of having all trading partners treated equally (especially common if a tariff is applied). However, they can compliment the trading system and the WTO strives to ensure that non-members can trade freely and easily with the member of a trade bloc
Reasons for restrictions on free trade
Reduce trade deficit
Infant and sunset industries need protecting
Protect domestic jobs
Quota
Places a quantity (suppy) limit on the volume of imports of a product
Subsidy
Form of financial help given to domestic producers in order to lower their costs and help them compete in international markets
Non-tariff measures
Administrative barriers
Exchange rate manipulation
Embargoes
Impact of protectionist policies for consumers:
- Less choice, higher price, loss of consumer surplus and economic welfare
+ Supports local business -> help communtiy
Impact of protectionist policies for producers:
+ Reduce competition, protect domestic firms and jobs
- Derived demand cause prices of other goods to rise, infaltionary (cost-push), increase costs of production -> less competitive
Impact of protectionist policies on the government
+ Tax revenue, jobs protected -> don’t pay benefits, reduce current account deficit
- Lead to government failure, props up inefficient business
Impact of protectionist polices on living standards
- WTO states it negatively affects living standards as stifles growth, increase in price of goods and services -> not everyone can afford
+ Protects jobs -> protects income -> improves living standards in short term
Impact of protectionist policies on equality
+ Protect income for farmers (raises incomes which are often low)
- Tariffs are regressive -> damaging to those on low and fixed incomes -> may increase wealth and ineqaulity
Balance of payments
Financial transactions bewteen one country and another
Three accounts in balance of payments
Current
Capital
Financial
What is in the current account?
Trade in goods
Trade in services
Net income flows (primary)
Net transfers (secondary)
Reasons for a current account deficit
High marginal propensity to import
Strong pound
Favourable terms of trade
Inflation -> cost of production rise -> prise rises -> competitiveness falls -> exports fall
Lack of productivity
Emerging economies = competitive
Deindustrialisation
Reasons for a current account surplus
Low marginal propensity to import
Weak pound
Unfavourable terms of trade
High productivity
Is a deficit a problem?
No - if you can balanc it out with current account
Dpends why i.e. if its exchange rates = no problem, productivity = problem
Capital account
Repatriation of financial capital from people entering and leaving UK plus government transfers such as foreign aid
Financial account
Records the majority of flows of financial capital into and out of a country
Long-term direct capital flows
Foreign direct investment - net acquisition of productive assets by UK firms overseas and by foreign firms in UK i.e. Nissan in Sunderland
Net portfolio investment - purchase of financial assets i.e. shares
Short-term direct capital flows
Hot money (foreign exchange markets)
The two main policies to reduce expenditure and switiching (3D’s)
Expenditure reducing policies: Deflation - reducing AD for goods and services i.e. rise in income tax, raise interest rates
Expenditure-switching policies: Direct control/devaluation - encouraging consumers to swithc their spending to domestic goods by changing the relative prices of UK and overseas output i.e. by devaluation or tariffs and quotas
Significance of global trade imbalances
- Countries are interdependent -> surplus/deficit in current may indicate an unbalanced economy -> over reliant on other economies -> difficult to attract sufficent financial flows in order to finance a current account deficit -> unsustainable in
long run - UK reliant on other economies - not an issue if financial and current account on surplus
- In EUROZONE, deficits in current account concern as they have a fixed exchange rate
- Surplus indicates low consumer spending and a low savings ration. Could mean consumers enjoying fewer goods than they could -> lowers living standards
- Significance depends why there is a deficit - some countries happy to have one as it allows them to have a financial account surplus to import other goods
