A Global Perspective Flashcards
Globalisation definition
Growing interdependence of countries economies
Factors for globalisation
Improvements in transport, improvements in technology, trade liberalisation (reduce protectionism), growth of TNCs, international financial markets (move money around the world)
Positive impacts of globalisation on consumers
More choice, can lead to lower prices (firms produce in countries with lower cost)
Negative impacts of globalisation on consumers
Cal lead to higher prices (rising incomes so greater demand), can lead to a loss of culture
How does globalisation effect employment in the manufacturing sector?
Jobs are lost in HICS, jobs grow in LICs as businesses move to countries where it’s cheaper to employ low-skilled labour
What is the impact of increased migration on workers?
Can lower wages as larger supply of labour, but skills provided can rise AD which may lead to improved wages
Impact of globalisation on inequality?
Increases, as wages for high skilled workers increase as demand for them rises as the global economy improves
What is the impact of globalisation on workers in LIC/developing countries?
Can increase jobs which may get them out of poverty, but workers can be exploited by TNCs and given low wages
Benefits of globalisation on producers
More countries to sell to reduces risk as AD not as negatively volatile, profits can increase as can exploit workers in LICs + produce in countries with comparative advantage
Negative impacts of globalisation on producers
Will lose out if unable to complete with international markets, may force some firms to close
Positive impacts of globalisation on the government
Greater tax revenue, as TNCs more willing to pay tax
Negative impacts of globalisation on the government
TNCs May create tax avoidance, also TNCs have the power to bribe weak governments which may create corruption
Positive impacts of globalisation on the environment
Countries can share technology+ ideas to tackle climate change and produce more environmentally friendly
Negative impacts of globalisation on the environment
Increased demand for raw materials + increased carbon emission through transport damages the environment
Positive impacts of globalisation on economic growth
Increased investment through TNCs, can be even greater depending on the size of the multiplier, also TNCs provide improved management and technology to improve productivity
What policies should the government implement to encourage TNCs investment?
Supply side, as would increase incentive for long-term investment
Negative impacts of globalisation on economic growth
Creates economic instability, the lack of loyalty of TNCs mean when costs rise they are likely to leave which creates structural unemployment and reduces growth
Comparative advantage theory for globalisation
Countries specialise in industries where they have comparative advantage as allows cheaper products
What does comparative advantage for globalisation rely on
Lots of global trade, so countries can still access goods for relatively cheap so they don’t have to produce them
Assumptions/limitations of the theory of comparative advantage for globalisation
No transport costs, assumes costs are constant ( doesn’t account for EoS), goods assumed to be homogenous, doesn’t assume for tariffs/barriers, dependent on the terms of trade between countries
Advantages of specialisation for global trade
Increase world output and economic growth, countries benefit from EoS, consumers have greater choice through trade, greater competition (this encourages innovation to lower costs)
Disadvantages of specialisation for global trade
Can lead to an overdependence on exports/imports, environmental issues, creates structural unemployment, loss of sovereignty/culture
How does specialisation for global trade increase structural unemployment?
Jobs in a domestic industry are lost to foreign firms who are more efficient - the less mobile the workforce the worse impact this will have
How does comparative advantage influence the pattern of trade?
Countries will trade where there is a comparative advantage - I.e there’s been a growth in exports of manufactured goods from developing countries to developed as lower price due to lower labour costs
How do emerging economies influence the pattern of trade?
Growing countries demand more imports/exports so take up a larger proportion of other countries imports/exports (I.e China’s growth)
Trading blocs and trade agreements influence on patterns of trade?
Increases level of trade with countered within these blocs agreements, but worsens trade for countries outside
Relative exchange rate influence on the patterns of trad
Prices determine where countered buy goods (stronger exchange rate, less demand for exports)
Terms of trade calculation
(Index of export prices divided by index of import prices) x 100
What does the Terms of Trade tell countries?
The relative value and quality of their exports against their imports
What can be indicated by a worsening/improvement of the terms of trade?
Worsening - relative value/quality of export decreases (either export worsens or imports improve), improvement relative value/quality of export increases (either export improves or imports worsen)
Short-run factors influencing the Terms of Trade
Exchange rates and inflation
Long run factors influencing the terms of trade
Improvement/worsening of productivity levels- improvement of productive can worsen ToT although as export prices decrease + change in incomes can increase demand for imports raising their price
Which macroeconomic objective do Terms of Trade directly change?
Balance of Payments
What is the impact of an improvement in the terms of trade?
Can lead to fall in the GDP and a rise in unemployment as demand for exports will fall
What is the long-run impact of a worsening of the terms of trade?
Suggests a long term decline in living standards, worsens economy as less faith so less investment
What is a free trade area?
Countries inside the trading bloc have free trade, and are allowed their own trading restrictions with other countries
What are the 4 types of Trading Blocs?
Free trade areas, customs union, common markets, monetary union
What is a customs union?
Free trade between members, they also share mutual trading restrictions with countries outside the union (allows them to trade outside as a bloc)
What is a common market trading bloc?
Same as a customs union, but also free movement of all factors of production with the aim to create one common market
What is a monetary union trading bloc, with an example?
When countries share one currency, meaning they share a trading bloc (I.e Eurozone and Europe central bank)
What are the issues with a monetary union
Expensive to start up and high costs if the union break up, also a loss of policy independence for the member countries so can use policies to benefit themselves
Advantages of trading blocs on consumers
Increased specialisation + competition lowers prices, greater choice,
Advantages of trading blocs on firms
Firms benefit from EoS due to specialisation, also protected from cheaper imports outside of the trading bloc, increased competition encourages innovation and improved efficiency
Advantages of trading blocs on firms
Increased specialisation + protection means more jobs available for domestic firms, so increased employment
Disadvantages of trading blocs on global trade
Counties outside the blocs are damaged, created trade diversion so inefficient producers in the blocs are protected over efficient producers outside the blocs
Other disadvantages of trading blocs
Reduction in competition, gains distributed unequally (usually developed countries benefit most), leads to retaliation, heightened regional inequalities, less choice for consumers, lessen national sovereignty, can worsen efficiency
Trade creation in a trading bloc
When consumption shifts from a high cost domestic producer to a lower cost producer inside the trading bloc, as costs lower due to reduced tariffs?
How can trade creation be shown in a diagram?
By reducing the tariff, which increases consumer surplus
Trade diversion in a trading bloc
Countries go from buying from a low cost producer to a higher cost producer within the trading bloc, as the lower cost producer + a tariff is more expensive than the free trade with the higher cost producer within the bloc
Impacts of trade diversion on the global economy
Reduces global efficiency as countries aren’t improving from counties with comparative advantage
When is trade diversion likely to exist within a trading bloc?
Trade diversion likely to exist when there is a high external tariff or a small cost difference between the 2 producers
Role of the WTO
Encourage trade liberalisation, ensure countries respect trade agreements as of a country complains, can hold meetings regarding the issue and if decide country has not respected agreement the other country can implement trade sanctions on them
Issues with the WTO
Both counties must agree to an agreement taking place - countries can just not agree therefore no action is taken
Conflicts with the WTO
Regional trade agreements conflict their principles of trade liberalisation, can ignore developing countries as developed countries don’t really trade freely with them
What does the infant industry argument state the reason for restrictions on free trade?
New industries need opportunity to grow, as early on their AC will be higher so can’t compete with international firms - government should protect them to help them grow
Why are restrictions on free trade needed for job protection?
Allowing too many imports reduces the need for domestic products, so unemployment would rise unless some domestic jobs are projected
What is the argument that restrictions on free trade are needed to protect potential dumping?
Countries with a large surplus are likely to sell these internationally at a very low price that firms can’t compete with, so firms need to be protected from this
Why is protection from unfair competition an argument for restrictions on free trade?
Some countries have low labour costs that other firms can’t compete with, so need protecting
Why are the terms of trade an argument for restrictions on free trade?
If a country buys lots of imports it raises their price through demand, which will lead to a worsening of the terms of trade
Why else are restrictions on free trade needed?
To stop overspecialisation - over dependence on imports for other goods
What is a tariff?
A tax placed on imported goods
What is a quota?
Where only a certain number of imports are allowed
What is an embargo?
Total ban on imports
What is import licesneing?
Where firms must have a license to import
How do subsidies to domestic producers provide restrictions?
Lowers domestic costs, reducing AC of domestic firms so less demand for imports
What are the impacts of protectionism on consumers?
Higher prices, less choice
What are the positive impacts on producers from protectionist policies?
Goods can be sold at a higher price to increase profits, greater security of business
What are the negative impacts of protectionist policies on producers?
May suffer from higher costs if imports are needed for production, foreign producers also lose out
Long-run impact on workers due to protectionism
Decreased job security as allows inefficient businesses to run, however does allow greater employment in export led industries
Short run impact of protectionist policies on the government
Increase revenue from tariffs
Long-run impact of protectionist policies on the government
Inefficient economy, hurts growth
Impacts of living standards due to protectionist policies
Increase deadweight welfare loss, retaliation causes a reduction in trade+growth, inequality worsens as poorest can’t afford goods
Short term causes of deficits/surplus in the BoP
High levels of consumer demand worsens the deficit - higher incomes lead to more imports but has no effect on exports
Why does the deficit worsen in the UK with an increase in income?
The UK has a high income elasticity for imports - however imports inelastic
Exchange-rate impact in the short-run on the BoP
Stronger the pound, the smaller the deficit as imports become cheaper ( and vice-Versa)
Inflation levels effect on the BoP
Higher inflation decreases export demand , worsens deficit
Medium term cause of deficit/surplus in the BoP
Loss/gain of comparative advantage
Long term causes of deficits/surplus in the BoP
Lack of investment, lack of productivity, deindustrialisation, availability of resources, levels of competition, corruption
Why may a weaker exchange rate have a secondary effect benefitting the BoP?
Exports become cheaper, which increased demand ( useful for the Uk as imports inelastic and exports elastic)
Demand-side policies effects on reducing BoP deficit
Reduce AD, so provides short term benefits, however creates a conflict of objectives as increases unemployment and decreases economic growth
Supply side policies effects on reducing the BoP deficit
Improved efficiency/quantity reduces export prices so may increased demand for them, however no guarantee of success as exports may be inelastic and are a long-term solutionn
Expenditure switching policies effects on reducing the BoP deficit
Tariffs/quotas reduce demand for imports, but create price wars
How do deflationary policies impact the BoP deficit?
Improves export competitiveness + reduces demand for imports, but leads to a fall in growth
What is the impact of a devaluation of the pound on the BoP
Import prices increase but the can lead to a surge in export competitiveness, can be evaluated by the J curve and the Marshall Lerner Condition
Marshall Lerner Condition
Either imports or exports have to be elastic for a depreciation of the currency to be effective in reducing the deficit
If a country has a current account deficit, must what it also have?
A capital account + financial account surplus
What is the risk of relying on a capital account surplus?
The capital account is very volatile, can decrease very quickly as shown by the 2008 financial crisis
What is the result of a consistent current account deficit?
Increase in debt, however only becomes an issue when countries can’t repay their debts
Why is a current account surplus not always beneficial?
Consumers within the country don’t see the higher standards of living they could benefit from greater imports
What is a free-floating exchange rate system?
Value of the currency is purely determined by demand and supply
What is a managed-floating exchange rate system?
Value of the currency is determined by demand and supply, but the central bank actively tried to stop large changes to the currency’s value by using interest rates and buying/selling foreign currency
Fixed exchange rate system
Government sets this currency against another and doesn’t change the exact age rate ( currency can be re valued if needed to)
What is the demand for the pound determined by?
Amount of British goods foreigners demand, demand for FDI
What is the supply of the pound determined by?
Amount of foreign goods people in the UK want to buy, British firm investment overseas, holidays
What determines the short term value of a currency?
Speculation largely cause as if people fear a deprecation will sell the currency band buy another, which depreciates the value as more supply ( same for an appreciation)
Long term determinants of the value of a currency
Economic fundamentals
How do the government intervene to improve the exchange rate?
Rising interest rates to increase demand for the currency, use of gold/foreign currency reserves ( use gold to buy currency back and increase the supply of foreign currency)
How do the government intervene to worse the exchange rate?
Decrease interest rates to reduce demand, use gold/foreign currency reserves ( use gold to buy back foreign currency + increase supply of currency)
What does the J-curve show?
An depreciation of a currency initially leads to a worsening of the deficit as imports rise, however improves after as demand for exports increase ( shows demand for exports not immediate +
inelastic in the short run)
Impact of exchange rates on economic growth and unemployment?
Weaker exchange rate will increase AD as increase exports and decrease imports, so increases employment + growth
How does the exchange rate effect the rate of inflation?
Weaker exchange rate worsens inflation as import costs rise + rise in exports increased AD (also vice-versa)
Impact of exchange rates on FDI in the short-term
Depreciation may increase FDI as cheaper to invest, whereas appreciation may decrease FDI as more expensive
Impact of exchange rates on FDI in the long-run
Long run depreciation likely to decrease FDI as suggest economic issues
Relative unit labour cost on international competitiveness
Cheaper labour, lower costs so more competitive
Relative export prices on international competitiveness
Rise in prices decreases competitiveness
How do exchange rates influence international competitiveness?
Lower the value of the currency, greater the competitiveness
How does productivity impact international competitiveness?
Greater the productivity, greater the competitiveness
How does regulation influence international competitiveness
Greater regulation worsened competitiveness as rises costs and slows business decisions
How does infrastructure impact international competitiveness?
Greater infrastructure improves productivity
How does investment impact international competitiveness?
Greater investment improves R and D and can also increase investment in technology so efficiency increases, firms can also develop new products so a smaller market to compete with - improves competitiveness
Impact of taxation on international competitiveness
Higher taxation, lower the investment to worsens competitiveness
Impact of inflation on international competitiveness
Lower inflation, greater competitiveness
Impact of economic stability on international competitiveness?
Less stability, lower investment as greater risk so less competitive
Impact of flexibility of labour market on international competitiveness
Greater flexibility improves competitiveness as business can move labour to where is needed and prevent wage rises which increases costs
Domestic demand impact on international competitiveness
Greater domestic demand allows business to benefit from EoS, so lowers cost improving competitiveness
Domestic competition impact on international competitiveness
High levels of domestic competition means efficiency already high, so more competitive
Factors of production impact on international competitiveness
Greater quality and quantity, more competitive
Trade barriers impact on international competitiveness
Lower barriers, more competitive
Benefits of international competitiveness
Current account surplus (which can be invested overseas to gain interest),attracts FDI (which improves technology + may create new firms), increased employment (may also rise wages as increased demand for labour), greater economic growth (as AD rises)
Problems with international competitiveness
Can be lost easily (export-led growth lead to economic growth which can rise labour costs and inflation), overdependence on exports, rise in exchange rate (caused by current account surplus)
