Chapter 14 Flashcards
Define globalisation
Process of increasing economic integration of the worlds economies
Examples of globalisation
UK dealing with customers through call centres in India
Main characteristics of globalisation
- Growth of international trade and reduction of trade barriers
- Greater international mobility of capital and land
- Increase in power of Multi national corporation
Consequences of globalisation on less developed countries
Forced to work in low skilled jobs
Define less developed countries
Countries considered behind in terms of their economy, human capital, infrastructure and industrial base
Consequences of globalisation for more developed countries
MNCs reduce wages and standards of living.
Define more developed countries
Countries with high degree of economic development, high average income per head, high standards of living
What is the dependency theory of trade and development
Developing countries have little capital compared to developed countries.
Developed at an advantage to developing:
-Greater material and better quality
Is globalisation good
Yes for rich
No for poor
What is more internationally mobile- Manufacturing or service
Until recently it was manufacturing
Now service because can do calls for example
4 factors encouraging overseas location of call centres
-Highly reliable
-Low wage
-24 hour employment
-Fluent in English
But lack british culture
What does globalisation do to the power of governments
Reduces it, especially in smaller countries
Define MNCs
Multi national corporations- businesses operating in several countries
Role of MNCs in globalisation
- Increased trade
- Broken down production of specialised workers globally
- Long term investment (Movement from developed countries to developing) of advanced technology
- Higher wages
- Consumer choice has widened with multiple MNCs
Define absolute advantage in regards to trade
Country has an absolute advantage of it can produce more of a good than other countries from the same amount of resource
Define comparative advantage in regards to trade
The country with the least opportunity cost when producing a good has a comparative advantage in that good
Assumptions for comparative advantage
- Factors of prod are fixed between countries
- Constant returns to scale
- Demand and cost conditions are stable
Define quotas
Physical limits on the quantities of imported goods allowed into a country
Define tariff
Tax imposed on imports from other countries entering
Define export subsidies
Money given to domestic firms by the gov to encourage firms to sell their products abroad
What is the argument supporting free trade
placing controls restrict countries from specialising in activities in which they have comparative advantage
Explain the infant and sunset theory
- Infant; countries with in industries more productively efficient have more returns to scale so have competitive advantage. Controls are in place to protect new industries from established rival ones
- Sunset industries: Protect older industries from competition from infant
Against overspecialisation
- Agriculture monoculture
- Country can become very vulnerable to changes in demand
Draw consumer and producer welfare in an open and closed economy
…
How does comparative advantage change
Through adjusting where manufacturing takes place
Types of trading (economic integration)
- Preference areas (countries agree on certain trade)
- Free trade areas( abolish of tariffs)
- Customs unions (free trade but protected by common external tariff barrier)
Define euro zone
Group of EU countries that have replaced their national currencies with the euro
What is the balance of payments
Record of all the currency flowing in a out of a country at a particular period
3 main kinds of balance of payments accounts
- Current account
- Capital account
- Financial account
Define the three kind of balance of payments
Current account- flow of currency in and out of a country
Capital account- transfers of income
Financial account- Part of the balance of payments recording capital flowing in and out of a country
What are the four components of the current account
-Balance of trade in goods
-Balance of trade in services
Balance of primary income and balance of secondary income (transfers)
Explain the balance of trade in services, current account
Exports vs imports
Explain the balance of trade in services, current account
Payments for services in vs out
Difference between primary and secondary income
Primary: made up from net flows between countries
Secondary: made up of gifts, donations between countries
What is capital flow
Movement of money for purpose of trade, or business operations
What is foreign direct investment
Investment in capital assets in foreign countries
What is portfolio investment
The purchase of one countries securities (e.g bonds)
What is hot money capital flow
Moving money between currencies to make money
What does an increase in exports do to the economy
Increase in AD occurs, as there is an increase in real national income
What is export led growth
Short run economic growth due to an increase in exports. Long run due to growth and increase in international competitiveness
Problems with current account defects
-Beneficial in short run due to increase in imports
-causes uncompetitiveness in countries industries
In developing countries defect can be understood through low capital goods
Disadvantages of current account surplus
- One countries surplus is another’s deficit
- Surplus can be inflationary, demand pull inflation
3 factors influencing a countries current account deficit
- Productivity
- Inflation
- Exchange tate
Policies to reduce balance of payments deficit
- Deflationary policy
- Direct control (import control)
- Devaluation (lowering exchange rate)
Explain what is meant by expenditure-reducing policy
Balance of payments defecit
Gov policy reducing AD of imported goods
Explain what is meant by expenditure switching policy
Balance of payments deficit
Switching demand from imported goods to domestically produced goods
Explain deflation as a policy to reduce balance of payments deficit
Reduce AD contractionary monetary or fiscal policy
Explain direct controls as a means of reducing balance of payments deficit
Imposed quotas or bans on imports to make more individuals buy domestically produced goods.
Welfare is decreased
Explain devaluation as a way of reducing the deficit of the balance of payments
Increasing price of imports compared to exports
Difference between depreciation, devaluation and downward float
Depreciation: Fall in external value of a currency
Devaluation and downward flow lay: more units are needed to buy a unit of another country
What is consumer led growth
Imports sucked into a country, not sustainable
Government policies to reduce balance of payments surplus
Three R’s
- Reflating demand
- Reducing import control
- Reduce global payment imbalances
