Chapter 2 - The Global Economy

Question 1

Global Pattern of Wealth

Answer 1

• GDP: Market value of total output of goods/services produced within a nation
  o Indicates country’s purchasing power but doesn’t reflect living standards
  o Need to calculate PPP – purchasing power in respective market
  o GDP only measures formal, official recorded activities – ignores shadow economy
• Economic growth: Annual percentage change in a nation’s GDP
• OECD predicts world economy will grow at 3% over next 50 years

Question 2

Pattern of international trade

Answer 2

• Trade has been growing at 7.3% over past 30 years
• Contributors to growth Reduction in barriers, reduction in transport and communication costs, establishment of global supply chains
• Mercantilism theory – countries should maximize their exports and try to limit imports to stimulate economy and increase number of jobs – generating a trade surplus.

Question 3

Intervening trade

Answer 3

• To protect domestic industries from foreign competitors – especially industries in their infancy
• To protect domestic jobs
• Protect against over dependence on a narrow base of products – countries should specialise in goods they have a comparative advantage over.

Question 4

Impact of exchange rates

Answer 4

• Countries with trade surpluses and those that attract inflows of capital will see demand for their currency rise – appreciation of value of currency
• To achieve stability – countries can adopt fixed exchange rate policy
• For businesses producing overseas – a rise in ER could reduce value of foreign sales/assets when converting into domestic currency