Chapter 6 - International trade and globalisation Flashcards
What is specialisation?
Specialisation occurs on several different levels. On an individual level where a worker specialises in a particular task. On a business level e.g. one firm may only specialise in manufacturing drill bits for concrete work. On a regional level e.g. Silicon Valley has specialised in the technology industry. On a national level as countries seek to trade e.g. Bangladesh specialises in textiles and exports them to the world.
What are the two main factors which allows a county to specialise?
Superior resource ability and cheaper production methods
How does superior resource ability allow countries to specialise?
Superior resource availability: if the quality of the resource is relatively better than other nations, the country will be able to charge higher prices for it. alternatively, if a country has a higher quantity of the resources, then it may be able to lower prices and drive competitors out of business by specialising in its extraction and sale.
How does cheaper production methods allow countries to specialise?
Cheaper production methods: if the country has lower costs of production, then it is very likely that they will be able to lower selling prices and gain a lead in the international share market. Some countries are able to produce cheaply using machinery or technological innovation, whilst others do so by providing a large labour force which can perform manual tasks very cheaply.
What are the advantages of national specialisation?
Greater competition may increase productivity. Higher productivity lowers costs per unit for firms, which makes their goods more competitive internationally (exports).
Increased exports can result in economic growth for the nation.
Economic growth usually leads to higher income and a better standard of living.
Income gained from exports can be used to purchase other goods from around the world (imports). This increases the variety of goods available in a country.
Global efficiency in the use of scare resources improves as resources are extracted by nations who have the competitive advantage.
With an increase in specialisation and output, it is possible to generate significant economies of scale which further lower production costs.
What are the disadvantages of national specialisation?
International trade is beneficial for the firms that can compete globally. However, some industries will be unable to compete and will go out of business.
Many firms in an entire industry may close leading to structural unemployment.
Specialisation may create over-dependency on other countries’ resources. This may cause problems if conflict arises. E.g. Europe’s reliance on Russia for natural gas during the Ukraine crisis.
Specialisation using a country’s own resources will lead to resource depletion over time. Specialisation will increase the rate of resource depletion.
As multinational firms grow in size and increase market power, they can dictate prices and output in many regions. They are also able to wield their power to influence governments and gain access to raw materials through bribery and corruption.
Start-up firms in developing countries (infant industries) find it harder to compete due to global competition – the ones that survive often have government support. Global monopolies also exert larger amounts of pressure on developing countries.
Over specialisation in developing economies often occurs as they lack the finance to develop a diversified product base and end up over specialising in commodity products. This makes the country’s GDP very dependent on the commodity prices.
What is globalisation?
Globalisation is the economic integration of different countries through increasing freedoms in the cross-border movement of people, goods/services, technology and finance.
What are the four main characteristics of globalisation?
The four main characteristics of globalisation are increasing foreign ownership of companies, increasing movement of labour and technology across borders, free trade in goods and services and easy flows of capital finance across borders.
What is a multinational corporation?
A multinational corporation is a business that has production facilities in two or more countries. E.g. Apple. Globalisation has made it easier for firms to do business on a global scale and the number and size of multinational corporation continues to increase.
What are eight advantages of multinational corporations?
Economies of scale, increased profit, create employment, new markets, transport costs, risk management, tax incentives and avoidance of protectionism.
What is economies of scale as an advantages of multinational corporations?
Economies of scale: as they operate globally, they are able to increase their output and benefit from lowered costs created by economies of scale.
What is increased profit as an advantages of multinational corporations?
Increased profit: much of their profit is sent back to their home country. This point is debatable as many MNCs have offshore bank accounts and do not bring the profit back home.
What is creation of employment as an advantages of multinational corporations?
Create employment: new jobs are created in host countries each time a new facility is setup, and this raises income which helps to improve the standard of living in that country.
What is new markets as an advantages of multinational corporations?
New markets: MNCs can identify potential markets and begin to sell there.
What is transport costs as an advantages of multinational corporations?
Transport costs: MNCs are able to setup facilities closer to their customers which reduced transportation costs.
What is risk management as an advantages of multinational corporations?
Risk management: by selling in many national markets, the risk of failure is reduced. E.g. if Egypt goes through a recession, leading to a loss of sails, this could be less impactful due to the rising sales in a strong German market.
What is tax incentives as an advantages of multinational corporations?
Tax incentives: MNCs are able to increase their profits by setting up in countries with low corporation tax or countries that offer MNCs a tax break for their first 5-10 years of operation.
What is avoidance of protectionism as an advantage of multinational corporations?
Avoidance of protectionism: MNCs can establish bases in countries that are operating protectionist measures and by doing so, they avoid the measures. E.g. a Chinese MNC may setup in the USA and produce there, therefore avoiding import tariffs on their products exported from China to the USA.
What are nine disadvantages of multinational corporations?
Worker exploitation, resource plundering, political power, reduce competition, lack of knowledge and culture, over reliance on MNCs for jobs, diseconomies of scale, exchange rate fluctuations and negative externalities.
What is worker exploitation as a disadvantages of multinational corporations?
Worker exploitation: many MNCs provide poor working conditions and very low pay.
What is resource plundering as a disadvantages of multinational corporations?
Resource plundering: many MNCs extract large quantities of host nation natural resources providing very little compensation or payments.
What is political power as a disadvantages of multinational corporations?
Political power: many MNCs enjoy revenue that is higher that the GDP of the host nation and this gives them immense political power which can be used to their advantage.
What is reduce competition as a disadvantages of multinational corporations?
Reduce competition: MNCs are so large that they can out compete domestic firms in the host country. This puts many firms out of business and reduces competition in that country and may increase unemployment.
What is lack of local knowledge and culture as a disadvantages of multinational corporations?
Lack of local knowledge and culture: this may result in problematic local relationships or flawed advertising campaigns or product offerings.
What is over reliance on MNCs for jobs as a disadvantages of multinational corporations?
Over reliance on MNCs for jobs: many developing nations have over reliance on MNCs to provide jobs for their citizens. If the MNC leaves it can create significant unemployment.
What is diseconomies of scale as a disadvantages of multinational corporations?
Diseconomies of scale: the challenges of operating a business over different time zones and cultures can create significant diseconomies of scale.
What is exchange rate fluctuations as a disadvantages of multinational corporations?
Exchange rate fluctuations: unexpected exchange rate fluctuations can have severe impacts on the costs and profits of MNCs.
What is negative externalities as a disadvantages of multinational corporations?
Negative externalities: MNCs are associated with many negative externalities of production in developing countries.
What is international trade?
International trade refers to the exchange of goods and services between countries. This is done through imports and exports. International trade is ‘free’ when there is no government intervention (quotas, taxes etc.) to reduce or limit trade.
What are the eight benefits of free trade?
Greater choice, lower prices, international cooperation, flow of new ideas, access to resources, increased efficiency, economic growth and economic development.
What is greater choice as a benefit of free trade?
Greater choice: with access to a wider variety of goods and services the standard of living improves.
What is international cooperation as a benefit of free trade?
International cooperation: required for trade helps countries to build better relationships which leads to lowers levels of hostilities.
What is lower prices as a benefit of free trade?
Lower prices: with international competition prices fall giving households the ability to buy more.
What is flow of new ideas as a benefit of free trade?
Flow of new ideas: innovative ideas and technology can be shared between countries.
What is access to resources as a benefit of free trade?
Access to resources: output can increase, and costs of production can fall with increased access to raw materials.
What is increased efficiency as a benefit of free trade?
Increased efficiency: international competition allows the most efficient firms to emerge, and this improved the use of global resources.
What is economic growth as a benefit of free trade?
Economic growth: exports are a key component of the gross domestic product of many countries and an increase in exports can lead to economic growth.
What is economic development as a benefit of free trade?
Economic development: increased output leads to lower levels of unemployment which leads to higher incomes and a higher standard of living.
What are the five methods of protection?
Tariffs, quotas, subsidies to domestic producers, embargoes and administrative barriers
What is a tariff?
Tariffs are taxes on imported goods and services. With the price of imports higher, domestic firms find it easier to compete and increase their market share as consumers switch from buying imports to buying domestically produced goods and services. Less efficient domestic firms are now producing at the expense of more efficient international firms.
What is a quota?
Quotas are the physical limits on imports. This limit is usually set below the free market level of imports. As cheaper imports are limited, a quota raises the market price and may create shortages. Some domestic firms benefit as they are able to supply more due to lower levels of imports which will increase the level of employment for domestic firms.
What are subsidies to domestic producers?
Subsidies to domestic producers can lower the cost of production of domestic firms, increase output and lower prices. With lower prices, their goods and services are more competitive internationally and their level of exports increases which may result in increased domestic employment.
What are embargoes?
Embargoes are a complete ban on trade with a certain country usually as the result of a politic fall out.
What are administrative barriers?
Administrative barriers such as health and safety regulations, product specifications, environmental regulations and product labelling.
What is a foreign exchange rate?
A foreign exchange rate is the price of one currency in terms of another. The central bank of a country controls the exchange rate system that is used in determining the value of a nation’s currency.
What is appreciation?
Appreciation is an increase in the external value of one currency in relation to another. It occurs when the value of a currency rises making its exports relatively more expensive and its imports less expensive.
What is depreciation?
Depreciation is a decrease in the external value of one currency in relation to another. It occurs when the value of a currency falls making its exports relatively more attractive and imports less attractive.
What are the two types of exchange rate systems?
The two main exchange rate systems are a floating exchange rate and a fixed exchange rate.
What is a floating exchange rate?
A floating exchange rate is determined by the market forces of supply and demand which one currency exchanges for another. If there is excess demand for the currency, then prices rise, and the currency appreciates. If there is excess supply for the currency, then prices fall, and the currency depreciates.
What is a fixed exchange rate?
A fixed exchange rate is a system in which the country’s central bank intervenes in the currency market to fix the exchange rate in relation to another currency. When the want their currency to appreciate, they buy it on markets using their foreign reserves and therefore increasing its demand. When they want their currency to depreciate, they sell it on markets and therefore increase its supply.
What is revaluation?
A revaluation occurs if the central bank decides to change the fixed exchange rate and increases the strength of its currency.
What is devaluation?
A devaluation occurs if the central bank decides to change the fixed exchange rate and decreases the strength of its currency.
What are the advantages of a floating exchange rate?
Natural fluctuations in the exchange rate based on supply and demand help to maintain stable current account balances.
If a currency appreciates, the country’s exports fall, and imports rise.
If a currency depreciates, the country’s exports rise, and imports fall.
Currency appreciation may allow costs of imported raw materials to decrease which may help lower prices in the economy.
Lower exchange rates or a depreciating currency may help to increase economic growth as export sales increase.
What are the disadvantages of a floating exchange rate?
Fluctuations in the exchange rate can create uncertainty for firms, leading to a reducing in investment.
Currency depreciation may cause costs of imported raw materials to increase resulting in cost push inflation.
Higher exchange rates or an appreciating currency may reduce and slow down economic growth as export sales decrease.
What are the advantages of a fixed exchange rate?
Government does not need to monitor and maintain a fixed exchange rate.
Even with an increasing demand for a country’s exports, the price of its exports will remain fixed as the currency will not appreciate with more demand.
This can boost export sales over time.
Firms that are foreign or domestic benefit as they can agree prices with a high level of certainty as the exchange rate will not fluctuate.
What are the disadvantages of a fixed exchange rate?
In order to maintain the fixed exchange rate, the central bank has to regularly intervene in the currency market by buying or selling its own currency.
This can be an expensive policy to maintain.
Changing the interest rate can also influence the exchange rate.
Changing the interest rate to maintain a fixed exchange rate can have negative consequences on consumption, investment, lending, saving and borrowing.
What are the seven causes of exchange rate fluctuations?
Relative interest rates, net investment, the current account, changes in demand, speculation, quantitative easing and MNCs.
How does relative interest rates cause exchange rate fluctuations?
Relative interest rates: influence the flow of money between one country to another in order to earn short term profits on interest rate differences. If New Zealand increases its interest rate, then demand for NZD$ by foreign investors increases and the NZD$ appreciates. The New Zealand decreases its interest rate, then the supply of NZD$ increases as investors sell their NZD$ in favour of other countries and the NZD$ depreciates. As inflation in New Zealand rises relative to other countries, its exports become more expensive so there is less demand for New Zealand’s products by foreigners which means there is less demand for NZD$ and so the NZD$ depreciates.
How does net investment cause exchange rate fluctuations?
Net investment: foreign direct investment into New Zealand creates a demand for the NZD$ which leads to the NZD$ appreciating. Foreign direct investment by New Zealand firms abroad creates a supply of NZD$ which leads to the NZD$ depreciating.
How does the current account cause exchange rate fluctuations?
The current account: New Zealand exports have to be paid for in NZD$. New Zealand imports have to be paid for in local currencies, which requires NZD$ to be supplied in the foreign exchange market. Due to this, increasing net exports will result in an appreciation of NZD$ and falling net exports will result in a depreciation of NZD$.
How does changes in demand cause exchange rate fluctuations?
Changes in demand: as global demand for quinoa increased as it became fashionable, Bolivia’s esports for quinoa increased dramatically which upward pressure on their currency. Foreigners demanded the Bolivian dollar in order to pay for the quinoa. This would cause the Bolivian dollar to appreciate.
How does speculation cause exchange rate fluctuations?
Speculation: the vast majority of currency trades are speculative. Speculation occurs when traders buy a currency in the expectation that it will be worth more in the short to medium term, at which point they will sell it to earn a profit.
How does quantitative easing cause exchange rate fluctuations?
Quantitative easing: is a process whereby the central bank buys back the New Zealand government securities or gilts from the open market. It involves increasing the money supply and much of the new supply is used to buy back gilts. Many of these gilts are owned by foreigners who then exchange the NZD$ received for their own currency, The increase in the supply of the NZD$ depreciates the NZD$.
How does MNCs cause exchange rate fluctuations?
MNCs: an increase in the number of MNCs globally will result in more money flows between countries, each of which influences the exchange rate.
What are the six consequences of foreign exchange rate fluctuations?
The current account, economic growth, inflation, unemployment, living standards and foreign direct investment.
How is the current account a consequence of foreign exchange rate fluctuations?
The current account: the depreciation of the NZD$ causes exports to be cheaper for foreigners to buy and imports to New Zealand are more expensive. The extent to which a currency depreciation improves the current account balance depends on the price elasticity of demand for exports and imports. This follows the revenue rule which states that in order to increase revenue, firms should lower prices for products that are price elastic in demand. If the price elasticity of demand for New Zealand’s exports is elastic, then a depreciation of the currency will result in a larger than proportional increase in demand for New Zealand exports, which rapidly improve any current account deficit.
How is economic growth a consequence of foreign exchange rate fluctuations?
Economic growth: net exports are a component of aggregate demand. A depreciation that results in an increase in net exports will lead to economic growth.
How is inflation a consequence of foreign exchange rate fluctuations?
Inflation: cost push inflation can be caused by a depreciating currency as the price of imported raw materials increases with a weaker currency. Net exports are a component of aggregate demand. A depreciation that results in an increase in net exports will lead to an increase in total demand. This may lead to an increase in demand pull inflation. An appreciation of the currency will have the opposite effect.
How is unemployment a consequence of foreign exchange rate fluctuations?
Unemployment: if depreciation leads to an increase in exports, unemployment is likely to fall as more workers are required to produce the additional products demanded. An appreciation of the currency will have the opposite effect.
How is living standards a consequence of foreign exchange rate fluctuations?
Living standards: the impact of a depreciation on living standards can be muted. As imports are more expensive, households face higher prices and less choice, which detracts from living standards. Rising exports can decrease unemployment and increase income which means as improved standard of living for some households. The impact of an appreciation on living standards will be the opposite of.
How is foreign direct investment a consequence of foreign exchange rate fluctuations?
Foreign direct investment (FDI): depreciation of a currency makes it cheaper for foreign firms to invest in the country which can increase investment and real GDP. An appreciation has the opposite effect.
What is the balance of payments?
The balance of payments for a country is a record of all the financial transactions that occur between it and the rest of the world.
What is the current account?
The current account which is all transactions related to goods and services along with payments related to the transfer of income. The current account records the net income that an economy gains from international transactions.
How is money recorded flowing into an out of a country?
Money flowing into the country is recorded in the relevant account as credit (+) and money flowing out as debit (-).
What is a current account surplus?
A current account surplus occurs when the credits are higher than the debits. The value of exports is greater than the value of imports.
What is a current account deficit?
A current account deficit occurs when the credits are less that the debits. The value of imports is greater than the value of exports.
What are goods?
Goods can also be referred to as visible exports or imports.
What are services?
Services can also be referred to as invisible exports or imports.
What is net income?
Net income consist of income transfers by citizens and corporations.
What is net primary income?
Net primary income is calculated by income credits – income debits.
What are current transfers?
Current transfers are typically payments at government level between countries.
What is net secondary income?
Net secondary income is calculated by transfer credits – transfer debits.
What is the current account balance?
The current account balance = net trade in goods + net trade in services + net primary income + net secondary income.
What are the causes of current account surpluses?
Relatively high productivity decreases costs and exporting firms with high productivity may find themselves at a price and cost advantage in overseas markets which will increase competitiveness and the level of exports.
Relatively low value of the country’s currency as currency depreciation makes a country’s exports less expensive in relative to other nations, foreign buyers increase their purchases and the level of exports rises, currency depreciation makes imports more expensive and domestic consumers may switch demand to locally produced products and the level of import falls.
Relatively low rate of inflation makes a country’s exports less expensive that other nations and foreign buyers will increase their purchases and the level of exports rise, improving the balance on the current account.
What are the consequences of current account surpluses?
Increasing employment because with increasing demand for locally produced goods and services, more works will be required and unemployment will fall.
Economic growth as exports are a key component of the real GDP of many counties and a rise in exports may significantly increase the level of economic growth.
Higher standards of living as a rise in economic growth usually leads to a rise in wages which leads to an increase in the standards of living.
Demand pull inflation as economic growth caused by a rise in exports will lead to demand pull inflation.
Appreciating exchange rate as rising exports will appreciate the exchange rate which leads to imports now being cheaper which causes the demand for imports to rise.
What are the causes of current account deficits?
Relatively low productivity raises costs and exporting firms with low productivity may find themselves at a price and cost disadvantage in overseas markets which will decrease competitiveness and the level of exports.
Relatively high value of the country’s currency as currency appreciation makes a country’s exports more expensive relative to other nations and makes imports cheaper, foreign buyers look for substitute products which are priced lower, exports fall and the balance on the current account worsens, and domestic consumers may switch demand to foreign goods as the imports rise and the balance on the current account worsens.
Relatively high rate of inflation makes a country’s exports more expensive than other nations; foreign buyers look for substitute products which are priced lower, exports fall and the balance on the current account worsens, also high inflation may mean that goods and services are cheaper in other countries and domestic consumers may switch demand to foreign goods and as imports rise, the balance on the current account worsens.
Rapid economic growth resulting in increase imports as rapid economic growth raises household income, households therefore respond by purchasing goods or services from abroad and the balance on the current account worsens.
Non-price factors such as poor quality and design causes a countries exports to fall as foreign buyers look for better substitutes elsewhere and domestic buyers who are able to shop abroad also choose to buy better quality products elsewhere and the level of imports rise.
What are the consequences of current account deficits?
Increasing unemployment because falling demand for locally produced goods and services, fewer workers will be required, and unemployment will rise.
Slow down in economic growth or a recession because exports are a key component of the real GDP of many countries and a fall in exports may significantly reduce the level of economic growth.
Lower standards of living as a fall in economic growth usually leads to a reduction in wages which leads to a decrease in the standards of living.
Increased levels of borrowing if the deficit is caused by continually increasing levels of exports, then it is likely that these imports are being paid for through higher levels of borrowing.
Depreciating exchange rate as while this may ultimately help to increase exports again, it makes the cost of imported goods and raw materials more expensive and may cause cost push inflation.
What four policies can be used to stabilise the current account balance?
Doing nothing, expenditure switching policies, expenditure reducing policies and supply side policies
How does doing nothing stabilise the current account balance?
Doing nothing and leaving it to market forces in the foreign exchange market to self-correct the deficit.
How does expenditure switching policies stabilise the current account balance?
Expenditure switching policies which include protectionist policies which raise the price of imports, so consumers switch to buying domestic goods or currency devaluation which makes the price of imports more expensive and so consumers switch to buying domestic products.
How does expenditure reducing policies stabilise the current account balance?
Expenditure reducing policies which include raising taxes which cause consumers to have lower disposable income and so they spend less on imports and raising interest rates which reduces the level of borrowing resulting in a fall in the level of imports.
How does supply side policies stabilise the current account balance?
Supply side policies which include investment into education which raises productivity making exports cheaper and more attractive and investment into infrastructure which lowers costs for firms making exports cheaper and more attractive.
What are the advantages of doing nothing to stabilise the current account?
Floating exchange rates act as a self-correcting mechanism. Over time a higher level of imports will end up depreciating the currency, causing imports to decrease as they are more expensive and exports to increase as they are cheaper. This improves the deficit.
What are the disadvantages of doing nothing to stabilise the current account?
There may be other external factors that prevent the currency from depreciating. It may take a long time for self-correction to happen, and many domestic industries may go out of business in the interim. The longer it takes to self-correct, the more firms will delay investment in the economy.
What are the advantages of expenditure switching policies to stabilise the current account?
This is often successful in changing the buying habits of consumers, switching consumption on imports to consumption on domestically produced goods and services. This helps improve a deficit.
What are the disadvantages of expenditure switching policies to stabilise the current account?
Any protectionist policy often leads to retaliation by trading partners. This may consist of reverse tariffs or quotas which will decrease the level of exports. This may offset any improvement to the deficit caused by the policy.
What are the advantages of expenditure reducing policies to stabilise the current account?
Contractionary fiscal policy invariably reduces discretionary income, which leads to a fall in the demand for imported goods and improves a deficit.
What are the disadvantages of expenditure reducing policies to stabilise the current account?
Contractionary fiscal policy also dampens domestic demand which can cause output to fall. When output falls, GDP growth slows, and unemployment may increase.
What are the advantages of supply side policies to stabilise the current account?
Improves the quality of products and lowers the costs of production. Both of these factors help the level of exports to increase, thus reducing the deficit.
What are the disadvantages of supply side policies to stabilise the current account?
These policies tend to be long term policies so the benefits may not be seen for some time. They usually involve government spending in the form of subsidies, and this always carries an opportunity cost.
