Chapter 8 Flashcards
Advantages of specialization
- make better use of scarce resources, So productivity increases shifting PPC outwards
- workers become more skilled, increased quality
- Increases GDP
- Global trade firms benefit from economies of scale
- International trade helps to keep prices down due to foreign competition
Disadvantages of specialization
- Over specialization, if demand decreased on product it would lead to drastic fall in economic growth and high structural unemployment
- leads to standardized mass produce product so consumers would increase demand on imports
- low labor mobility
- increased wages for highly skilled and specialized labor so CoP increase
Globalization
Process by which world is becoming one market, due to reduced cost of transportation advances of communication and removal of trade restriction
Advantages of globalization
- Increase competition allows consumers to buy more varieties with higher quality and lower prices
- films can locate in most efficient location and benefit from economies of scale
Disadvantages of globalization
- recession in one economy can affect other economies negatively
- workers may lose jobs due to increased competition creating unemployment
- Gavin may be reluctant to increase corporation tax for fear that MNCs May locate in other countries leading to structural unemployment
Advantages of multinational companies to host and home countries
-would create more jobs
-operate on a Large scale so benefit from economies of scale
increased profit due to large consumer base and profits are repatriated
-MNCs able to avoid trade Restrictions,decreased CoP
-reduce transport costs
-May choose to locate where there is low income tax, more tax rev to host country
Disadvantages of multinational
-criticized for unethical and cost cutting practices
-can force local firms to close down as firms find it hard to compete
-can exploit government of host country to lower corporation tax
over-reliance in low income countries
-may face different tax regulations
-harder to control
-Fluctuations in exchange rate make it harder to measure profits
Advantages of free trade
- access to more variety at a lower price
- large scale ,benefit from EoS
- large market size, increased profit
- forces domestic firms to be efficient
Quotas
Limit on the quantity of foreign goods imported, market price of imports increase
Subsidy
Financial grant to domestic firms to help reduce costs of production and compete with foreign producers
Embargo
Ban on trade with a certain country
Due to trade disputes or political conflicts
Rules and regulations
Use strict rules regarding food quality, safety and environmental protection
Advantages of protectionism
- to protect infant industry
- to protect domestic jobs
- to protect against dumping
- to overcome BoP deficit
- to protect strategic industries
- source of Gov revenue
Disadvantages of protectionism
- Can lead to misallocation of resources
- can lead to increased CoP
- retaliation
Floating exchange rate
Value of currency determined by market forces
Demand:Foreign demand on domestic currency increase exports
Supply: increased imports
Fixed exchange rate
Exist when the central bank buys and sells foreign currency to ensure the value of its currency stays constant
Case of Egypt
If market forces push down value of currency central bank will buy domestic currency and sell foreign currency
Case of China
Market forces Pushing up price of domestic currency central bank would sell domestic currency and buy foreign
Causes of exchange rate fluctuations
- changes in demand for imports and exports
- inflation
- foreign direct investment
- speculation
- interest-rate
- Government intervention
Adv of a floating exchange rate
- help eliminate current acc deficit
- no need to waste foreign reserves
- allows country to use monetary policy
Disadv of a floating exchange rate
- can fluctuate making it difficult for firms to plan ahead
- speculation may cause major changes in price of currency
Adv of a fixed exchange rate
- reduces uncertainties
- reevaluation of currency occurs when a country is a major importer of inelastic goods,keeps value officially high,avoiding cost push inflation
- devaluation of currency helps make goods more int. comp.
Disadv of fixed exchange rate
- central bank has to use large amount of foreign reserves, opp cost
- reduces ability to use monetary policy
Consequences of exchange rate fluctuations Exporters : Imports: Balance of payment: Employment and economic growth: Inflation:
- if demand is Elastic Exports would be more expensive however if exports are inelastic export revenue would increase
- rising countries exchange rate would make imports cheaper so lower cost of production
- if currency appreciated exports decrease imports increase so balance of payment Worsens
- decreased employment in exporting firms
- imports more expensive leading to cost push inflation and would increase aggregate demand and if aggregate demand increases more than output it will lead to demand pull inflation
Balance of payment
Financial record other countries transactions with the rest of the world over a given period of time
Current account
Largest component of balance of payment, Records all exports and imports of goods and services of a country with its trading partners Plus primary and secondary incomes
Primary income
Income earned by individuals and firms
- employee compensation
- investment income
Secondary income
Transfer of money goods services sent to other countries received by home country not in return for anything
- gifts and donations
- foreign aid
- worker remittance
Why do exports and imports change over time
- inflation rate
- Exchange rate
- productivity
- Quality
- domestic GDP and foreign GDP
- trade restrictions
Causes of current account deficits
- Low income abroad and high income at home
- high exchange rate
- higher cost of production
- deficit in primary or secondary incomeshh
Consequences of a deficit
- lower aggregate demand and may lead to a recession
- derived demand for labor so decreased aggregate demand will cause cyclical unemployment
- less income lower standard of living as outflow exceeds inflow
- countries need to borrow representing opportunity cost
- lower exchange rate
Why may a deficit not be a problem
- small deficit that last for short time
- if deficit is caused by import of raw material and capital goods that are going to be used to produce exports
- Will reduce aggregate demand so help reduce demand pull inflation
- following countries exchange rate would lower inports and increase exports
Causes of a current account surplus
- low exchange rate
- High quality of domestic goods
- High income abroad
- low CoP
- increase in primary and secondary income
Advantages of current account surplus
- increase exports so unemployment decreases
- increase incomes and SoL
Disadvantages of current account surplus
- high AD, leading to demand pull inflation,so int. comp. decreases
- high demand for exports, appretiation of exchange rate,increase export prices, decrease int. comp.
Policies to control current account deficit
- contractionary fiscal
- contractionary monetary
- SS policy: -education
- infrastructure
- subsidy or tax cuts
- protectionism policy
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What would depreciation of currency do to imports
DENENADANT ON ELASTICITY
