E6 Trade and Globalization

Question 1

effects of SPECIALIZATION

Answer 1

Question 2

define INTERNATIONAL SPECIALIZATION

Answer 2

countries focus on producing certain goods due to advantage in cost/resources

Question 3

define GLOBALIZATION

Answer 3

increased inter-dependence of world economies due to increase in international trade

Question 4

define MNC

Answer 4

operate in two or more countries

Question 5

PROS/CONS of MNC

Answer 5

• *+ FDI** (capital, infra, tech, new production method) → PC → EG
• *- exploits your resource → NE** (resource-depletion, pollution…)
• *+ creates jobs**
• *- competition** → domestic firms go out of business → UE

Question 6

# define INTERNATIONAL TRADE
define FREE TRADE

Answer 6

exchanging g/s beyond national borders

free trade is when g/s are exchanged beyond national borders without restrictions

Question 7

define PROTECTIONISM

Answer 7

using barriers (tariff, quota, embargo) to limit international trade + foreign competition

Question 8

pros/cons of PROTECTIONISM / TRADE BARRIER

Answer 8

• *+ encourage domestic p/c** → protect domestic/infant/sunset/strategic industries
• *+ discourage import** → correct CA deficit, prevent dumping
• restrict consumer choice → LS
• lack of competition → domestic firms inefficient
• restrict market size → D, revenue, job opportunity, EOS
• other countries retaliate by also imposing barriers → higher price, less choice → LS

***opposite argument for free trade!!

Question 9

pros/cons of FREE TRADE

Answer 9

• *- dumping → domestic/infant/sunset/strategic firms go out of business →** UE
• *- M > E → CA deficit**

+ more consumer choice → LS
+ competition → incentive → efficiency, quality, innovation…
+ bigger market size → D, revenue, job opportunity, EOS
+ improved international relations → specialization, lower price, more choice → LS + prosperity

***opposite argument for free trade!!

Question 10

define TARIFF, QUOTA, SUBSIDY, EMBARGO

Answer 10

T: tax on imports

Q: quantitative limit on imports

S: financial aid by govt to reduce COP → encourage domestic production, improve competitiveness

E: ban on trade with a particular country

Question 11

define EXCHANGE RATE

Answer 11

price of one currency in terms of another currency

Question 12

define FLOATING XR + draw D&S diagram

Answer 12

value of currency fluctuates with D&S, no govt intervention

Question 13

define FIXED XR + draw D&S diagram

Answer 13

value of currency fixed at a range by govt (by buying/selling foreign currencies)

Question 14

how is XR determined in a FLOATING system?

Answer 14

M > X → sell own currency in exchange for foreign currency → S+ → DEPRECIATE

X > M → other countries sell currency to demand your currency → D+ → APPRECIATE

Question 15

how is XR determined in a FIXED system?

Answer 15

govt buys/sells foreign currencies:

sell own $ to buy foreign $ → S+ → DEVALUATION (XR-)

sell foreign $ to buy own $ → D+ → REVALUATION (XR+)

Question 16

how do you calculate:

1. trade balance
2. current account balance
3. balance of payment

Answer 16

TB = X-M

**CA = (X – M) + NY + NCT**
\*NY = net earning from abroad = money earned by employees abroad + dividends earned from investment abroad – money paid to foreign employees
\*NCT = net transfer payments = govt transfer + other transfers

BP = CA balance + capital balance + financial balance

Question 17

how do you calculate the NET BALANCE of CA?

Answer 17

Visible Balance + Invisible Balance + Primary Income + Secondary Income

Question 18

define CURRENT ACCOUNT SURPLUS/DEFICIT

Answer 18

SURPLUS: X > M (earning > spending)

DEFICIT: M < X (spending > earning)

Question 19

effects of CA surplus/deficit

Answer 19

X + M + C → AD

X+M → BP

D for X/M → D for $ → XR

borrow $ to rectify deficit → govt budget → oppo. cost (repay vs. invest/spending)

***depends on the SIZE, DURATION, TYPE:
increase in income? raw material? protectionist barriers?

Question 20

pros/cons of FLOATING XR

Answer 20

+ automatically eliminates CA deficit/surplus (M > X → sell own $ in exchange for foreign $ → S+ → XR- → more price-competitive → E > X)

+ govt can freely change IR → use IR to achieve macro goals

+ doesn’t need high foreign reserves needed → no oppo. cost

- uncertainty for firms that trade internationally → discourage investments

Question 21

pros/cons of FIXED XR

Answer 21

• hard to find the right value to fix (high XR hurts exporter; low XR hurts importer)
• can’t freely change IR → can’t freely use IR to achieve macro goals

- need sufficient foreign reserve → oppo. cost

+ stability → encourage investments, prevents speculation

Question 22

factors that influence XR

Answer 22

GOVT → buy/sell foreign reserve in exchange for own $ → D/S → value

IR (relative) → attract foreign investment → buy/sell $ → D/S → value

MNC’s entry/withdraw → buy/sell $ → D/S → value

D for X/M → buy/sell $ → D/S → value

speculation → hot money as speculators buy/sell $ → D/S → value

Question 23

factors that influence D for X/M

Answer 23

PRICE - COP, inflation, productivity

INCOME (domestic vs. foreign)

***depends upon PED - brand, quality, reliance on raw material/commodity

***depends upon the marginal propensity to consume import!