E6 Trade and Globalization Flashcards
effects of SPECIALIZATION
define INTERNATIONAL SPECIALIZATION
countries focus on producing certain goods due to advantage in cost/resources
define GLOBALIZATION
increased inter-dependence of world economies due to increase in international trade
define MNC
operate in two or more countries
PROS/CONS of MNC
- *+ 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
# define INTERNATIONAL TRADE define FREE TRADE
exchanging g/s beyond national borders
free trade is when g/s are exchanged beyond national borders without restrictions
define PROTECTIONISM
using barriers (tariff, quota, embargo) to limit international trade + foreign competition
pros/cons of PROTECTIONISM / TRADE BARRIER
- *+ 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!!
pros/cons of FREE TRADE
- *- 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!!
define TARIFF, QUOTA, SUBSIDY, EMBARGO
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
define EXCHANGE RATE
price of one currency in terms of another currency
define FLOATING XR + draw D&S diagram
value of currency fluctuates with D&S, no govt intervention
define FIXED XR + draw D&S diagram
value of currency fixed at a range by govt (by buying/selling foreign currencies)
how is XR determined in a FLOATING system?
M > X → sell own currency in exchange for foreign currency → S+ → DEPRECIATE
X > M → other countries sell currency to demand your currency → D+ → APPRECIATE
how is XR determined in a FIXED system?
govt buys/sells foreign currencies:
sell own $ to buy foreign $ → S+ → DEVALUATION (XR-)
sell foreign $ to buy own $ → D+ → REVALUATION (XR+)
how do you calculate:
- trade balance
- current account balance
- balance of payment
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
how do you calculate the NET BALANCE of CA?
Visible Balance + Invisible Balance + Primary Income + Secondary Income
define CURRENT ACCOUNT SURPLUS/DEFICIT
SURPLUS: X > M (earning > spending)
DEFICIT: M < X (spending > earning)
effects of CA surplus/deficit
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?
pros/cons of FLOATING XR
+ 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
pros/cons of FIXED XR
- 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
factors that influence XR
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
factors that influence D for X/M
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!
