Econ Macro Theme 4

Question 1

Comparative advantage

Answer 1

When countries should specialise in goods and services which have the lowest opp cost and then trade

Would only benefit if suitable rate of exchange

Question 2

Comparative advantage limitation

Answer 2

-assume perfect info
-no transport cost considered
-no EOS consider (constant cost)
-rates of inflation ignored
-no import control (no tariff)
-exchange rates ignored
-RandD investment ignored

Question 3

Free trade benefits

Answer 3

-Global trade (competition)
-Increase Comparitive advantage
-increase consumer choice : access to good that can’t be produced domestically
-Lower prices as EOS, Competition, Tech transfers
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Question 4

Protectionism benefits

Answer 4

Protect infant industry till they reach EOS
-protect product standards
-protect domestic employment (
-Protect against dumping (sale of the good is below the cost of production)
-protect against low cost labour countries (china) to reduce competition
-gov rev (tariff)
-avoid over-specialisation

Question 5

Tariff disadvantage

Answer 5

-market distribution -increase prices -decreasing choice and CS
-Production inefficiency (not being allocative efficient
-retaliation
-Regressive (affects those with lower income)
Evaluation : size of tariff and elasticity
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Question 6

What is the World Trade Organisation (WTO)

Answer 6

-international organisation that regulates world trade

Question 7

WTO believes ideal trade is:

Answer 7

-non-discriminatory (charge 1 country tax but not others shouldn’t happen) to prevent ongoing retaliation
-free from Barriers (protectionism) as it encourages Comparitive advantage and greater competition from inefficient firms.
-trade should be predictable to encourage growth
- fair competition : so allow tariffs to be placed for infant industries.
-should be beneficial for developing countries so some WTO rules aren’t applied on developing.

Question 8

Role of the WTO

Answer 8

-enforce rules int.trade (fines) and resolve disputes between nations
-The WTO promote trade liberalisation (free trade) by organising negotiations to reduce trade barriers
-monitor trade liberalisation and make sure the agreement is followed
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Question 9

Example of Trading blocs and WTO disagreement

Answer 9

“The Banana Wars” US imposing a high tariff on imports of bananas from French colony’s in the Caribbean

Question 10

BOP financial account

Answer 10

Direct investment. This is net investment from abroad. For example, if a UK firm built a factory in Japan it would be a debit item on UK financial account) and reserves
Portfolio investment. These are financial flows, such as the purchase of bonds, gilts, shares or saving in banks. They include
Short-term monetary flows known as “hot money flows” to take advantage of exchange rate changes, e.g. foreign investor saving money in a UK bank to take advantage of better interest rates – will be a credit (good) item on financial account

Question 11

What is the current account made up of

Answer 11

-Balance of trade in goods (visibles)
-Balance of trade in services (invisibles) e.g. tourism, insurance.
-Net income flows. Primary income flows (wages and investment income)
-Net current transfers. Secondary income flows (e.g. government transfers to UN, EU)

Question 12

Factors affecting Current account deficit

Answer 12

-Economics growth from C increasing inflation however the uk high MPI so increased imports and depends on type of economics growth
-ER however J curve.. PED inelastic ST
And a depreciation may lead to inefficiency and increase inflation due to domestic demand.
-competitiveness :
-the financial account is important to ensure a stable ER

Question 13

Features of deglobalisation

Answer 13

Decline in world trade
-fall in capital movement
-decrease in FDI
-decrease in tourism