economics_theme_4_20241003080005 Flashcards
What is globalisation?
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?
Increasing foreign ownership of companies
Increasing movement of labour and technology across borders
Free trade in goods/services
Easy flow of capital across borders
What are two factors contributing to globalisation
Improvements in containerised shipping
innovation in communication technology
What is meant by economies of scale
An increase in output results in a lower cost per unit
What is meant by transnational corporation
A firm that has production facilities in two or more countries
What is containerised shipping
A system where many goods are placed in large metal containers for transport by boat
Positive impacts of globalisation on stakeholders
Increased capital and labour mobility
Greater competition = lower prices
Reduction in absolute poverty
Rising incomes
Rising levels of education
Increased trade = greater choice of goods
Economies of scale- more efficient production
Negative impacts of globalisation on stakeholders
Structural unemployment from shifting sectors
Monopoly power of multinationals
Rapid depletion of natural resources
Increase in global warming
Deforestation
Increase in organised crime
Rising inequality
Tax avoidance easier
What is structural unemployent
Unemployment caused by a mismatch between jobs and skills as the structure of the economy changes
What is transfer pricing
Technique use by multinational corporations to shift profits out of the countries they operate in and into tax havens
What is comparative advantage?
A theory that states a country should specialise in the goods and services that it can produce at the lowest opportunity cost
What is opportunity cost?
The loss of the next best alternative
What is absolute advantage
When a country is able to produce a product using fewer factors of production than another country
What are the factors of production
Land
Labour
Capital
Enterprise
What are the assumptions of comparative advantage
Transport costs are zero
There is perfect knowledge- every country knows what countries have the comparative advantage over each other
Factor substitution is easily achieved0 economies can quickly adjust to changing markets
Constant costs of production- doesn’t take into account economies of scale
Limitations of comparative advantage
Over dependence on the good you specialise in
Environmental damage as negative externalities of production are not considered
Distribution of income- GDP is likely to increase but the extra income is likely to spread unevenly
Structural unemployment
Advantages of international specialisation and trade
Lower prices
Greater variety of goods/services
More competition leads to better quality products
Economies of scale create efficiencies
Higher economic growth
Improved living standards
Disadvantages of specialisation and trade
Global monopolies emerge- transnational firms grow in size and market power
Exposure to external shocks due to dependence on other countries
Deficit on the current account of the balance of payments
Unemployment
What is the pattern of trade
The nature of trade between two countries and how it changes over time
Factors influencing the pattern of trade
-Comparative advantage- a country should specialise in the goods/services that it can produce at the lowest opportunity cost
-Impact of emerging economies - emerging economies are obtaining a higher share of global business
-Growth of trading blocs and bilateral reading agreements
-Changes in relative exchange rates. WPIDEC and SPICED
What is trade creation
A trade agreement shifts production of certain goods or services from a high cost country to a low cost country
What is trade diversion
The formation of a trading bloc results in the production of a good or services transferring from a country with a lower opportunity cost to one with a higher cost
What is a trading bloc
A trading bloc is a group of countries who come together and agree to reduce or eliminate any barriers to entry that exist between them
What is a free trade area
A bloc in which countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries
What is a customs union
An agreement between countries in which all goods/services produces by members are traded without any tariffs. Countries will also agree on common tariff rates on imports from external countries
What is a common market
goods and services are traded without tariffs as well as the four factors of production flow freely between member countries.
The goal is to improve the allocation of resources between the common market members
What is a monetary union
Members enjoy benefits of a custom union and common market but they also establish a central bank which issues a common currency and controls the monetary policy of member countries
Essential conditions for a successful monetary union
-Movement of labour - labour should be able to move freely without any major barriers
-Similar trade cycles to avoid tensions with the union
-Mobility of finance- should be complete mobility of finance with prices and wages free to adjust to market conditions
-Fiscal transfers- should be automatic fiscal transfers to countries that are performing badly
What is a trade cycle
Stages of economic growth that an economy moves through. (Boom, slowdown, recession and recovery)
Benefits of regional trade agreements
Trade creation improves efficiency and generates a higher income
Tariffs between member states are eliminated
Less uncertainty surrounding exchange rates
Negatives of regional trade agreements
Trade diversion occurs as countries reallocate trade to partners in their agreement
Some domestic industries experience structural unemployment
Increased negative externalities of production, resource depletion and environmental damage
Transitioning to a monetary union can be expensive
Loss of sovereignty
What is sovereignty
Decision making process and authority of the state
What is the role of the WTO (World trade organisation)
Promote free trade
What is trade liberalisation
The process of rolling back the barriers to free trade
What is the balance of payments?
A record of all the financial transactions that occur between it and the rest of the world
What are the two main sections of the balance of payments?
Current account
Financial and capital account
What is a current account?
Transactions related to goods and services along with payments related to the transfer of income
What is the financial and capital account
All transactions related to savings, investment and currency stabilisation
What is currency stabilisaion?
Government intervention in exchange rate markets so as to influence the price of a currency
What does the capital account record?
Small capital flows between countries and is relatively inconsequential
What does the finance account record?
The flow of transactions associated with changes of ownership of the UK’s foreign financial assets and liabilities
What is an asset?
Any resource/good that can provide future economic benefits
What is a liability?
A debt that has to be repaid
What is the monetary policy?
The adjustment of interest rates and the money supply so as to influence AD and meet the inflation target
What are the main causes of current account deficits?
Relatively low productivity
Relatively high value of the country’s currency
Relatively high rate of inflation
Rapid economic growth- raises household income
Non price factors such as poor quality and design
How does relatively low productivity cause a current account deficit
raises costs. This causes firms to find themselves at a price and cost disadvantage
How does relatively high value of the country’s currency cause a current account deficit
Exports are more expensive compared to other nations so foreign buyers look for substitute goods. Therefore, the number of exports falls.
How does relatively high rate of inflation cause a current account deficit
Exports more expensive than other nations. Foreign buyers look for substitute products for cheaper.
How does rapid economic growth cause a current account deficit
raises household income ->purchase goods with a high income elasticity of demand -> many of these goods are imported
How do non price factors such as poor quality and design cause a current account deficit
foreign buyers look for better quality substitutes elsewhere. This causes a fall in exports
What measures could the government take to tackel a current account deficit
`Could do nothing and leave market forces to self correct the deficit
Could use expenditure switching policies
Expenditure reducing policies
Supply side policies
What are expenditure switching policies?
The use of protectionism or devaluation of the currency under a fixed exchange rate mechanism
What are expenditure reducing policies?
Measures designed to reduce AD such as deflationary fiscal policyW
What are supply-side policies?
These aim to improve the quantity/quality of the factors of production thereby raising potential output
What are the benefits and costs of doing nothing to tackle a current account deficit
benefits: Floating exchange rates act as a self correcting mechanism.
Cost: May be other external factors that prevent the currency from depreciating. May take too long to self correct
What are the benefits and costs of expenditure switching to tackle a current account deficit
Benefit: Often successful in changing the buyer habits of consumers, switching consumption on imports to consumption on domestically produced goods and services
Cost: any protectionism often leads to retaliation by trading partners. e.g. reverse tariffs or quotas
What are the benefits and costs of expenditure reducing to tackle a current account deficit
Benefit: Deflationary fiscal policy reduces disposable income which leads to a fall in the demand of imported goods
Cost: Deflationary fiscal policy also dampens domestic demand which can cause output to fall -> gdp growth slows -> unemployment increases
What are the benefits and costs of supply side policies to tackle a current account deficit
Benefit: Improves the equality of the products and lowers the costs of production
Cost: These policies tend to be long term so the benefit may not be seen for some time
What is deflationary fiscal policy?
When the government raises taxes, decreases government spending or both
Why can current account deficits be problematic?
They can cause you to acquire finance from abroad in the form of loans, this creates vulnerabilities
Why can current account surpluses be problematic?
The focus of the allocation of a nations resources is on meeting foreign demand as opposed to meeting domestic demand
“What are national currencies?”
“National currencies are essentially products that can be bought & sold on the foreign exchange market (forex).”
“Who controls the exchange rate system in a country?”
“The Central Bank of a country controls the exchange rate system that is used in determining the value of a nation’s currency.”
“How many exchange rate systems are there?”
“There are three exchange rate systems: A floating exchange rate, A fixed exchange rate, A managed exchange rate.”
“What is a floating exchange rate?”
“In a floating exchange rate system, if there is excess demand for the currency on the forex market, prices rise (the currency is worth more) - this is called an appreciation. If there is excess supply, prices fall (the currency is worth less) - this is called a depreciation.”
“What is a fixed exchange rate?”
“The Central Bank negotiates with the International Monetary Fund (IMF) to fix (peg) their currency to another one. Sometimes the peg is at parity (e.g., 1 Brunei Dollar = 1 Singapore Dollar), often it is not (e.g., HK$ 7.75 = US$ 1). A revaluation occurs if the Central Bank increases the strength of its currency, and a devaluation occurs if it decreases the strength.”
“What is a managed exchange rate?”
“A managed exchange rate is a combination of the fixed & floating mechanisms. The Central Bank determines the preferred currency value, and the currency is free to fluctuate within a certain range of this value (e.g., 0.75%). The Central Bank intervenes by buying or selling its own currency to keep it within the range.”
“How can interest rates influence exchange rates?”
“Raising interest rates appreciates a currency as returns on investment/savings become more attractive to foreigners, increasing demand for the local currency. Decreasing interest rates depreciates a currency as returns become less attractive, leading foreigners to sell the local currency.”
“What factors influence floating exchange rates?”
“Numerous factors influence floating exchange rates, including relative interest rates, relative inflation rates, net investment, and the current account.”
“How do relative interest rates affect exchange rates?”
“If the UK increases its interest rate, demand for £’s by foreign investors increases, and the £ appreciates. If the UK decreases its interest rate, the supply of £’s increases as investors sell their £’s, and the £ depreciates.”
“How do relative inflation rates affect exchange rates?”
“As inflation in the UK rises relative to other countries, its exports become more expensive, reducing demand for UK products and £’s, leading to depreciation of the £.”
“How does net investment affect exchange rates?”
“Foreign direct investment (FDI) into the UK creates demand for the £, leading to appreciation. FDI by UK firms abroad creates a supply of £’s, leading to depreciation.”
“How does the current account affect exchange rates?”
“UK exports have to be paid for in £’s, and imports in local currencies, requiring £’s to be supplied to the forex market. An increasing trade surplus results in appreciation of the £, and an increasing deficit results in depreciation.”
“What is speculation in currency trading?”
“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 realize a profit.”
“What is quantitative easing?”
“Quantitative easing 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 £s received for their own currency, increasing the supply of £’s and depreciating the £.”
“How does government intervention in currency markets work under a managed exchange rate system?”
“Government intervention in currency markets under a managed exchange rate system is managed by the Central Bank and takes place in two ways: changing interest rates and buying & selling currency in the forex market.”
