Global Economy 1& 2 Flashcards
Roles of the WTO
-organising rounds of talks
-settle trade disputes
Trading blocks impact of trade
1- trade creation
2-trade divserion
patterns of trade
The nature of trade and how this changes over time
4 factors which impact the pattern of trade
-comparative advantage
- emerging economies
- trading blocks
- exchange rates
Value of trade between in EU countries in 2017
3.1 trillion euros
5 elements of globalisation
1 increased international movement of labour
2 increased international movement of financial capital
3 increased specialisation
4 increased inernational trade
5 increased trade to GDP ratio
Oil in Saudi Arabia stat
50% of GDP
value of the significant of trade to a country
trade / GDP ratio
USA 27%
Luxumburg 400%
Eq for trade to GDP ratio
Trade // GDP x100
4 causes of globalisation
improvements in transport
improvements in IT
containerisation
Trade liberalism
trade liberalism
removal of barriers of trade
advantages of globalisation
Jobs
Shared values
movement of healthcare
groups Impacted by globalisation
-individual countries
-governments
-producers
-consumers
-workers
-enviroment
disadvantages of globalisation
inequality
poor working conditions
environmental impacts
impact of globalisation on individual countries
increase of specialisation due to comparative advantage
this leads to more exports
higher living standards
more dependance on imports
impact of globalisation on government
increased higher tax revenue
lower tariffs
increased trade
less tax paid by TNC leads to transfer pricing
Transfer pricing
basing a company in a country with low corporation tax
several hundred billion dollars of tax is cost through transfer pricing per year
Impact of globalisation on producers
lower cost of production
globalised production network
economies of scale
Impact of gobalisation for consumers
lower prices
more choice
impact of globalisation for workers
increase in international movement of labour
structural unemployment
impact of globalisation on the environment
increase in international trade
increase I global co-operation such as the Paris agreement
this leads to more pollution
global remittances in 2016
600bn usd
4 forms of restrictions on free trade
1 tariffs
2 quotas
3 subsidies
4 non tariff boundaries
producer surplus
the total amount of benefit from producing a good which is higher than the equilibrium price
consumer surplus
the Toal benefit from consumption which is higher than the equilibrium price
quota
limit on quantity of imports
drawbacks on quotas
no tax revenue
no capacity for import after a quote has been filled leading to shortage
subsidy to domestic production
a subsidy to domestic production is when the government gives a grant to producers in ofer to increase supply
consumers decrease imports as domestic goods increased
Non tariff barriers
regulation makes importing challenging
food standards regulation such as labels with a date
Dumping
predatory prices (falling below AVC) on an international scale
reasons to restrict free trade
1-dumping
2-protect domestic employment
3- protecting infant industries
4- health and safety
Infant industries
new industries which do not benefit from economies of scale and can’t compete with established industries
why do infant industries need to be protected
do not benefit from the economies of scale
cost of production is higher
cant compete with established industry
hence cant compete with countries with economies of scale
subsides on restricting free trade allow industries to establish to the point where they operate at economies of scale
3 ways of measuring competivness
- export price
- unit labour cost
- global competeivness index
international competitiveness
a country is more competitive if their exports are cheaper and and are sold at a lower price than other competitors
unit labour cost formula
total wage cost // total output
global competitiveness measure
an Index which attempts to rate international competitiveness of different countries
export prices
if a country has low export prices foreign consumers are more likely to buy product making it more competitive
unit labour price
cost of producing a product in terms of the labour cost per unit
Impact of lower labour costs
SRAS shifts right
price level decreases
more competition
Global competitiveness index
A measure calculated by WEF each year
price and quantity Factors:
costs
technology
infrastructure
health
education
this leads to index forms
hence higher rankings- more competition
4 factors which influence competivness
-E/R
-Wage cost
-Non wage cost
-Supply side policies
ER on international competitiveness
ER depreciates
imports increase and exports decrease
Hence the UK becomes more internationally competitve
Wage costs of attacks affecting international competitiveness
- increase in minimum wage
- wages are a variable cost per hour
increase in wage on competivness
decrease in SRAS
Price Level decreases
competivness increases
non wage cost on internatual competivness
decrease in efficiency
greater cost of production
decreased competition
IE- tax regulation pensions contributes, increase in developed countries
Supply side policy in reducing international
lowering corporation tax
increases SRAS- right
lower production cost
more competitive
____
lower healthcare spending
lower health levels
lower productivity
higher production cost
lower corp tax rev
factors influencing ER supply and demand for a currency
imports and exports
speculation
relative IR
Relative inflation
FDI
QE
How does import/export change affect ER
less import= less S of currency
ER strengthens
How speculation impacts E/R
when investors predict a change in a currency
hence they purchase and sell more now in advance
- speculation of future appriciation
- creates more demand now
- hence appreciates ER
Impact of relative interest rate
when the IR was higher in another country
buy currency in currency for country with higher ER (hot money)
increases in demand for that country
E/R appreciates
Relative inflation rate
higher inflation in one country will leads to less of a price increase of the equal production in another country
as that productivity is more competitive demand increases
export then increases
currency demand increase
currency appriciates
hence low inflation rate leads to high inflation rate
Impact of FDI on ER
increase is FDI
increase in demand for a currency
ER appreciates
Impact of QE on ER
Supply increases which causes a depreciation in the ER
4 impacts on a change in the IR on a country
growth and employment
inflation rate
FDI flows
current accounts
Growth for employment change in ER
Change in ER changes import/export distribution which from AD changes
impact on changes in Import/export on inflation
increase in AD
demand pull inflation
_______________
SRAC decreases
cost push inflation
Imported inflation
cost push inflation
inflation caused from increase in cost of imports
change in FDI from change in ER
Cheaper FDI- FDI increases
If speculation that the value of would decrease then no FDI
Impact of ER on current account
ER increases
imports increase and ER
current account decreases
In the short run what is the impact of the change in SRAS
In SR the impact on demand is inelastic
contract have to be completed for example
demand becomes more elastic in the long run
Marshall Learner condition
Long run:
PED imports + PED exports >1
When this is met the country will exist in the long run
Meaning marginal cost condition will be satisfied and inelastic to change in ER
Impact of increase in ER on 3 areas it impacts
lower growth
lower inflation
lower FDI flows
2 ways to manage ER
1- IR
2- Foreign currency transactions
Changing IR to manage ER
increase in IR
increased Hot Money
ER appreciates
Foreign currency transactions to manage ER
See currency
increase in supply
decrease in ER
Impact of competitive depriciation
when countries with similar and competing economies compete by devaluing their currency to increase the competivness of their exports
This happened in China and Thailand
Currency war
competitive devaluation to make exports more competitive
Hyperinflation
> 50% inflatoin
Argentina 1957-1990
hyperinflation
economic contraction
huge poverty
hyperinflation on ER
increase in price exports
lower exports
less demand
ER depriciates
3 er systems
fixed
managed
floating
Fixed ER systems
when ER is fixed to currency so a change in the ER is corrected by the central bank
How do you manage foreign currency
changes in IR
through foreign currency transactions
how to change value of fixed currency
revalue a currency
changed value- UK did this when MT was PM
devalue is to decrease the value of a currency
Managed ER
govt manages ER between certain bonds
Floating ER
no govt intervention
S/D determining gprices
Advantages of fixed ER
-certain for investors
- less speculation and volititility
- revalue currency account deficit through competitive devaluation
Advantages of floating ER
monetary policy can be used for AD and inflation rather than a currency
prevents a currency from being over valued
self correcting ER
2 types of ER
Nominal ER
Real ER
Nominal ER
price of one currency in terms of another
Real ER
how much a currency is worth relative to price of goods and services in another country
Real ER EQ
Nominal ER x Domestic PL /// Foreign PL
absolute advantage
when country is more productive at producing multiple goods
comparative advantage
lowest opportunity cost to increase production
comparative advantage
1- work out opportunity cost, use PPF, divide and find who has comparative advantage
2- this increases world output
3- specialisation
impact of global specialisation
world output increases
theory of comparative advantage assumption
- production is constant
- no trade barriers
- transport costs
Limitations of the theory of comparative advantage
- diseconomies of scale which could lead to AC increasing
- trade barriers could disrupt competitive advantage
advantages of specialisation and trade
increase in world output
increase in world GDP
increase in living standards
economies of scale
incraease in productivity
decrease in LRAC
disadvantages of specialisation
overdepenance on imports and exports
not diversifies economy if anyone producers certain goods
more overdependent and unknown
impact of specialisation
lower production cost
increased specialisation could lead to diseconomies of scale
trading block
a group of countries which have a market agreement to have low trade barriers between each other which are fixed
impact of countries framing a trade block
trade within the trading block is likely to increase
4 types of trading blocks
free trade areas
customs unions
common market
monetary union
free trade area
an area where there is a free trade between countries and each country has the right to set individual trade barriers
USMCA
UNITED STATES CANADA MEXICO AGREEMENT
Free trade in NR countries
free trade area
customs union
EU is 27 countries
like a free trade union but there is a homogeneous external tariff on non member products
10% tariff from cars coming from outside the EU
Common market
like a customs union but FOP can move freely between member countries
this is in place EU common market (31 countries)
Monetary union
like a customs union but a common currency is showed between members
Eurozone has 20 members
Trade creation
AS production
may be cheaper now with no tariff members less likely to import a good from a country outside the free trade area
trade diversion
trade can be diverted from low cost producers to higher cost producers
(a country may have had a more favourable trade deal before it entered a common market or it could just be a lower cost now because of shipping)
