Global Economy

Question 0

What is comparative advantage?

Answer 0

Where one country can produce a products at the least/lowest opportunity cost.

Question 1

What is absolute advantage?

Answer 1

Where one country can produce a good/service more efficiently with less resources.

Question 2

What is the law of comparative advantage?

Answer 2

The law states; there are gains from trade when countries specialise in the production of a good they have the least cost in.

Question 3

What are the terms of trade?

Answer 3

The average index of export price relative to the average index of import price.

Question 4

Wha is perfect occupational mobility?

Answer 4

Where resources used in one industry can be switched into another without any loss of efficiency.

Question 6

What is constant returns to scale?

Answer 6

Where doubling the inputs in each country leads to a doubling of total or world output.

Question 7

What is integration?

Answer 7

It is the removal or blurring of economic boundaries to foster trade and development.

Question 8

What is a free trade area?

Answer 8

It is where member states remove tariffs and quotas between themselves, but retain whatever restrictions each member chooses with non-member countries.

Question 9

What is a custom union?

Answer 9

It is like a free trade area, but member countries adopt common external tariffs and quotas with non-member states.

Question 10

What is a single/common market?

Answer 10

It is where member countries operate as a single market.

Question 11

What are the characteristics of a single market?

Answer 11

Member countries have the following:
A common tax system.
A common law on employment, trade and production.
Free movement of labour, materials, goods, services and capital.
Absence of special government treatment on domestic industries.

Question 12

What is an economic and monetary union?

Answer 12

It is a trading arrangement whereby member countries operate as a common market but in addition, have a fixed exchange rate between themselves and a common monetary policy.

Question 13

What are the benefits of a monetary union?

Answer 13

The removal of transaction costs as there is no cost to convert currency.
Promotes price transparency meaning that it easy to compare prices.

Question 14

What is trade diversion?

Answer 14

It is where consumption shifts from a low cost producer outside of the bloc/area to a high cost producer within the bloc/area.

Question 15

What is trade creation?

Answer 15

It is where consumption moves from a high cost producer to a low cost producer within the bloc/area.

Question 16

What are the 3 rules required for monetary convergence?

Answer 16

Countries should have an inflation rate within 1.5% of the 3 EU countries with the lowest rate.
Long-term interest rates must be within 2% of the 3 lowest interest rates in the EU.
Exchange rates must be kept within “normal” fluctuation margins (6%) of Europe’s exchange-rate mechanism.

Question 17

What is development?

Answer 17

The improvement in social and economic well being of the citizens/population.
The process of improving the economic and social welfare/well being of the population.

Question 18

What are the basic need for a developed country?

Answer 18

Universal access to education.
Adequate food, shelter, warmth and clothing.
Availability of adequate healthcare
Availability of non-demeaning jobs.
Sufficient free time for social interaction.
Freedom to make ones own economic decisions.
Freedom for people to participate in the decisions of government and other bodes that affect their lives.

Question 19

What is globalisation?

Answer 19

Te process by which regional economies, societies and cultures have become integrated through a network of communication and trade (FD, capital flow, technology and migration).

Question 20

What is outsourcing?

Answer 20

To obtain goods or services by a contract from an outside supplier to reduce costs by transferring a portion of work to outside suppliers rather than completing it internally.

Question 21

What is off shoring?

Answer 21

The practice of basing some of a company’s processes or services overseas, so as to take advantage of lower costs.

Question 22

What are the benefits of globalisation?

Answer 22

It allows firms to sell to a larger market.
Gives firms access to new and more efficient production methods.
Allows firms to off shore and outsource.

Question 23

Explain 2 functions of the world trade organisation (WTO)

Answer 23

The WTO publishes an annual report on world trade. It is the only global organization dealing with the rules of trade between nations. Overseas implementation, administration and operation of the covered agreement.
Reduce tariffs and other barriers to trade and dealing with disputes
Note the exceptions to the rule (articles 18- protection of infant industries by newly industrialising nations and 19- where rising imports is a threat to local production.)
To eliminate discrimination in trade- the benefits of bilateral agreement s should be extended to all nations (multilateral instead of bilateral trade)
Contribute to rising living standards.
Fuller use of world resources.

Question 24

What is the meaning of intra-regional trade?

Answer 24

Trading amongst integrated countries.

Trade amongst countries within the same economic are/bloc. E.g. The UK trading within France who are both in the EU.

Question 25

How is intra-regional trade different from inter-regional trade?

Answer 25

Inter regional trading is where you trade with countries outside of the region.

Question 26

What is the meaning of economic integration?

Answer 26

Economic integration is the unification of economic policies between different states through the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior to their integration.
The removal of barriers to trade so that countries can benefit. This could be via methods such as specialisation.

Question 27

What is a custom union?

Answer 27

It is similar to a free trade area except the member countries must adopt a common policy when trading with non-member states.

Question 28

Explain 2 benefits of a customs union.

Answer 28

Customs union promote trade among members by reducing the barriers of trade. This reduction makes exporting more profitable and easier to accomplish because it makes the cost of goods more competitive with domestic products
It provides protection for the domestic industries of members conducting business in protected trade area from nonmembers. Protection is available because all members create a common trade policy, including such matters as quotas and tariffs, that protect member industries from outsiders.
The members agree to revenue sharing regarding funds generated from common tariffs imposed upon outsiders. This may provide additional income to a country that might not otherwise generate such income because of low trade activity.

Question 29

What is the meaning of trade creation and trade diversion?

Answer 29

Trade creation is where consumption moves from a higher cost producer to a lower cost producer within a bloc/area. Trade diversion is where consumption shifts from a lower cost producer outside the bloc/area to a higher cost producer within the bloc/area.

Question 30

What is the exchange rate mechanism II (ERM)?

Answer 30

A system which was set up by a group of European countries in 1979 with the objective of keeping member countries’ currencies relatively stable against each other.
Where one country must fix there currency to the Euro and the value of their currency should not fluctuate more than or less than 6% so that they can show that they have economic stability.
It brings stability to the euro which maintains price stability. It would lower business costs as they do need to hedge funds. This promotes international trade and attracts FDI.

Question 31

Distinguish between single market and monetary union.

Answer 31

Single markets are where member countries operate as a single market. It is like a custom union where countries have a common tax system, a common law on employment, trade and production, free movement of labour, materials, services and capital, absence of special government treatment of domestic industries. A monetary union is an arrangement whereby member countries operate as a common market but in addition, have a fixed exchange rate between themselves and a common monetary policy.
In a monetary union member states must adopt the same currency however in a single market member states can adopt different currency’s
In a monetary union such as the EU countries have their monetary policy set by a board, in the case of the EU it would be the ECB. However in a single market member states can set their own monetary policy.

Question 32

Explain 2 economic benefits to countries for operating in a single market.

Answer 32

There is free movement of resources and materials meaning that member countries can buy resources that they require from the cheaper countries and not have to pay any taxes or tariffs and therefore they lower the cost of production and can provide the finished good cheaper within their own country.
There is free movement of labour meaning firms within the member countries can employ skilled labour from anywhere with in the market. This means that firms can employ highly skilled workers who produce less waste and therefore the cost per unit falls and therefore they can charge a lower price to consumers.
There is an increase in the market that people within the single market can trade with. And due to the lack of taxes on imports between the countries it means that goods appear cheaper within the single market

Question 33

Identify 3 characteristics of a single/common market.

Answer 33

Member countries have a common tax system.
Member countries have a common law on employment, trade and production.
Member countries have free movement of labour, materials, goods, services and capital.
Common quality standards.

Question 34

Define the recovery stage of the economic cycle.

Answer 34

The recovery stage is where GDP growth turns from negative to positive, but is still below trend.

Question 35

What is the meaning of the economic cycle?

Answer 35

The regular fluctuations in economic activity/GDP, characterised by four distinct changes recovery, peak, slow down and recession.

Question 36

What are the characteristics of the recovery stage of the economic cycle?

Answer 36

Unemployment rate is falling due to rising levels of production. Increased or even reduced consumer and investment confidence RGDP is rising.
GDP turns from negative to positive.
The output gap is negative but is still increasing.
There is low consumer and investor confidence.

Question 37

Define unemployment and or unemployment rate.

Answer 37

Unemployment is where people are of working age and are willing and able to work at the average market wage rate but are without a job. Unemployment rate is the percentage of people who are willing and able to work at the average market wage rate but are without a job.

Question 38

What are the methods of measuring unemployment, why the discrepancy with bullet point 2 on page 4?

Answer 38

The claimant count is the number of people claiming job seekers allowance
The labour force survey takes into account those people who are without a job, but are actively seeking work who are ready to start within 4 weeks.
The claimant count doesn’t count part time work so unemployment can still rise due to another determinant as part time workers are not classed as employed.
Rise in the number of active labour force.

Question 39

Why would a continued rise in long term unemployment affect the future potential growth rate of UK economy as mentioned on page 4?

Answer 39

The hysteresis effect takes places if people are unemployed for a long period of time they will lose their skills or will lose the quality that they had in those skills, they will also become accustom to living on benefits. The unemployed become economically inactive which lowers the productive potential of the individual as well as the economy. Also when it comes to finding a job later on then they will find it hard to become employed as there skill level is now lower, hence production falls as the labour can not produce as efficiently.
Long term unemployment leads to future negative output gap meaning the labour market would under perform.
Capital flight may also occur which would drive FDI out of the country as other countries are more efficient.

Question 40

Identify reasons why the fall in the value of the pound (20%) did not reflect in increased growth in exports as stated on page 5.

Answer 40

The value of the pound falls, but a high inflation rate means that goods appear just as expensive to foreigners as the price has increased meaning that exports do not increase and therefore exports will fall.
If firms must import resources, then the price of the imports will increase meaning that firms must charge more money for their goods as the cost of production increases meaning that the goods may not appear competitive and exports do not rise.
If the goods produced are of low quality then firms may still not buy the goods regardless of their low prices.
Whilst there is a 20% fall in the value of the currency other currency’s may still appear cheaper or may even fall themselves meaning that the goods are no more cheaper.

Question 41

Why would David Blanchflower (Fig. 1.1) argue that Osborne’s austerity policy would not help the recovery?

Answer 41

Austerity is where there is increased taxation and reduced government expenditure. Reduces real disposable income therefore purchasing power for the same bad et of goods is reduced. This reduces c which decreases AD and natural output.

Reduced government borrowing reduces crowding out of the private sectors investment. This means that private firms will have the funds to be able to employ more people and therefore unemployment rates will fall. It will also mean that firms can buy more efficient technology, which will lower the cost of production meaning that RGDP increases.

Reduced spending on transfer payments may act as an incentive for the unemployed to find work. People receiving transfer payments will begin to struggle and will need to find a job in order to survive and therefore unemployment rates will fall.

Question 42

Analyse 2 costs of inflation.

Answer 42

It causes fiscal drag meaning people are pushed into a higher tax bracket meaning the their disposable income falls as they now pay more in taxation. This means consumers have less disposable income and therefore AD falls causing RGDP to fall.

It causes inflationary noise which means that it has hard to calculate the actual price of goods and services. It can also lead to people panick buying if the fear inflation will increase. It could lead to people putting off purchasing goods and services as they know prices will be cheaper in the future. This means that c could which means that AD will fall and therefore RGDP will fall. Also if consumers are spending less then firms receive less revenue and mean that they must cut cost by making people unemployed meaning that unemployment rates will rise.

It will mean that firms will experience increased menu costs meaning that they will have to pay money to change the prices of goods and services on things such as packaging. This will add to the cost of production and mean that the price of the product will increase. If the cost of production becomes too high then firms revenue will fall meaning that firms may struggle to employ everyone and therefore some people may be made unemployed, meaning that there is an increase in unemployment.

Question 43

What is the meaning of national debt?

Answer 43

National debt is the total amount of money that the government of a country owes due to borrowing. This could be both external and internal borrowing.

Question 44

Identify all of the stages of the economic cycle.

Answer 44

Recovery/Upturn, Peak/Boom, Slow down/Downturn and Recession/Trough.

Question 45

Show the extent to which high levels of government debt, such as that mentioned on page 5 act as a constraint on UK growth.

Answer 45

A high level of Government debt can lead to less finance available to the UK Government as they are having to pay back their debt with interest. This can lead to less spending on areas such as Education which would be a huge constraint on UK growth as they would not be able to improve the standard of education in the UK and may even have to cut back on spending if the debt is so high. If spending on education falls, then the skill level of the population will fall. This will mean that firms will either have to spend more money on training and therefore not as high production due to a higher average cost.
However the golden rule can be applied in this situation and therefore even if there is a high level of Government Debt then this could be used for investment rather than for current consumption. This will therefore mean that the borrowings are used in a way that is beneficial to the UK economy as the investment could be used to create jobs (i.e. building infrastructure).

Question 46

What is the meaning of comparative advantage?

Answer 46

Where one country can produce a product at the least/lowest opportunity cost; that is has to forgo less of other goods/resources in order to produce this good.

Question 47

How is comparative advantage different from absolute advantage?

Answer 47

Comparative advantage is producing at the lowest opportunity cost whereas absolute advantage means that a good is produced more efficiently with fewer resources involved in the production.

Question 48

Why would a loss of comparative advantage be a concern for the UK’s future economic growth/net trade?

Answer 48

The UK will be producing at a relatively higher opportunity cost to trading partners which means that the UK will sacrifice more resources in producing the good. This could be in the form of employing more labour than a country like France which is gaining comparative advantage. The UK will lose exports to France as the average cost or cost/unit will increase. This means that UK exports are more expensive and therefore reducing demand for UK good’s.

Question 49

What does terms of trade mean?

Answer 49

Average index of export price relative to average index of import price.

Question 50

How may the following help rebalance the UK economy towards encouraging growth in exports and FDI; a) reforms to tax system and b) creating a more education and flexible workforce

Answer 50

a) A reform of the tax system may first of all make it much easier for foreign firms to enter into the UK. This could be through the use of cutting corporation tax as by doing this the UK will be encouraging other firms to come to the UK. This is because they will have more money in reserves as the corporation tax is lower and therefore they will be able to invest more money into the production. This could be through the use of technology and therefore this will mean a decrease in production costs. These increased firms will create more exports. However this will depend on how big the cut is and if it is lower than other countries. Having more of these firms in the UK will lead to an increase in growth due to the fact more production will arise from the increased firms in the UK. This will contribute towards the growth of the UK economy.
b) As the education is improved in the UK then this will mean that the workforce are more highly skilled and better trained. This will mean that production will become more efficient and therefore it will mean that the UK can produce more for the same cost. This will make our goods appear cheaper to other countries and therefore increase export

Question 51

Using Fig 2.2, show how any of the policies identified would help improve the UK’s cost competitiveness and other forms of international competitiveness?

Answer 51

An investment in infrastructure could mean that the transport network is a lot better and modernised. This can make it easier and cheaper to move goods across the UK and therefore easier to export goods from the UK. This can increase the international competitiveness and cost competitiveness as firms don’t have to spend as much money on moving goods across the UK as transport is quicker with an improved network.
A loan that is provided to business can be used to increase their production by lowering the production cost. This lower production cost will mean that the firm will be able to produce more goods at the same cost. This will mean that this saving can be passed onto customers and therefore appear cheaper to other countries. This will improve the cost competitiveness.
An increase in the tax allowance on investment will encourage firms to increase their investment into new technology. This will mean that their production costs will decrease as a result of the better production methods that arise from new technology. This could be the result of employing less workers.
A decrease in the corporation tax will mean that firms will have more reserves which they are then able to invest into the business with the same result as previous.
Simplification of business regulation will mean that it is easier for firms to set up in the UK. This will bring with it both new domestic firms being set up but also FDI into the UK as firms see it as an easy place to set up business. Regulation on the business is necessary though such as safety but some areas such as increased costs due for admin staff for form filling are not necessary. The Government is looking to get rid of this kind of regulation. This would reduce the firms cost and therefore improve its cost competitiveness.
Creating an education workforce will mean that there is a highly skilled ready workforce available in the UK.

It is generally accepted that some business regulation is essential (product safety, pollution control, health and safety), but we also have to accept that business regulation adds to business costs (eg the cost of employing resources in form filling, or the constraints imposed on business by planning controls). All recent governments have promised to reduce the burden of regulation in order to improve competitiveness, but the volume of regulation continues to grow, and therefore continues to attract government attention.

Question 52

Why may weak performance by economies in the EU offset the positive impact on world trade?

Answer 52

The EU is such a large group of counties that any potential weak economic performance by the countries in the EU may have a large impact on the rest of the world trade. This is because it is not just one country that may be suffering but all of the states in the EU may have a knock on effect and therefore trade will drop worldwide as there isn’t a big enough market to export to.

Question 53

Why may the uncertainty about the future of the Euro result in slow growth in global GDP?

Answer 53

Uncertainty about the Euro is bad for global GDP. This is because if there is a change in the exchange rate which means that the Euro value falls massively then this will make the cost of importing into the EU too expensive. This will mean that there is a large market of that is no longer able to import as the goods are too expensive. This can mean that there is a fall in the overall trade across the world and therefore as exports are a part of AD, then this will lead to a fall in global GDP.

Question 54

Explain 2 reasons why the EU experienced negative growth whilst the rest of the world enjoyed positive growth rates?

Answer 54

• Recession in some EU countries, causes high unemployment and low production, fall in economic growth as prices are high. However our recession is unlikely to affect other country’s growth.
• Loss of comparative advantage (fig 4.5), means that other countries are cheaper, trade shifts from us to them, net trade falls decreasing our RGDP and growth falls. Other country’s get goods for cheaper so can buy more, therefore growth rises for them.

Question 55

What is the meaning of intra-industry trade?

Answer 55

This refers to the exchange of similar products belonging to the same industry. The term usually applies to international trade, where the same types of goods or services are both imported and exported.

Question 56

Have a closer look at the intra-regional and inter-regional changes in trade around the world, Fig. 4.3. Identify possible reasons for the changes.

Answer 56

Countries could be losing comparative advantage and therefore it is is cheaper to trade with countries outside of their area such as China which has cheaper production costs.

Question 57

Explain drawbacks to the concept of comparative advantage.

Answer 57

• Transport costs may outweigh any comparative advantage
• Increased specialisation may lead to diseconomies of scale
• Government may restrict trade

Question 58

What is the meaning of globalisation?

Answer 58

The process by which regional economies, societies and cultures and have become integrated through a network of communication and trade.

Question 59

Identify 2 characteristics of globalisation; and show how they help promote economic growth

Answer 59

There is increased levels of FDI. This would help to promote economic growth as foreigners could benefit from the lower cost of production by investing.
Firms can specialise in the production of certain goods meaning that they can increase their output with the same amount of resources as they have become more efficient.
There is a greater transfer of technology which means firms have access to new efficient methods of of production, which allow them to reduce waste. This lowers the cost per unit allowing production to be cost-productive.

Question 60

Trade enhances the division of labour as countries specialise in areas of comparative advantage.

Answer 60

Unemployment: Concern has been expressed by some that investment and jobs in advanced economies will drain away to developing countries.

Inflation: Strong demand for food and energy has caused a steep rise in commodity prices. Food price inflation (known as agflation) has placed millions of the world’s poorest people at great risk.

Trade Imbalances: Trade has grown but so too have trade imbalances. Some countries are running enormous trade surpluses and these imbalances are creating tensions and pressures to introduce protectionist policies.

Question 61

Which has more economic benefits; globalisation or regionalisation/economic integration?

Answer 61

Economic integration as it involves a number of countries working as one in order to improve their regional economy. However with globalisation there is little that can be done as when larger firms move to a country they may replace a domestic firm which already does that job. This can lead to unemployment as larger firms may have machines which are able to do a job more efficiently.

Question 62

What is the World Commission on Social Dimensions of Globalisation?

Answer 62

It is a report that was generated to see what the effect of globalisation was on ordinary people around the world. It also looked to see if globalisation was fair and also to see how globalisation would be fair on people. It also looked at how it could be made fairer.

Question 63

What is the United Nations Human Development?

Answer 63

The UN Human Development index is a measure of looking at how developed country’s were on a scale. It looked at life expectancy, education and income to determine this.