Globalisation

Question 1

Globalisation

Answer 1

Increased movement of goods, services, labour, capital and investments internationally (across borders)

Increase in X, M and FDI

Question 2

Measure of openness (of a country)

Answer 2

GDP ratio = Value of X+M / GDP

Question 3

Free trade

Answer 3

Government does not discriminate against X or M from other countries

Question 4

Inter-industry trade

Answer 4

Trade in products belonging to different industries

Question 5

Horizontal intra-industry trade

Answer 5

Trade in different varieties of the same end-product of the same industry

Question 6

Vertical intra-industry trade

Answer 6

Trade in parts and finished products belonging to same industry

Question 7

Global supply chain

Answer 7

World-wide system involving flow of info and resources that a firms uses to produce good and services

Question 8

Free trade agreements (trade integration)

Answer 8

FTAs allow goods and services to move more smoothly, Eg less border checks

Question 9

Capital mobility

Answer 9

• Decrease in capital controls
• Increased movement of hot money and FDI
• More offshoring and outsourcing

Question 10

Comparative advantage

Answer 10

Countries that produce a product at a lower opportunity cost are preferred

Question 11

Absolute advantage

Answer 11

Countries that produce a product at a lower absolute cost are preferred

Question 12

Terms of trade

Answer 12

Rate of exchange of one good for another between countries

Question 13

Assumption of CA theory

Answer 13

1. Perfect Competition
2. Perfect mobility of resources within a country
3. Imperfect mobility of resources across countries
4. Constant opportunity costs of production
5. No transport costs
6. No trade restrictions

Question 14

Import-competing industries

Answer 14

Domestic industry that also produces good and services that are imported (competing with foreign firms)

Question 15

Dumping

Answer 15

Foreign producers selling their product below MC in a local market to gain monopoly power, usually requires government subsidy. (similar to predatory pricing)

Question 16

Protectionism

Answer 16

Partial or complete protection of domestic industries from foreign competition

Question 17

Benefits of free trade

Answer 17

1. Increase in welfare
   Trading with CA allows country to have goods more than PPC
   Trading increases variety of goods
2. Promotes more competition
   Increases efficiency and drives innovation
3. Drives AG if BOT improves
4. Drives PG
   Importing high-tech equipment

Question 18

Costs of free trade

Answer 18

1. Structural unemployment
   Workers in import-competing industries may lose CA thus retrenched
2. Income inequality
   Exporting sectors income increase disproportionately
3. Dependence of other countries
   Macro instability
   Vulnerable to external DD/SS shocks
4. Exposure to unfair competition
   Dumping

Question 19

Benefits of free flow of capital

Answer 19

1. Long term capital inflow (FDI)
   Increases I component of AD
   Increase capital stock, increasing AS
   Provides access to overseas markets
2. Short term capital inflow
   Increases supply of loanable funds, reducing IR

Question 20

Costs of free flow of capital

Answer 20

1. Forex
   Maybe lead to BOT deficit and thus ER depreciates
2. DD deficient unemployment
   Offshoring and outsourcing of local companies result in DD for domestic labour to fall

Question 21

Benefits of protectionism

Answer 21

1. Stimulate EG (during a recession)
   Increases domestic C
2. Reduce structural unemployment
   Restriction on imports slow down decline of import competing industries, providing time for skills retraining

Question 21

Benefits of free flow of labour

Answer 21

1. Increases quantity and quality of labour
   Reducing labour costs
2. Foreign workers remit money back home

Question 22

Costs of free flow of labour

Answer 22

1. Brain drain
   Emigration of high-trained professionals

Question 23

Protectionist policies

Answer 23

1. Quotas
   Limit the quantity of a good that can be trades
2. Tariffs
   Taxes levied on products when they cross national boundaries (fixed amount of money per unit of good)
3. Subsidies
   Government subsidies firms to decrease UCOP thus increasing competitiveness