Globalisation and the International Economy Flashcards
benefits of trade
high consumption possibilities: countries import goods that they do not have a CA in. These countries hence consume beyond its production probabilities, increasing the M-SOL.
lower prices for consumers
wider variety of choices for consumers to choose from: higher SOL
cheaper raw materials and immediate inputs, which lowers the COP for domestic producers.
*trade is an engine of growth. Countries like Singapore, Japan and Korea rely on exports for economic growth.
cons of trade
dumping: when firms sell the goods in the FEM at lower than its marginal cost, which will lead to an increased demand of their good due to its cheap price. Hence, they can monopolise the market
susceptibility to import inflation: when a country is dependent on imported goods for consumption and production, the rising costs of its imports adds to the high costs of living of people, which may result in a demand for higher pay to cope with the higher cost of living. To reduce the impact of the employee’s higher wages on the company’s revenue, the employers will have to raise the price of their products, which creates a WAGE-PRICE SPIRAL.
structural unemployment: during free trade, changes in technology can cause many to be structurally employed due to the mismatch between the skills they have and the skills required by employers.
worsening balance of payments: in developing countries, their export revenue may be less than their demand for imports, which will worsen the BOT/CA more than in a more developed country. Since BOT is a factor which affects BOP, trade impedes the improvement of BOP, which is one of the four macroeconomic goals
environmental degradation: the production of exports produce pollutants, which affects NM-SOL
benefits of protectionism:
decreases unemployment as the use of protectionism measures(PM) such as tariffs and quotas discourage the consumption of A RANGE OF FOREIGN IMPORTS due to its high price, and hence consumers turn to domestic goods(DG) instead. When there is a higher demand for DG, the producers will higher more labour to cope with the higher demand. Hence, unemployment rate will drop.
BOT and hence EG is improved. When PMs are used, the spending on imports are reduced and hence the net export revenue increases, leading to an increase in the AD, which causes economic growth through the improvement of the BOT.
slows down structural unemployment. slows down the declining industries and provides time for workers to learn new skills to apply for other jobs that match their skill set.
cons of protectionism:
when tariffs are implemented, the opposition country may retaliate with their own set of PMs, hence, the exports of the initiating country falls.
when the PES of a good is INELASTIC less than proportionate goods will be produced, hence, PMs are not as effective.
