Globalisation and trade Flashcards
Free trade
Free trade is international trade free from artificial barriers such as import tariffs, quotas and other trade barriers.
Absolute advantage
Occurs when a country can produce a product using fewer resources than another nation (eg they use the same FOP’s but one produces more)
Comparative advantage *Check book for diagram
Occurs when a country has a lower relative opportunity cost when deciding to specialise in a particular product.
Key factors determining comparative advantage
*Q&Q of resources available
*Rate of capital investment on infrastructure
*Fluctuations in the exchange rate
Problems with comparative advantage
Assumes constant returns to scale, amplifying gains from trade.
Assumes no import control such as tariffs and quotas.
Assumes low transportation costs to overseas markets - high logistical costs may erode comparative advantage.
Globalisation
When economies become interconnected through a global network of trade, capital flows and technology.
Causes of globalisation
Trade & investment deals
Transnational activities
Containerisation & Freight
Difference in tax systems (lower tax attracts FDI)
Characteristics of globalisation
Falling transport costs - containerisation & air freight
International mobility of labour
Inwards FDI
Growing power of MNC’s
Outsourcing production
Consequences of globalisation
Trade imbalances eg. import dependency
Brain drain
Corporate tax avoidance eg. Dubai
How has globalisation affected Mauritius?
Mauritius has moved from an upper middle income to Africa’s 1st high income nation. $12700 GDP per capita.
However, oil spill of a Japanese bulk carrier into a pristine maritime environment in 2020.
economic growth vs sustainability macro conflict.
‘worst ecological disaster’ - scientists
MNC’s and competition
Competition from MNC’s encourages domestic firms to improve competitiveness by raising efficiency.
However, these firms may not be able to compete with MNC’s and some will fail - coca-colanisation.
Outsourcing production controls price levels, however profits are remittances - 2014 eBay repatriated $9billion back to US from overseas subsidiary company
Static & Dynamic gains
Static gains are improvements in productive and allocative efficiency in markets.
Dynamic gains are gains in welfare from improved product quality, choice & innovation behaviour.
Arguments for protectionism
Protecting structural employment
Correcting balance of payments
Source of gov. revenue (tariffs paid by consumers)
Arguments against protectionism
Lack of incentive for domestic firms to increase efficiency & innovate - X inefficiency
Distortion of true comparative advantage - less productivity.
Difference between Custom Unions and Common Markets
Custom Unions are countries that operate free trade with each other and impose a common external tariff, and promote the free movement of goods & services.
Common markets are the same, but promote the free movement of goods, services, labour and capital.
Problems with custom unions - Wider Reading
Distorts comparative advantage for non-members.
EU put a large tariff on Kenyan flowers to protect European flower supply.
What is a monetary / currency union?
The creation of a single currency amongst a group of countries - Fixed exchange rate.
Advantages of Currency Unions
Eliminating currency conversion makes it easier and cheaper for businesses & consumers to engage in cross-border trade - lowers inflationary pressure.
Dynamic gains - trade encourages specialisation through education, training, infrastructure and technology - long run economic growth.
Disdavantages of a currency union
Set base rate of interest amongst members restricts monetary policy - Members can no longer rely on a competitive depreciation of their currency, making it difficult to achieve macro-economic objectives.
Subject to economic shocks, if they can’t change monetary policy to address issues.
Trade creation
When joining a customs union, bringing about a reduction in tariffs. *CHECK DIAGRAM.
Trade diversion
When joining a customs union causes trade to be diverted from a more efficient exporter, to a less efficient one due to common external tariffs . *CHECK DIAGRAM.
