Globalisation and trade

Question 1

Free trade

Answer 1

Free trade is international trade free from artificial barriers such as import tariffs, quotas and other trade barriers.

Question 2

Absolute advantage

Answer 2

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)

Question 3

Comparative advantage *Check book for diagram

Answer 3

Occurs when a country has a lower relative opportunity cost when deciding to specialise in a particular product.

Question 4

Key factors determining comparative advantage

Answer 4

*Q&Q of resources available
*Rate of capital investment on infrastructure
*Fluctuations in the exchange rate

Question 5

Problems with comparative advantage

Answer 5

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.

Question 6

Globalisation

Answer 6

When economies become interconnected through a global network of trade, capital flows and technology.

Question 7

Causes of globalisation

Answer 7

Trade & investment deals
Transnational activities
Containerisation & Freight
Difference in tax systems (lower tax attracts FDI)

Question 8

Characteristics of globalisation

Answer 8

Falling transport costs - containerisation & air freight
International mobility of labour
Inwards FDI
Growing power of MNC’s
Outsourcing production

Question 9

Consequences of globalisation

Answer 9

Trade imbalances eg. import dependency
Brain drain
Corporate tax avoidance eg. Dubai

Question 10

How has globalisation affected Mauritius?

Answer 10

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

Question 11

MNC’s and competition

Answer 11

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

Question 12

Static & Dynamic gains

Answer 12

Static gains are improvements in productive and allocative efficiency in markets.

Dynamic gains are gains in welfare from improved product quality, choice & innovation behaviour.

Question 13

Arguments for protectionism

Answer 13

Protecting structural employment
Correcting balance of payments
Source of gov. revenue (tariffs paid by consumers)

Question 14

Arguments against protectionism

Answer 14

Lack of incentive for domestic firms to increase efficiency & innovate - X inefficiency
Distortion of true comparative advantage - less productivity.

Question 15

Difference between Custom Unions and Common Markets

Answer 15

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.

Question 16

Problems with custom unions - Wider Reading

Answer 16

Distorts comparative advantage for non-members.
EU put a large tariff on Kenyan flowers to protect European flower supply.

Question 17

What is a monetary / currency union?

Answer 17

The creation of a single currency amongst a group of countries - Fixed exchange rate.

Question 18

Advantages of Currency Unions

Answer 18

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.

Question 19

Disdavantages of a currency union

Answer 19

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.

Question 20

Trade creation

Answer 20

When joining a customs union, bringing about a reduction in tariffs. *CHECK DIAGRAM.

Question 21

Trade diversion

Answer 21

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.