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Macroeconomics > Globalisation & Trade > Flashcards

Globalisation & Trade Flashcards

1
Q

why do countries trade

A

if they do not have the resources or capacity to satisfy their own needs & wants

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2
Q

6 advantages of trade

A
  1. exploitation of country’s comparative advantage - trade encourages specialisation in specific G & S - becomes more efficient and lowers OC
  2. producing a narrow range of G & S for domestic & export markets - countries can produce at high volume = cost benefits (E of S)
  3. increases competition and lowers world prices - benefits to consumers by raising purchasing power
  4. breaks down domestic monopolies
  5. quality - competition encourages innovation
  6. increase employment - related to production
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3
Q

3 disadvantages of trade

A
  1. over-specialisation - risk of losing jobs should world demand fall - or when goods can be bought cheaper abroad (structural unemployment)
  2. hard to grow due to competition from more established foreign firms
  3. local producers suffer - cheaper imports may destroy their market - diversity of output in an economy may diminish
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4
Q

assumptions made in absolute advantage

A
  1. 2 countries
  2. 2 products
  3. no transport/transaction costs
  4. both countries endowed with a given set of re-sources
  5. each country puts 1/2 resources towards each good
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5
Q

what is an absoloute advantage

A

the ability of an individual, company, region, or country to produce a greater quantity of a good or service with the same quantity of inputs per unit of time

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6
Q

why should you specialise and trade when two countries have absoloute advantage in different goods

A

increase in total production output

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7
Q

assumptions made in comparative advantage

A
  1. 2 countries
  2. 2 goods
  3. no transaction costs
  4. given set of resources
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8
Q

what is comparative advanatge

A

when opportunity cost ratios of producing two goods in both countries differ so that the opportunity cost of producing good “a” in country “a” is less

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9
Q

when is there no benefit from trade

A

when the lines are parallel (PPF) or OC are equal

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10
Q

why is there benefit from trade in comparative advantage

A

increase in total production output

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11
Q

what is the rate of exchange of trade

A

determined by the OC of production for each country

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12
Q

why do countries use protectionism (W.T.O accepted)

A
  1. strategic industries: defense, steel, power
  2. anti dumping - stopping the selling of excess stock below WP abroad
  3. reciprocity - response to other people putting up barriers
  4. infant industry - protect growing industries till they’re high enough to compete internationally
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13
Q

why do countries use protectionism (unnaccepted by W.T.O)

A
  1. sunset/declining industries - protect against structural unemployment
  2. recession/downturn
  3. raise tax revenue
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14
Q

how do countries implement protectionism

A
  1. tariffs
  2. quota: numerical limitation
  3. subsidy
  4. non-price barriers: H + S, Regulation, ‘Structural + Social impediment’
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14
Q

why is unemployment bad

A
  1. lost output
  2. unemployment benefits
  3. lost tax rev
  4. cost of reskilling
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15
Q

define preferential trade area

A

counties within a geographical region agree to reduce or eliminate tarriff barriers on selected goods imported from other members of the area

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15
Q

define free trade area

A

when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods from other members
- NAFTA

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16
Q

define customs union

A

the removal of tarrif barriers between members, thus the acceptance of a common (unified) external tarrif against non-members

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17
Q

define common market/single market

A

member countries trade freely in all economic resources - not just tangible goods

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18
Q

define economic union

A

a trading bloc that has both a common market and a common trade policy towards non-members (members free to pursue independent macro-economic policies)

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19
Q

define a monetary union

A

adopting a single, shared currency
- common exchange rate
- monetary policy
- central bank

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20
Q

define fiscal union

A

harmonise tax rates

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21
Q

define economic and monetary union

A
  • single economic market
  • common trade policy
  • single currency
  • common monetary policy
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22
Q

define complete economic integration

A
  • single economic market
  • common trade policy
  • single currency
  • common monetary policy
  • single fiscal policy, tax and benefit rates
    (harmonisation of all policies, rates and economic trade rules)
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23
Q

advantages for members of trading blocs

A
  1. free trade within the bloc - specialisation & comparative advantage
  2. market access & trade creation
  3. E of S
  4. jobs
  5. protection - exports
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24
Q

disadvantages for members of trading blocs

A
  1. loss of benefits - free-trade with countries outside of the bloc
  2. distortion of trade - reduce benefits of specialisation & comparative advantage worldwide
  3. inefficiencies & trade diversion - inefficient producers within the bloc
  4. retaliation
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25
Q

making of the EU

A
  • pre-1956 - preferential trade area (European Coal & Steel Community)
  • 1957 - Free trade area ( European Economic Community)
  • 1986 - Common Market (European Community)
  • 1992 - EU (aimed to have single currency by 1997)
  • 2000 - rewrites European constitution
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26
Q

arguments against protectionism

A
  1. market distortion
  2. higher prices for consumers
  3. reduction in market access for producers
  4. loss of economic welfare
  5. regressive effect of the distribution of income
  6. production inefficiencies
  7. trade wars - retaliation
  8. negative multiplier effect
  9. second best approach - import controls = gov failure
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27
Q

define globalisation

A

the geographic dispersion of industrial & service activities through joint ventures & the sharing of assets

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28
Q

8 key aspects of the impact of globalisation

A
  1. trade = increase in GDP
  2. increase in finacial capital flows
  3. FDI, cross border merges & acquisitions
  4. increase num of global brands
  5. increase specialisation of labour
  6. global supply chains & new trade investment routes
  7. increase in international labour & migration (diaspora)
  8. increase connectivity
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29
Q

key drivers for globalisation

A
  1. containerisation - decrease cost of shipping
  2. technological change - decrease cost of communication
  3. E of S - increase in MES
  4. differences in tax systems - attract FDI
  5. less protectionism - decrease import tariff levels
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30
Q

advantages of globalisation

A
  • increase division of labour & E of S
  • decrease scale of monopoly profits & increase cost-reducing innovations
  • higher per capita incomes - decrease in extreme poverty
  • freer movement of labour
  • dynamic efficiency - sharing ideas/skill/technology across boarders
  • increase awareness of global inequalities & issues
  • competition - improved governance & better labour protection
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31
Q

disadvantages of globalisation

A
  • increase inequality/relative poverty
  • threats to global commons - damage to ecosystems
  • macroeconomic fragility - external shocks can rapidly spread - volatile capital movements & savings in trade flows
  • increase structural unemployment - countries where production has shifted to lower cost centers
  • dominant global brands - squeeze out local producers
  • poor behaviour of some global multinationals - exploitation of workers, tax avoidance, environmental issues
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32
Q

why is world trade currently growing slowly

A
  • western nations suffering from secular stagnation
  • slowing pace of trade liberalisation
  • non-tarriff barriers have grown & regional trade blocs are more common
  • rising prosperity
  • technological change
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33
Q

define balance of payments

A

an account of G, S & money into/out of an economy over time

34
Q

what are the visibles in the current account

A

exports and imports of goods

35
Q

what are the invisibles in the current account

A

exports and imports of services

36
Q

what is in the current account

A
  1. visibles
  2. invisibles
  3. net primary income
  4. net secondary income
37
Q

what is the net primary income

A

I.P.D - interest/profit/dividens
- financial flows that are the return on an asset
I = bank lending
P = investments
D = ownership of shares
REMITTANCES - wages earnt in a foreign country brought back to the country of origin

38
Q

what is the net secondary income

A

transfers:
- charity
- gov aid

39
Q

what is in the financial/capital account

A
  • accounts of changes in assets & liabilities for UK & overseas
  • bank lending
  • funds for investment
  • funds to purchase shares/ bonds
  • balancing items
40
Q

what is a tariff

A

a tax or duty to be paid on a particular class of imports or exports

41
Q

what is a quota

A

a government-imposed trade restriction that limits the number or value of goods a country can import or export during a specific period

42
Q

what are the 3 types of exchange rates

A
  1. fixed
  2. managed
  3. free floating
43
Q

what is a fixed exchange rate

A

where a country guarantees a certain XR for its currency via the central bank
- all transactions will operate through the central bank of that country

44
Q

what is a managed XR

A

centeral bank intervention used to stabalise XR OR the XR mechanism is ‘pegged’ = 1/2 way between fixed and floating

45
Q

what is a free floating XR

A

determined entirely by the levels of S + D for the currency
- if D for the currency increases = appreciation
- if D for the currency decreases = depreciation

46
Q

advantages of a fixed XR

A
  • certainty for trade & businesses
  • in control
47
Q

disadvantaged of a fixed XR

A
  • significant foreign reserves needed to meet market demand
48
Q

advantages of a floating XR

A

no foreign reserves needed

49
Q

disadvantages of a floating XR

A
  • uncertainty
  • lack of control
50
Q

advantages of a managed XR

A

some certainty & control

51
Q

disadvantages of a managed XR

A

need exchange reserves

52
Q

what is an “effective” XR

A

an ‘average’ XR where the currency is measured against a trade-weighted basket of the other currencies we trade in

53
Q

what is a reserve currency

A

other countries hold these as assets

54
Q

what are the 4 things that help determine XR

A
  1. international trade in goods/services
  2. investment flows - FDI, portfolio
  3. speculation
  4. hot money flows - chasing the best rate of return
55
Q

what is speculation

A

buying/selling currencies in the hope of making more money when the value changes

56
Q

how a fixed XR changes

A

if the XR is ‘wrong’:
- inflows/outflows of a currency will force a reevaluation/devaluation

57
Q

what does the J curve show

A

the impact of a change in XR on the B of P
- the B of P will move towards surplus assuming the ML condition is satisfied

58
Q

what is the marshall-lerner condition

A

a devaluation/depreciation in the XR will lead to an improvement in the B of P if the sum of the elasticies of X + M is < 1

59
Q

how does the j curve impact inflation

A
  • devalue/depreciate (assume ML is satisfied)
  • increase X, decrease M
  • AD shifts out
  • inflation
60
Q

how does the j curve impact economic growth

A
  • AD shifts out
  • increase GDP
61
Q

how does the j curve impact unemployment

A
  • increase growth = increase demand for labour
  • decrease unemployment
62
Q

how does the j curve impact the B of P

A

moves towards surplus

63
Q

what are the two types of competitiveness

A
  1. price
  2. non-price
64
Q

what is a measure of price competitiveness

A

R.U.L.C - relative unit labour cost
- measure of the cost of labour per unit produced
- the higher the labour cost per unit, the higher the product price

65
Q

how is R.U.L.C a productivity measure

A

shows the effect of:
- capital
- labour skills
- flexibility
- bureaucracy

66
Q

examples of non price competition

A
  • branding
  • quality
  • A.S.S
  • reputation
  • segmentation
67
Q

what is purchasing power paraties

A

improve accuracy when comparing data between countries. it is calculated by comparing the price of a basket of comparable goods and services in different countries

68
Q

what are the 4 main causes of a current account deficit

A
  1. poor price and non-price competitiveness
  2. strong exchange rate affecting demand for exports and imports
  3. recession in one or more major trade partner countries
  4. volatile global prices
69
Q

consequences of a current account deficit

A
  • fall in AD = lower GDP, living standards and employment
  • depreciation = cost-push inflation = deterioration in terms of trade
  • borrowing = financial account surplus = risk
  • loss of investors = capital flight and BoP crisis
70
Q

policies to reduce a current account deficit

A
  1. demand management
    - tighter fiscal and/or monetary policy = reduces real spending power of consumers = less imports
    - lower exchange rate
  2. supply-side improvements
    - increase productivity
    - invest in human capital
  3. protectionism
71
Q

what are expenditure switching policies

A

designed to change relative prices of exports and imports

72
Q

what are expenditure reducing policies

A

policies designed to lower real incomes and AD

73
Q

what is the big mac index

A
  • way of measuring PPP between different countries
  • converts the average national big mac prices to U.S. dollars
  • the same goods can be informally compared
74
Q

what are the problems with PPP adjustments

A
  1. differences in quality of a good or service
  2. differences in consumption weights
  3. many goods and services are not bought and sold in markets
  4. doesn’t take into account transaction costs of converting currency
  5. quality of economic data varies
75
Q

what are the 6 features of the EU

A
  1. tariff/quota free trade between member nations
  2. common external trade barriers on imports from non-member countries
  3. common policies
  4. free movement of labour & capital
  5. co-ordination of economic policy
  6. 17/28 members adopting the euro - monetary union
76
Q

potential advantages for new members of the EU

A
  • tariff free access to a single market of nearly 500 million people
  • easier to access foreign direct investment from inside/outside EU
  • access to EU structural funds
  • better access to EU capital markets
  • discipline of competition from being inside the EU single market
77
Q

what is the norway option to dealing with the EU

A
  • free movement of goods, services, capital and people
  • no formal input unto shaping the rules
  • annual fee paid by Norway for access to the EU single market
78
Q

short term impacts of brexit on the uk

A
  • weaker exchange rate (higher price for imports)
  • high current account deficit
  • short run real GDP growth (2 years to negotiate terms)
  • housing market (fall in confidence)
  • unemployment
79
Q

impact of brexit on developing countries

A
  1. contraction in UK exports to developing nations
    - bangladesh, kenya most affected
  2. migration flows are uncertain
    - fall in £ = reduced value of remittances
    - south africa, uganda, nigeria most affected
  3. UK aid was $18.7 bn in 2015 - falling £ cuts real value
    - 10% of UK aid through the EU
80
Q

negatives of EU membership

A
  1. forced to follow EU laws & regulations
  2. cost of contributions to the EU budget
  3. trade benefits could accrue from FTAs instead - including with nations outside the EU
  4. high levels of immigration
81
Q

what are the consequences of price deflation

A
  1. holding back on spending
  2. debts increase
  3. real cost of borrowing increases
  4. low profit margins
  5. falling confidence = increased savings
  6. redistribution of income (debtors to creditors)
  7. exporters more competitive
82
Q

what are the factors causing slow growth in the euro area

A
  1. fallout from the global financial crisis
  2. labour market failures
  3. high exchange rate
  4. fiscal crisis and resulting fiscal austerity programmes some of which imposed by the bail-out programmes
  5. increase in relative poverty
  6. policy inertia on behalf of the european central bank
83
Q
A

Macroeconomics (12 decks)

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