Globalisation & Trade Flashcards
why do countries trade
if they do not have the resources or capacity to satisfy their own needs & wants
6 advantages of trade
- exploitation of country’s comparative advantage - trade encourages specialisation in specific G & S - becomes more efficient and lowers OC
- producing a narrow range of G & S for domestic & export markets - countries can produce at high volume = cost benefits (E of S)
- increases competition and lowers world prices - benefits to consumers by raising purchasing power
- breaks down domestic monopolies
- quality - competition encourages innovation
- increase employment - related to production
3 disadvantages of trade
- over-specialisation - risk of losing jobs should world demand fall - or when goods can be bought cheaper abroad (structural unemployment)
- hard to grow due to competition from more established foreign firms
- local producers suffer - cheaper imports may destroy their market - diversity of output in an economy may diminish
assumptions made in absolute advantage
- 2 countries
- 2 products
- no transport/transaction costs
- both countries endowed with a given set of re-sources
- each country puts 1/2 resources towards each good
what is an absoloute advantage
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
why should you specialise and trade when two countries have absoloute advantage in different goods
increase in total production output
assumptions made in comparative advantage
- 2 countries
- 2 goods
- no transaction costs
- given set of resources
what is comparative advanatge
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
when is there no benefit from trade
when the lines are parallel (PPF) or OC are equal
why is there benefit from trade in comparative advantage
increase in total production output
what is the rate of exchange of trade
determined by the OC of production for each country
why do countries use protectionism (W.T.O accepted)
- strategic industries: defense, steel, power
- anti dumping - stopping the selling of excess stock below WP abroad
- reciprocity - response to other people putting up barriers
- infant industry - protect growing industries till they’re high enough to compete internationally
why do countries use protectionism (unnaccepted by W.T.O)
- sunset/declining industries - protect against structural unemployment
- recession/downturn
- raise tax revenue
how do countries implement protectionism
- tariffs
- quota: numerical limitation
- subsidy
- non-price barriers: H + S, Regulation, ‘Structural + Social impediment’
why is unemployment bad
- lost output
- unemployment benefits
- lost tax rev
- cost of reskilling
define preferential trade area
counties within a geographical region agree to reduce or eliminate tarriff barriers on selected goods imported from other members of the area
define free trade area
when two or more countries in a region agree to reduce or eliminate barriers to trade on all goods from other members
- NAFTA
define customs union
the removal of tarrif barriers between members, thus the acceptance of a common (unified) external tarrif against non-members
define common market/single market
member countries trade freely in all economic resources - not just tangible goods
define economic union
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)
define a monetary union
adopting a single, shared currency
- common exchange rate
- monetary policy
- central bank
define fiscal union
harmonise tax rates
define economic and monetary union
- single economic market
- common trade policy
- single currency
- common monetary policy
define complete economic integration
- 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)
advantages for members of trading blocs
- free trade within the bloc - specialisation & comparative advantage
- market access & trade creation
- E of S
- jobs
- protection - exports
disadvantages for members of trading blocs
- loss of benefits - free-trade with countries outside of the bloc
- distortion of trade - reduce benefits of specialisation & comparative advantage worldwide
- inefficiencies & trade diversion - inefficient producers within the bloc
- retaliation
making of the EU
- 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
arguments against protectionism
- market distortion
- higher prices for consumers
- reduction in market access for producers
- loss of economic welfare
- regressive effect of the distribution of income
- production inefficiencies
- trade wars - retaliation
- negative multiplier effect
- second best approach - import controls = gov failure
define globalisation
the geographic dispersion of industrial & service activities through joint ventures & the sharing of assets
8 key aspects of the impact of globalisation
- trade = increase in GDP
- increase in finacial capital flows
- FDI, cross border merges & acquisitions
- increase num of global brands
- increase specialisation of labour
- global supply chains & new trade investment routes
- increase in international labour & migration (diaspora)
- increase connectivity
key drivers for globalisation
- containerisation - decrease cost of shipping
- technological change - decrease cost of communication
- E of S - increase in MES
- differences in tax systems - attract FDI
- less protectionism - decrease import tariff levels
advantages of globalisation
- 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
disadvantages of globalisation
- 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
why is world trade currently growing slowly
- 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
define balance of payments
an account of G, S & money into/out of an economy over time
what are the visibles in the current account
exports and imports of goods
what are the invisibles in the current account
exports and imports of services
what is in the current account
- visibles
- invisibles
- net primary income
- net secondary income
what is the net primary income
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
what is the net secondary income
transfers:
- charity
- gov aid
what is in the financial/capital account
- accounts of changes in assets & liabilities for UK & overseas
- bank lending
- funds for investment
- funds to purchase shares/ bonds
- balancing items
what is a tariff
a tax or duty to be paid on a particular class of imports or exports
what is a quota
a government-imposed trade restriction that limits the number or value of goods a country can import or export during a specific period
what are the 3 types of exchange rates
- fixed
- managed
- free floating
what is a fixed exchange rate
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
what is a managed XR
centeral bank intervention used to stabalise XR OR the XR mechanism is ‘pegged’ = 1/2 way between fixed and floating
what is a free floating XR
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
advantages of a fixed XR
- certainty for trade & businesses
- in control
disadvantaged of a fixed XR
- significant foreign reserves needed to meet market demand
advantages of a floating XR
no foreign reserves needed
disadvantages of a floating XR
- uncertainty
- lack of control
advantages of a managed XR
some certainty & control
disadvantages of a managed XR
need exchange reserves
what is an “effective” XR
an ‘average’ XR where the currency is measured against a trade-weighted basket of the other currencies we trade in
what is a reserve currency
other countries hold these as assets
what are the 4 things that help determine XR
- international trade in goods/services
- investment flows - FDI, portfolio
- speculation
- hot money flows - chasing the best rate of return
what is speculation
buying/selling currencies in the hope of making more money when the value changes
how a fixed XR changes
if the XR is ‘wrong’:
- inflows/outflows of a currency will force a reevaluation/devaluation
what does the J curve show
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
what is the marshall-lerner condition
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
how does the j curve impact inflation
- devalue/depreciate (assume ML is satisfied)
- increase X, decrease M
- AD shifts out
- inflation
how does the j curve impact economic growth
- AD shifts out
- increase GDP
how does the j curve impact unemployment
- increase growth = increase demand for labour
- decrease unemployment
how does the j curve impact the B of P
moves towards surplus
what are the two types of competitiveness
- price
- non-price
what is a measure of price competitiveness
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
how is R.U.L.C a productivity measure
shows the effect of:
- capital
- labour skills
- flexibility
- bureaucracy
examples of non price competition
- branding
- quality
- A.S.S
- reputation
- segmentation
what is purchasing power paraties
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
what are the 4 main causes of a current account deficit
- poor price and non-price competitiveness
- strong exchange rate affecting demand for exports and imports
- recession in one or more major trade partner countries
- volatile global prices
consequences of a current account deficit
- 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
policies to reduce a current account deficit
- demand management
- tighter fiscal and/or monetary policy = reduces real spending power of consumers = less imports
- lower exchange rate - supply-side improvements
- increase productivity
- invest in human capital - protectionism
what are expenditure switching policies
designed to change relative prices of exports and imports
what are expenditure reducing policies
policies designed to lower real incomes and AD
what is the big mac index
- 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
what are the problems with PPP adjustments
- differences in quality of a good or service
- differences in consumption weights
- many goods and services are not bought and sold in markets
- doesn’t take into account transaction costs of converting currency
- quality of economic data varies
what are the 6 features of the EU
- tariff/quota free trade between member nations
- common external trade barriers on imports from non-member countries
- common policies
- free movement of labour & capital
- co-ordination of economic policy
- 17/28 members adopting the euro - monetary union
potential advantages for new members of the EU
- 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
what is the norway option to dealing with the EU
- 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
short term impacts of brexit on the uk
- 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
impact of brexit on developing countries
- contraction in UK exports to developing nations
- bangladesh, kenya most affected - migration flows are uncertain
- fall in £ = reduced value of remittances
- south africa, uganda, nigeria most affected - UK aid was $18.7 bn in 2015 - falling £ cuts real value
- 10% of UK aid through the EU
negatives of EU membership
- forced to follow EU laws & regulations
- cost of contributions to the EU budget
- trade benefits could accrue from FTAs instead - including with nations outside the EU
- high levels of immigration
what are the consequences of price deflation
- holding back on spending
- debts increase
- real cost of borrowing increases
- low profit margins
- falling confidence = increased savings
- redistribution of income (debtors to creditors)
- exporters more competitive
what are the factors causing slow growth in the euro area
- fallout from the global financial crisis
- labour market failures
- high exchange rate
- fiscal crisis and resulting fiscal austerity programmes some of which imposed by the bail-out programmes
- increase in relative poverty
- policy inertia on behalf of the european central bank
