IER. Final Exam

Question 1

Introduction to IER

List and explain key reasons for the development of the global economy.

Answer 1

Technological advances:
Information and Communication Technologies (ICT). The development of ICT has revolutionised global communication, transport and trade. The Internet, mobile devices and advanced logistics systems have facilitated the flow of information, goods and services across borders, enabling seamless global trade and collaboration.
Transport infrastructure. Improvements in transport infrastructure, such as containerization and air transport, have significantly reduced the costs and time of international trade. These advances have fueled the development of global supply chains in which production is distributed across multiple countries, promoting economic efficiency and specialisation.
Production processes. Technological advances in manufacturing and manufacturing have led to increased automation, efficiency, and productivity, allowing countries to produce goods at lower costs and higher quality. This has made global trade more attractive and competitive, stimulating economic growth and development.

Economic policies:
Trade liberalisation: The removal of trade barriers such as tariffs and quotas has facilitated trade flows and promoted economic integration. International trade agreements such as the World Trade Organization (WTO) have played a critical role in reducing trade barriers and promoting global trade.
Financial integration: Liberalisation of capital markets and development of financial systems have made cross-border investments and financial flows possible. This has facilitated the movement of capital, technology and expertise, promoting economic growth and innovation.
Economic reforms: Many countries have implemented economic reforms such as privatisation, deregulation and market-oriented policies to improve their competitiveness in the global economy. These reforms increased economic efficiency and attracted foreign direct investment (FDI), promoting economic growth.

Geopolitical shifts:
Globalisation: The rise of globalisation has facilitated the interconnection of economies, cultures and societies around the world. This led to increased trade, investment and cultural exchange, shaping the modern global economy.
The rise of emerging markets: The emergence of new economic powers such as China and India has changed the global economic landscape. These countries have become major players in international trade, finance and technological innovation, challenging the dominance of traditional developed economies.
Regionalization: The formation of regional trading blocs such as the European Union and the North American Free Trade Agreement (NAFTA) has deepened economic integration within regions. These blocs promote trade liberalisation, investment flows and economic cooperation among member countries.

Question 2

Introduction to IER

Explain the concepts of globalisation and internationalisation. What are the differences?

Answer 2

Internationalisation - The growing tendency of corporations to operate across national boundaries

■National enterprises versus International enterprises versus Multinational enterprises (MNEs)
■ Licensing and Franchising
■ Foreign Direct Investments (FDI)

Globalization - The worldwide movement toward economic, financial, trade, and communications integration.

Globalization implies the opening of local and nationalistic perspectives to a broader outlook of an interconnected and interdependent world with free transfer of capital, goods, and services across national frontiers. However, it does not include unhindered movement of labor and, as suggested by some economists, may hurt smaller or fragile economies if applied indiscriminately.”

Key Differences:
Scope:
Globalization has a broader scope, encompassing various aspects of global interconnectedness beyond business activities.
Internalization specifically focuses on a company’s expansion into foreign markets.
Drivers:
Globalization is driven by factors such as technology, trade liberalization, and cultural exchange on a global scale.
Internalization is driven by strategic considerations specific to a company’s desire to control, coordinate, and expand its operations in foreign markets.
Context:
Globalization is a macro-level phenomenon involving the integration of economies, cultures, and societies.
Internalization is a micro-level strategy used by individual companies to expand their operations internationally.

Question 3

Introduction to IER

Discuss the most important positive effects of globalisation. Provide examples.

Answer 3

1. Decentralised Production: Different parts of a product can be manufactured in various regions of the world, facilitating decentralised production. The automotive industry is cited as an example of this practice.

2. Outsourcing Opportunities: Businesses, particularly in the United States, can distribute services such as call centres and information technology to countries with cost-effective labour, such as India.

3. Job Creation: Globalisation, driven by trade agreements like NAFTA, can lead to the relocation of manufacturing operations, creating more jobs in countries with lower labour costs and positively impacting national economies.

4. Improved Living Standards:Certain countries, like China and Vietnam, have experienced increased income from globalisation, contributing to poverty reduction and an overall improvement in living standards.

5. Lower Manufacturing Costs:Globalisation decreases the cost of manufacturing, allowing companies to offer goods at lower prices to consumers.

6.Access to a Variety of Goods: Consumers benefit from globalisation by gaining access to a wider variety of goods, contributing to an improved standard of living.

Question 4

Introduction to IER

Discuss the most important negative effects of globalisation. Provide examples.

Answer 4

1. Job Loss in Developed Countries: Workers in developed nations may face job competition from lower-cost markets, leading to potential job loss and decreased job security.

2. Exploitative Working Conditions in Developing Countries: The rapid economic changes in developing nations may lead to deplorable working conditions, as seen in the example of the clothing industry in Bangladesh, where workers earn significantly less than their counterparts in developed countries.

3. Tragic Consequences: Incidents like the 2013 textile factory building collapse in Bangladesh, resulting in over 1,100 worker deaths, highlight the tragic consequences of poor working conditions associated with globalisation.

4. Child Labour Concerns: Globalisation may increase the negative impacts of child labour in poor countries, as employment opportunities for children may lure them away from schools, perpetuating a cycle of poverty.

5. Income Inequality:Globalisation may contribute to income disparity and inequality within societies. For example, while China has experienced remarkable economic growth, income inequality has also risen. Disparities between urban and rural areas, as well as between coastal and inland regions, contribute to income inequality challenges.

Question 5

Trade and Trade Theories

What are the major causes for the rapid development of international trade? Give examples.

Answer 5

1. Differences in Technology-Advantageous trade can occur between countries if the countries differ in their technological abilities to produce goods and services. Ex:China and Germany can benefit from trade based on their respective comparative advantages. China, with its vast manufacturing capabilities, can produce consumer goods efficiently and at scale. Germany, with its advanced technology and precision engineering, can produce high-tech goods. Through trade, both countries can access goods that they can produce more efficiently than the other, leading to overall economic gains.

2. Differences in Resource Endowments-Advantageous trade can occur between countries if the countries differ in their endowments of resources. Ex:Ethiopia benefits from trading its abundant coffee resources for high-quality machinery produced by Germany. Germany benefits by accessing a crucial resource it lacks for its industries. Through trade, both countries optimise their resource utilisation and enhance overall economic welfare.

3. Differences in Demand-Advantageous trade can occur between countries if demands or preferences differ between countries. Individuals in different countries may have different preferences or demands for various products. The Chinese are likely to demand more rice than Americans, even if facing the same price. Canadians may demand more beer, the Dutch more wooden shoes, and the Japanese more fish than Americans would, even if they all faced the same prices.

4. Existence of Economies of Scale in Production-The existence of economies of scale in production is sufficient to generate advantageous trade between two countries. Economies of scale refer to a production process in which production costs fall as the scale of production rises. For example, China has a comparative advantage in producing textiles due to its large labor force and low labor costs. This has led to China becoming a major exporter of textiles to countries around the world.

5. Existence of Government Policies-Government tax and subsidy programs can be sufficient to generate advantages in production of certain products. In these circumstances, advantageous trade may arise solely due to differences in government policies across countries.
Example : Renewable Energy Subsidies:
Germany:Substantial subsidies for solar panels and wind turbines; Aiming to lead in the renewable energy sector
United States:Variable policies on renewable energy subsidies; May import solar panels and wind turbines.
Outcome: Advantageous Trade: Germany: Exports renewable energy technologies. United States: Imports to meet domestic demand.

Question 6

Trade and Trade Theories

What challenges do countries face nowadays in their trade relations because of the COVID-19 pandemic and the Russia-Ukraine war? Provide examples.

Answer 6

Challenges Due to COVID-19 Pandemic:
Disruptions in Supply Chains: Lockdowns, restrictions, and disruptions caused by the pandemic have led to significant interruptions in global supply chains. This has affected the production and availability of goods and services.
Reduced Consumer Demand: Economic uncertainties, job losses, and changes in consumer behaviour during the pandemic have led to reduced demand for various products, impacting international trade.
Travel Restrictions: Restrictions on international travel have hampered the movement of people, affecting business travel, tourism, and the ability of companies to manage global operations effectively.
Logistical Challenges: Transportation and logistics have been adversely affected due to restrictions, leading to delays in the shipment of goods and increased transportation costs.
Tariff and Trade Policy Uncertainties: Governments may implement protectionist measures or change trade policies in response to the economic challenges posed by the pandemic, creating uncertainties for businesses engaged in international trade.

Challenges Due to Russia-Ukraine War:
Geopolitical Tensions and Sanctions: The conflict between Russia and Ukraine has led to geopolitical tensions, and several countries have imposed sanctions on Russia. These sanctions can impact international trade and economic relations.
Energy Supply Concerns: Russia is a significant exporter of natural gas and oil. The conflict has raised concerns about the stability of energy supplies, affecting countries dependent on Russian energy exports.
Disruption of Regional Trade: The war has led to disruptions in regional trade flows, particularly in Eastern Europe. Businesses may face challenges in accessing markets and maintaining stable trade relations in the affected regions.
Currency Volatility: Geopolitical tensions can lead to currency fluctuations, affecting the costs and prices of goods in international trade. Businesses may face challenges in managing currency risks.
Uncertainty for Investors: Geopolitical conflicts create uncertainty for investors, impacting investment decisions and potentially leading to a slowdown in economic activity.

Question 7

Trade and Trade Theories

What are the major disadvantages of international trade for different economic actors? Give examples.

Answer 7

Impediment in the Development of Home Industries: International trade has an adverse effect on the development of home industries. It poses a threat to the survival of infant industries at home. Due to foreign competition and unrestricted imports, the upcoming industries in the country may collapse.
Economic Dependence: The underdeveloped countries have to depend upon the developed ones for their economic development. Such reliance often leads to economic exploitation. For instance, most of the underdeveloped countries in Africa and Asia have been exploited by European countries(Congo was exploited by Belgium: King Leopold II’s rule led to brutal exploitation for rubber extraction, causing significant loss of life)
Political Dependence: International trade often encourages subjugation and slavery. It impairs economic independence which endangers political dependence. For example, the Britishers came to India as traders and ultimately ruled over India for a very long time.
Mis-utilisation of Natural Resources: Excessive exports may exhaust the natural resources of a country in a shorter span of time than it would have been otherwise. This will cause economic downfall of the country in the long run.
Deterioration of Environment: Higher levels of production can often negatively influence the quality of environment, e.g. due to pollution, soil and water contamination etc. This happens especially in low developed countries, where there are no clean technologies implemented.
Import of Harmful Goods: Import of spurious drugs, luxury articles, etc. adversely affects the economy and well-being of the people.
Storage of Goods: Sometimes the essential commodities required in a country and in short supply are also exported to earn foreign exchange. This results in shortage of these goods at home and causes inflation. For example, India has been exporting sugar to earn foreign trade exchange; hence the exalting prices of sugar in the country.
Danger to International Peace: International trade gives an opportunity to foreign agents to settle down in the country which ultimately endangers its internal peace.
World Wars / Trade Wars: International trade breeds rivalries amongst nations due to competition in the foreign markets. This may eventually lead to wars and disturb world peace.
Hardships in times of War: International trade promotes lopsided development of a country as only those goods which have comparative cost advantage are produced in a country. During wars or when good relations do not prevail between nations, many hardships may follow.

Question 8

Trade and Trade Theories

What are the major advantages of international trade for different economic actors? Give examples.

Answer 8

Optimal use of natural resources: International trade helps each country to make optimum use of its natural resources. Each country can concentrate on production of those goods for which its resources are best suited. Wastage of resources is avoided.
Availability of all types of goods: It enables a country to obtain goods which it cannot produce or which it is not producing due to higher costs, by importing from other countries at lower costs.
Specialisation: Foreign trade leads to specialisation and encourages production of different goods in different countries. Goods can be produced at a comparatively low cost due to advantages of division of labour.Example:(Middle Eastern countries:Oil production; Germany and Japan:Automibile industry etc.)
Advantages of large-scale production (economies of scale): Due to international trade, goods are produced not only for home consumption but for export to other countries also. Nations of the world can dispose of goods which they have in surplus in the international markets. This leads to production at large scale and the advantages of large scale production can be obtained by all the countries of the world.
Stability in prices: International trade irons out wild fluctuations in prices. It equalises the prices of goods throughout the world (ignoring cost of transportation, etc.)
Exchange of technical know-how and establishment of new industries: Underdeveloped countries can establish and develop new industries with the machinery, equipment and technical know-how imported from developed countries. This helps in the development of these countries and the economy of the world at large.Example: South Korea shared technical expertise with Vietnam, supporting industrialization. Impact: Facilitated the growth of manufacturing and technology sectors.
Increase in efficiency: Due to international competition, the producers in a country attempt to produce better quality goods and at the minimum possible cost. This increases the efficiency and benefits to the consumers all over the world.
Development of the means of transport and communication: International trade requires the best means of transport and communication. For the advantages of international trade, development in the means of transport and communication is also made possible.Example:Panama Canal: Facilitates maritime trade by providing a shortcut for ships traveling between the Atlantic and Pacific Oceans.
International cooperation and understanding: The people of different countries come in contact with each other. Commercial intercourse amongst nations of the world encourages exchange of ideas and culture. It creates co-operation, understanding, cordial relations amongst various nations.
Ability to face natural calamities: Natural calamities such as drought, floods, famine, earthquake etc., affect the production of a country adversely. Deficiency in the supply of goods at the time of such natural calamities can be met by imports from other countries. Example: Turkey 2023 earthquake etc.
Other advantages: International trade helps in many other ways such as benefits to consumers, international peace and better standard of living.

Question 9

Trade and Trade Theories

Explain the reasons for international trade based on classical theories of international trade. Provide pros and cons/strengths and weaknesses of the theories.

Answer 9

Adam Smith’s Theory of Absolute Advantage

Adam Smith’s 1776 book, “The Wealth of Nations,” introduced the notion of absolute advantage as a basis for international trade. Smith argued that countries should specialize in producing the goods they can produce more efficiently than other countries and export those goods in exchange for goods that other countries can produce more efficiently. This specialization allows each country to enjoy a higher standard of living than if it tried to produce everything itself.

David Ricardo’s Theory of Comparative Advantage

David Ricardo’s 1817 book, “On the Principles of Political Economy and Taxation,” refined the concept of absolute advantage by introducing the idea of comparative advantage. Ricardo recognized that even if a country is absolutely more efficient at producing all goods, it can still gain from trade by specializing in the goods in which it has a comparative advantage, meaning it can produce those goods at a lower opportunity cost compared to other countries.

Pros and Cons of Classical Theories of International Trade

Strengths:

Focus on efficiency and specialization: Classical theories highlight the economic benefits of trade through specialization and the pursuit of comparative advantage.

Universality: The concepts of absolute and comparative advantage apply to all countries, regardless of their level of development or resources.

Simplicity: Classical theories are relatively easy to understand and explain, making them accessible to policymakers and the general public.

Weaknesses:

Static perspective: Classical theories provide a static view of trade, focusing on the allocation of resources at a given point in time. They do not consider the dynamic effects of trade on innovation, technology, and growth.

Neglect of non-economic factors: Classical theories primarily focus on economic gains from trade, overlooking non-economic factors such as culture, politics, and environmental considerations.

Limited applicability to modern trade: Classical theories have been criticized for their assumptions of perfect competition, free mobility of labor, and constant returns to scale, which may not fully reflect the realities of modern international trade.

Question 10

Trade and Trade Theories

Explain the reasons for international trade based on the factor endowment theory of international trade (H-O). Provide pros and cons/strengths and weaknesses of the theory.

Answer 10

Reasons for International Trade (H-O Theory):
Factor Abundance: Countries have different factor endowments, such as labor, capital, and natural resources.
Comparative Cost Differences: Countries will specialize in and export goods that use their abundant factors, leading to lower production costs.
Trade Imbalance: Countries will import goods that use factors in which they are relatively scarce, taking advantage of comparative cost differences.

Pros/Strengths of H-O Theory:
Explanatory Power: Provides a logical explanation for why countries trade based on differences in factor endowments.
Predictive Value: Can predict patterns of trade based on relative factor abundance.
Empirical Support: Some empirical evidence supports the theory, particularly in explaining trade patterns between developed and developing countries.

Cons/Weaknesses of H-O Theory:
Homogeneous Factors Assumption: Assumes factors of production are homogeneous within each category (e.g., all labor is the same), which oversimplifies real-world complexities.
Neglects Technological Differences: Ignores technological differences between countries, which can significantly impact production efficiency.
Static Nature: H-O theory is static and doesn’t account for changes over time, such as technological advancements or shifts in factor endowments.
Ignores Non-factor Determinants: Disregards non-factor determinants of trade, such as government policies, transportation costs, and economies of scale.
Doesn’t Explain Intra-industry Trade: Struggles to explain the phenomenon of intra-industry trade, where countries exchange similar types of goods within the same industry.

Question 11

Trade and Trade Theories

Explain the reasons for international trade based on the country similarity theory of international trade. Provide pros and cons/strengths and weaknesses of the theory.

Answer 11

Reasons for International Trade (Country Similarity Theory):
Consumer Preferences: Countries with similar income levels and preferences are more likely to demand similar types of goods.
Product Quality and Standards: Countries with similar income levels often have similar standards for product quality and safety, facilitating trade between them.
Geographical Proximity: Countries with similar income levels and preferences are more likely to be geographically closer, reducing transportation costs and making trade more feasible.

Pros/Strengths of Country Similarity Theory:
Consumer-Centric Explanation:Focuses on consumer preferences, providing a consumer-centric explanation for trade patterns.
Intuitive Logic: The idea that countries with similar income levels and tastes will trade more is intuitively logical and aligns with observed trade patterns in certain industries.
Reflects Real-world Observations: The theory aligns with the observation that countries with similar income levels often engage in significant trade, particularly in industries catering to consumer preferences.

Cons/Weaknesses of Country Similarity Theory:
Neglects Comparative Advantage: Doesn’t explicitly consider comparative advantage or factor endowments as determinants of trade, overlooking other important factors.
Static Nature: Like some other classical theories, it tends to be static and doesn’t account for changes over time, such as evolving consumer preferences or shifts in comparative advantage.
Not Universally Applicable: The theory may not apply universally to all industries or types of goods, as factors other than consumer preferences also influence trade.

Question 12

Trade and Trade Theories

Explain the reasons for international trade based on the new trade theory of international trade. Provide pros and cons/strengths and weaknesses of the theory.

Answer 12

Reasons for International Trade (New Trade Theory):
Economies of Scale: Countries engage in international trade to exploit economies of scale by producing larger quantities for both domestic and export markets.
Product Differentiation: International trade allows countries to access a wider variety of differentiated goods and services that may not be available domestically.
Imperfect Competition: Imperfect competition provides opportunities for firms to expand their market share by engaging in international trade, where they may face less competition.

Pros/Strengths of New Trade Theory:
Expands Scope of Traditional Theories: NTT expands the scope of traditional theories by considering factors such as economies of scale and imperfect competition, which were not adequately addressed in classical theories.
Explains Intra-industry Trade: Unlike classical theories, NTT can explain the phenomenon of intra-industry trade, where countries trade similar types of goods within the same industry.
Product Variety and Consumer Choice: Recognizes the importance of product variety and how international trade contributes to greater consumer choice through the availability of differentiated goods.

Cons/Weaknesses of New Trade Theory:
Data Requirements: NTT often requires detailed data on firm-level behaviour and product differentiation, making it challenging to apply in certain contexts where such data may be limited.
Less Prescriptive: While NTT provides insights into why trade occurs, it is less prescriptive about policy recommendations compared to classical theories.
Doesn’t Explain All Trade Patterns: NTT may not explain all trade patterns, and other factors, such as comparative advantage and factor endowments, still play a role in certain industries.

First mover andvantage and economies of scale
The reason for trade: economis of scale, specialisation, greater variety for lower prices
+ nations may benefit from trade even withour absolute advantage
+

Question 13

Trade and Trade Theories

Explain the reasons for international trade based on the international product life-cycle theory of international trade. Provide pros and cons/strengths and weaknesses of the theory.

Answer 13

Reasons for International Trade (IPLC Theory):
Introduction Stage: New products are introduced in the home country where they are developed. Initially, there is minimal international trade as the product is unique to the home country.
Growth Stage: As the product gains acceptance, demand increases, and production expands. International trade begins to grow as the home country starts exporting the product.
Maturity Stage: The product reaches maturity, and standardised production processes are established. Production becomes more cost-effective, leading to increased international trade, with exports from the home country and the establishment of foreign production facilities.
Decline Stage: The product becomes mature and faces declining demand in the home country. The home country may reduce production, but international trade may continue if the product finds new markets abroad.

Pros/Strengths of IPLC Theory:
Predictive Value: The IPLC theory helps explain the evolving patterns of international trade, especially for products with distinct life cycles.
Innovation Focus: It highlights the role of innovation and technological advancements in driving international trade.
Strategic Decision-Making: Businesses can use the IPLC theory to make strategic decisions regarding when and where to invest in production facilities or enter new markets.

Cons/Weaknesses of IPLC Theory:
Assumption of Home Country Innovation: The theory assumes that innovation originates only in the home country, which may not be accurate in today’s globalised and collaborative research environment.
Neglect of Non-Traditional Products: The IPLC theory is more applicable to traditional manufactured goods and may not effectively explain the trade patterns of services or rapidly evolving industries like technology.
Changing Dynamics: In a fast-paced global economy, the life cycle of products may be shorter, and the theory may not capture the dynamic shifts in international trade patterns.

+: was good for explanation of 1960s-1970s American economy.
-: doesn’t explain trade now. Products are produced in various countries and are introduced in multiple countries simultaniosly

Question 14

Trade and Trade Theories

Explain the reasons for international trade based on the theory of competitive advantage of nations. Provide pros and cons/strengths and weaknesses of the theory.

Answer 14

Reasons for International Trade (Competitive Advantage of Nations):
Reasons for International Trade (Competitive Advantage of Nations):
Factor Endowments:: Nations trade to leverage their unique factor endowments, exporting goods and services for which they have a comparative advantage based on their resource endowments.
Demand Conditions: Access to a demanding domestic market encourages firms to improve their products, making them competitive in international markets.
Related and Supporting Industries: Industries benefit from the presence of a strong supporting infrastructure, and nations can specialise in industries where a supporting network exists.
Firm Strategy, Structure, and Rivalry:: Nations engage in international trade to expose their firms to global competition, encouraging them to improve strategies, structures, and efficiency.

Pros/Strengths of Competitive Advantage of Nations:
Holistic Approach: The model takes a holistic approach, considering multiple factors that contribute to a nation’s competitive advantage, making it comprehensive.
Dynamic Perspective: Recognizes the dynamic nature of competitiveness and emphasises the role of continuous improvement, innovation, and adaptability.
Policy Implications: Provides policymakers with insights into the importance of creating a conducive environment for industries to thrive, focusing on factors beyond labour and resources.

Cons/Weaknesses of Competitive Advantage of Nations:
Complexity: The model can be complex and may require detailed data and analysis, making it challenging to apply universally.
Static Assumptions: While it recognizes the dynamic nature of competitiveness, the model may still be criticised for not fully capturing rapid changes in global markets and technology.
Empirical Challenges: Empirical testing and validation of the model can be challenging due to the multitude of factors involved and the need for comprehensive data.

Question 15

Trade and Trade Theories

Which theory explains international trade in the clearest and most complex way? Explain your opinion.

Question 16

Trade policy

Give and explain arguments for trade protectionism. Provide some empirical examples.

Answer 16

Protect sunrise industries-Barriers to trade can be used to protect sunrise industries, also known as infant industries, such as those involving new technologies. This gives new firms the chance to develop, grow, and become globally competitive.
Protection of domestic industries may allow them to develop a comparative advantage. For example, domestic firms may expand when protected from competition and benefit from economies of scale. As firms grow, they may invest in real and human capital and develop new capabilities and skills. Once these skills and capabilities are developed there is less need for trade protection, and barriers may be eventually removed.
Protect sunset industries
At the other end of the scale are sunset industries, also known as declining industries, which might need some support to enable them to decline slowly, and avoid some of the negative effects of such decline. Example: For the UK, each generation throws up its own declining industries, such as ship building in the 1950s, car production in the 1970s, and steel production in the 1990s.
Protect strategic industries
Barriers may also be erected to protect strategic industries, such as energy, water, steel, armaments, and food. Example:The implicit aim of the EUs Common Agricultural Policy is to create food security for Europe by protecting its agricultural sector.
Protect non-renewable resources
Non-renewable resources, including oil, are regarded as a special case where the normal rules of free trade are often abandoned.Example:For countries aiming to rely on oil exports lasting into the long term, such as the oil-rich Middle Eastern economies, limiting output in the short term through production quotas is one method employed to conserve resources.
Deter unfair competition
Barriers may be erected to deter unfair competition, such as dumping by foreign firms at prices below cost.
Save jobs
Protecting an industry may, in the short run, protect jobs, though in the long run it is unlikely that jobs can be protected indefinitely.Example:The U.S. implemented tariffs on steel and aluminium in 2018 to protect domestic producers and preserve jobs in those industries.
Help the environment
Some countries may protect themselves from trade to help limit damage to their environment, such as that arising from CO2 emissions caused by increased production and transportation.Example: The European Union imposes restrictions on imports that don’t comply with its environmental standards.
Limit over-specialisation
Many economists point to the dangers of over-specialisation, which might occur as a result of taking the theory of comparative advantage to its extreme. Retaining some self-sufficiency is seen as a sensible economic strategy given the risks of global downturns, and an over- reliance on international trade.

In addition to the economic arguments for protection, some protection may be for political reasons.
more examples
Some real-world examples of protectionism are the EU Common Agricultural Policy (CAP) for protecting domestic farmers in the EU, the Banana War which lasted for 20 years where the EU imposed tariffs on the imports of Bananas from Latin America, and the USA’s use of tariffs on the imports of Tyres from China.

Question 17

Trade policy

Give and explain arguments against trade protectionism. Provide some empirical examples.

Answer 17

Misallocation of resources
It leads to global misallocation of resources, as it supports inefficient producers and in certain cases (tariffs and quotas) consumer surplus is scarified.Example:The U.S. maintains tariffs and quotas on sugar imports to protect domestic sugar producers.This protectionist policy can lead to overproduction of sugar domestically, even in regions where it may not be the most efficient use of resources.
The danger of retaliation and “trade wars”
Continuous protectionist measures by a country might lead to retaliation of other countries and they might also put protectionist measures on the imports.Example: the Banana War which lasted for 20 years where the EU imposed tariffs on the imports of Bananas from Latin America, and the USA’s use of tariffs on the imports of Tyres from China.
The potential for corruption
Putting administrative controls might also lead to corruption.
Increased costs of production due to lack of competition:
Constant protection to the domestic producers and lack of competition propagates inefficiency and lack of initiative to control cost.
Higher prices for domestic consumers
As we can see due to tariffs and quotas domestic consumers end up paying more.
Increased costs of imported factors of production
Imported goods become expensive which might also lead to imported inflation.
Reduced export competitiveness
Continuous protection to domestic industries (such as subsidies) might make them inefficient in terms of cost and technology. In the long run they might become uncompetitive in the exports market.

Question 18

Trade policy

What are the most common instruments of trade protection in the XXI century? Give examples based on trade policies of different countries.

Answer 18

Tariffs: Tariffs are taxes levied on imported goods. They raise the price of imported goods, making them less competitive with domestically produced goods. Tariffs are a relatively straightforward way to protect domestic industries, but they can also raise consumer prices and lead to retaliatory tariffs from other countries.
Example: The United States has imposed tariffs on a variety of goods from China, including steel, aluminum, and solar panels.

Quotas: Quotas limit the quantity of goods that can be imported. They are similar to tariffs in that they make imported goods more expensive, but they can be even more effective at protecting domestic industries because they prevent foreign producers from flooding the market with their goods. Quotas can also be more difficult to enforce than tariffs.
Example: The European Union has imposed quotas on the import of cars from Japan.

Subsidies: Subsidies are government payments to domestic producers to help them compete with foreign producers. Subsidies can be given directly to producers, or they can be provided in the form of tax breaks or other incentives. Subsidies can distort competition and make it difficult for foreign producers to compete.
Example: The United States government provides subsidies to farmers.

Anti-dumping duties: Anti-dumping duties are taxes imposed on goods that are imported at less than their fair market value. They are designed to protect domestic industries from unfair competition from foreign producers who are dumping their goods on the market.
Example: The United States has imposed anti-dumping duties on imported washing machines from China.

Voluntary export restraints (VERs): VERs are agreements between a foreign producer and the government of an importing country to limit the quantity of goods that can be exported. VERs are less common than other forms of trade protection, but they can be effective in protecting domestic industries.
Example: Japan imposed VERs on the export of automobiles to the United States in the 1980s.

Question 19

Trade policy

What prevails today – free trade or protectionism? Explain your opinion, based on 4 convincing arguments.

Answer 19

In today’s globalized economy, both free trade and protectionism continue to play significant roles in shaping international trade policies. While there is a general trend towards free trade, protectionism remains a prominent force, particularly in certain industries and countries.

Free Trade’s Economic Benefits: Free trade advocates emphasize its positive impact on economic growth, consumer welfare, and global efficiency. By removing trade barriers, countries can specialize in producing goods and services where they have a comparative advantage, leading to lower prices, improved quality, and wider consumer choices. This increased efficiency translates into overall economic gains.

Globalization and International Cooperation: Free trade is a cornerstone of globalization, fostering economic interdependence and cooperation among nations. Trade agreements and institutions like the World Trade Organization (WTO) facilitate the exchange of goods, services, and capital, promoting cross-border collaboration and knowledge sharing. This interconnectedness can lead to technological advancements, innovation, and overall economic progress.

Competition and Innovation: Free trade encourages competition between domestic and foreign producers, driving innovation and efficiency. In a competitive market, businesses must constantly strive to improve their products, processes, and services to stay ahead of the curve. This competitive pressure stimulates innovation, leading to higher-quality goods at lower prices.

Consumer Welfare and Choice: Free trade expands consumer choice by providing access to a wider range of products and services from different countries. Consumers can benefit from lower prices, better quality, and diverse options, leading to increased satisfaction and overall consumer welfare.

Question 20

Trade policy

Explain the reasons for and consequences of the economic war between the US and China.

Answer 20

Causes of the Trade War:

Intellectual Property Theft and Technology Transfer: China’s unfair trade practices, including intellectual property theft and force technology transfer threaten high-wage jobs and high-value-added manufacturing in the U.S.
China’s Economic Model and State-Owned Enterprises (SOEs): China’s economic model, characterised by state control and support for its globally dominant SOEs challenges fair competition in the global market, affecting international trade norms.
Protectionist Policies and Violation of WTO Commitments: China’s protectionist policies and unwillingness to give market access for its own companies. It leads to uneven playing fields, hindering global trade norms and creating economic tensions.
Exchange Rate Policy and Undervalued Renminbi:China’s devalued exchange rate imposing an import tariff and export subsidies. It Influenced global trade flows, posing challenges for trade partners and competitors.

Consequences of the Trade War:
Tariffs and Consumer Impact: Tariffs raised prices and negatively affected American consumers.
Ineffectiveness of Phase-One Trade Deal: The Phase-one trade deal failed to reduce China’s tariffs and non-tariff barriers. Deal was unable to address key issues and potential harm to other countries.
Reshaping Global Trade Dynamics: The trade war is reshaping global trade dynamics, with companies relocating and supply chains adjusting. The trade war’s consequences extend beyond bilateral relations, impacting the structure of global trade.

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An economic conflict between China and the United States has been ongoing since January 2018, when U.S. President Donald Trump began setting tariffs and other trade barriers on China with the goal of forcing it to make changes to what the U.S. says are longstanding unfair trade practices and intellectual property theft. China retaliated with imposing more tariffs on the US. When Biden’s administration came into power, they started cooperating with Taiwan, South Korea and Japan, which also had an aim of decreasing China’s power. Biden’s strategy is to cut the exports of microchips in China. Trade war greatly affected businesses in the US as China’s main export consists of intermediate goods and the tariffs on them are paid by importers. Consumers are also greatly affected as with lesser international competition home companies can increase prices and not develop the technology.

Question 21

Bretton Woods Institutions

Explain the reasons for creating Bretton Woods Institutions and “an international economic order” at the end of World War II.

Answer 21

Creating new rules for the post-World War II international monetary system
IMF: the maintenance of a system of fixed exchange rates centred on the U.S. dollar and gold, short-term financial assistance to countries experiencing temporary deficits in their balance of payments
World Bank: responsible for providing financial assistance for the reconstruction of war-ravaged nations and the economic development of less developed countries

Question 22

Bretton Woods Institutions

What were the basic principles of the New Economic Order created after World War II?

Answer 22

Open trade and investment: The General Agreement on Tariffs and Trade (GATT), established in 1947, aimed to reduce trade barriers and promote free trade among its member countries. This principle was based on the belief that open markets would lead to greater economic growth and prosperity for all.

Fixed exchange rates: The Bretton Woods system, established in 1944, fixed the exchange rates of major currencies to the US dollar, which was in turn pegged to gold. This system provided stability and predictability for international trade and investment.

Multilateralism: The international economic order was based on the principle of multilateralism, which means that decisions were made by consensus among all member countries. This approach was seen as a way to prevent any one country from dominating the system and to ensure that the interests of all countries were taken into account.

Development assistance: The international community recognized that developing countries needed assistance to boost their economies and achieve sustainable development. The World Bank and the International Monetary Fund (IMF) were created to provide loans and technical assistance to developing countries.

Question 23

Bretton Woods Institutions

Which international trade organisations are the most important, according to you? Explain your opinion by giving 4 convincing arguments.

Answer 23

World Trade Organization (WTO)
Promotes global trade and economic growth: The WTO’s rules and agreements help to reduce trade barriers, such as tariffs and quotas, which makes it easier and cheaper for businesses to trade across borders. This can lead to increased economic growth and job creation.
Provides a forum for resolving trade disputes: The WTO’s dispute settlement system allows countries to resolve trade disputes peacefully and fairly. This helps to prevent trade wars and promotes a stable and predictable trading environment.
Supports developing countries: The WTO provides technical assistance and other support to developing countries to help them improve their trade capacity. This can help developing countries to benefit from trade and reduce poverty.
Encourages environmental and social sustainability: The WTO’s rules and agreements can be used to promote environmental protection and labour standards. This can help to ensure that trade is not conducted at the expense of the environment or workers’ rights.

United Nations Conference on Trade and Development (UNCTAD)
UNCTAD helps developing countries participate more effectively in the global economy: UNCTAD provides technical assistance and capacity building to developing countries to help them improve their trade policies, infrastructure, and competitiveness. This assistance helps developing countries overcome the challenges they face in participating in the global economy and reap the benefits of trade.
UNCTAD promotes a more equitable and inclusive global trading system: UNCTAD advocates for policies that promote the interests of developing countries in the global trading system. This includes advocating for fairer trade rules, support for small and medium-sized enterprises, and access to new technologies. UNCTAD’s work helps to ensure that the benefits of trade are shared more equitably among all countries.
UNCTAD produces valuable data and analysis on trade and development issues: UNCTAD produces a wide range of data and analysis on trade and development issues. This data is essential for governments, businesses, and civil society to make informed decisions about trade policy and development strategies. UNCTAD’s data is also used to monitor progress on the Millennium Development Goals and other international development targets.
UNCTAD provides a forum for developing countries to voice their concerns and share their experiences: UNCTAD provides a platform for developing countries to voice their concerns about the global trading system and share their experiences with trade and development challenges. This forum helps to ensure that the voices of developing countries are heard in international negotiations and that their perspectives are taken into account when making decisions about trade policy.

Question 24

Bretton Woods Institutions

Based on 4 examples, explain positive effects of activities of the IMF.

Answer 24

Support for economic recovery: The IMF has played a key role in supporting economic recovery in countries that have experienced financial crises. For example, the IMF provided $157 billion in loans to Greece between 2010 and 2018 to help the country stabilise its economy and exit its debt crisis.

Promoting financial stability: The IMF helps to promote financial stability by providing surveillance of member countries’ financial systems and by providing advice on how to improve their financial stability. For example, the IMF has helped countries to implement reforms to strengthen their banking systems and their financial markets.

Reducing poverty: The IMF’s work on trade, debt relief, and other issues has helped to reduce poverty in developing countries. For example, the IMF has helped to increase access to credit for small businesses in developing countries, which has helped to create jobs and reduce poverty.

Improving economic governance: The IMF provides technical assistance to member countries to help them improve their economic governance. This includes advice on how to strengthen their public financial management, improve their tax systems, and develop their legal and regulatory frameworks.

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Promoting trade: The IMF helps to promote trade by providing technical assistance to member countries on how to reduce trade barriers and improve their trade policies.
Enhancing financial inclusion: The IMF helps to enhance financial inclusion by providing technical assistance to member countries on how to expand access to financial services for people who have been excluded from the formal financial system.
Supporting environmental sustainability: The IMF helps to support environmental sustainability by providing technical assistance to member countries on how to develop climate-resilient economies and improve their environmental policies.

Question 25

Bretton Woods Institutions

Based on 4 examples, explain positive effects of activities of WTO.

Answer 25

1. Increased Trade and Economic Growth: The WTO’s rules and agreements have significantly reduced tariffs and other trade barriers, leading to an increase in global trade. As countries trade more with each other, they enjoy the benefits of specialization, economies of scale, and increased competition, all of which contribute to economic growth. According to a study by the World Bank, the WTO has been responsible for an average annual increase in global trade of around 3% since its creation in 1995.

2. Increased Access to Affordable Goods and Services: Reduced trade barriers have made it easier for consumers around the world to access a wider variety of goods and services at more competitive prices. This has benefited consumers in developed countries by providing them with access to a broader range of products and lower prices. It has also benefited consumers in developing countries by exposing them to new products and technologies that can enhance their lives.

3. Enhanced Innovation and Productivity: Trade liberalization encourages competition, which drives innovation and productivity improvements. As companies compete to produce and sell goods and services in global markets, they are forced to find new and better ways of doing things. This leads to the development of new technologies, processes, and products, which benefit consumers in terms of quality, affordability, and variety.

4. Support for Developing Countries: The WTO provides technical assistance and training to developing countries to help them integrate into the global trading system and reap the benefits of trade. This assistance helps developing countries build trade capacity, improve their legal and regulatory frameworks, and develop export-oriented industries. As a result, developing countries can increase their exports, attract foreign investment, and create jobs, which contributes to their economic development and poverty alleviation.

Question 26

Bretton Woods Institutions

Based on 4 examples, explain positive effects of activities of the World Bank.

Answer 26

1. Reducing poverty
Since 1990, the proportion of people living below the international poverty line has fallen from 37% to 9%. The World Bank’s lending has helped to finance infrastructure projects, education and health programs, and social safety nets, all of which have contributed to this decline in poverty.

2. Improving education
It has helped to finance the construction of schools, the training of teachers, and the development of curriculum materials. As a result of these investments, enrolment in primary schools has increased significantly in many developing countries. **For example, in sub-Saharan Africa, primary school enrolment has increased from 66% in 1990 to 88% today. The World Bank has provided $2.5 billion in loans and grants to Bangladesh for education since 1990. **

3. Expanding access to clean water and sanitation
The World Bank has played a crucial role in expanding access to clean water and sanitation in developing countries. It has helped to finance the construction of water and sanitation infrastructure, as well as the development of programs to educate people about the importance of hygiene. As a result of these investments, the proportion of people without access to improved drinking water has fallen from 40% in 1990 to 14% today.

4. Promoting climate resilience
The World Bank is increasingly focused on helping developing countries adapt to the impacts of climate change. It has provided funding for projects to build climate-resilient infrastructure, support climate-smart agriculture, and protect natural resources. As a result of these investments, developing countries are better prepared to withstand the impacts of climate change, such as extreme weather events and rising sea levels.

Question 27

Bretton Woods Institutions

Based on 4 examples, explain criticism of activities of the IMF.

Answer 27

1. Structural Adjustment Programs (SAPs)
SAPs are a set of economic reforms that countries must adopt in exchange for IMF loans. These reforms often austerity measures, such as cutting government spending, raising taxes, and devaluing currencies. Critics argue that SAPs disproportionately burden the poor and vulnerable, exacerbate social inequalities, and can undermine long-term economic growth.

2. Neoliberal Bias
The IMF has been accused of promoting a neoliberal economic agenda, which emphasises free markets, deregulation, and privatisation. Critics argue that this approach is not suitable for all countries, particularly developing nations with weak institutions and limited capacity. They contend that the IMF’s focus on fiscal discipline and market liberalisation often comes at the expense of social welfare programs and sustainable development.

3. Democratic Deficit
The IMF’s decision-making process has been criticised for being undemocratic. Voting power in the IMF is allocated based on a country’s economic size, giving developed nations with large economies disproportionately more influence over IMF policies. This lack of representation for developing countries is seen as undermining the legitimacy of the IMF and its ability to address the unique challenges faced by poorer nations.

4. Inconsistent and Ineffective Policies
The IMF has been accused of inconsistent and ineffective policy implementation. Critics point to instances where IMF-imposed reforms have led to economic crises or failed to achieve their intended goals. They argue that the IMF’s one-size-fits-all approach fails to account for the diversity of economic conditions and political realities across its member countries.

Question 28

Bretton Woods Institutions

Based on 4 examples, explain criticism of activities of WTO.

Answer 28

Advantaging Developed Countries over Developing Countries: Critics argue that the WTO’s rules and agreements are heavily skewed in favour of developed countries, giving them a competitive edge over developing nations. This can lead to increased poverty and inequality in developing countries. For instance, the WTO’s intellectual property rules protect the interests of multinational corporations, often at the expense of innovation and access to affordable medications in developing countries.
Undermining National Sovereignty: Critics contend that the WTO’s dispute settlement system undermines national sovereignty by allowing foreign corporations to challenge domestic laws and regulations. This can limit governments’ ability to regulate in the public interest, such as protecting public health, the environment, or labour rights. For example, the WTO has ruled against countries for imposing standards for food safety, environmental protection, or labour practices, citing them as trade barriers.
Regulating Trade but Ignoring Other Important Issues: Critics point out that the WTO focuses primarily on regulating trade, while neglecting other important issues that can affect global economic well-being, such as climate change, labour standards, and sustainable development. For instance, the WTO’s agreements do not explicitly address climate change mitigation or adaptation measures, which can have significant economic consequences.
Inefficient Dispute Settlement System: Critics argue that the WTO’s dispute settlement system is inefficient and can take years to resolve disputes, hindering trade and economic growth. The system is also criticised for being biassed towards developed countries, as they have more resources to mount legal challenges. For example, the United States’ blocking of appointments to the WTO’s appellate body has paralyzed the dispute settlement system, leaving countries with no impartial forum to resolve trade disputes.

Question 29

Bretton Woods Institutions

Based on 4 examples, explain criticism of activities of the World Bank.

Answer 29

1. Structural adjustment programs (SAPs)
Structural adjustment programs (SAPs) are conditions imposed by the World Bank and International Monetary Fund (IMF) on countries that receive loans in exchange for implementing economic reforms. Critics argue that SAPs have led to job losses, increased poverty, and environmental damage in developing countries.
Example: The World Bank’s support of SAPs in Ghana in the 1980s is often cited as an example of the negative impacts of these programs. SAPs led to the privatisation of state-owned enterprises, which resulted in job losses and increased poverty.

2. Social impacts of projects
The World Bank has also been criticised for the social impacts of its projects, such as displacement of communities, environmental damage, and gender inequality. Critics argue that the World Bank does not adequately consider the social impacts of its projects and that it does not adequately consult with affected communities.
Example: The World Bank’s Narmada Dam project in India is often cited as an example of the negative social impacts of its projects. **The dam displaced thousands of people and caused environmental damage.

3. Lack of transparency and accountability
Critics argue that the Bank’s decision-making process is cloudy and that it does not adequately explain how it allocates its resources.
Example: **The World Bank’s Independent Evaluation Group (IEG) has found that the Bank has a culture of secrecy and that it does not adequately disclose information about its projects.

4. Neocolonialism
Some critics argue that the World Bank is a tool of neocolonialism, as it imposes its policies on developing countries and maintains control over their economies. Critics argue that the Bank’s policies benefit wealthy countries at the expense of developing countries.

Question 30

Bretton Woods Institutions

Explain the goals and the role of the IMF.

Answer 30

The IMF, established in 1945, is a global financial institution that aims to promote global monetary stability, secure financial stability, facilitate international trade, promote sustainable economic growth, and reduce poverty. With 190 member countries, the IMF plays a vital role in maintaining global economic stability.

The IMF’s key goals include:
Promoting Global Monetary Stability: Ensuring the stability of the international monetary system, which encompasses exchange rates, payment systems, and financial institutions.
Encouraging International Trade: Supporting free and open trade policies, promoting trade facilitation measures, and providing technical assistance to developing countries.
Promoting Sustainable Economic Growth: Helping member countries implement economic policies that foster growth, job creation, and poverty reduction.
Reducing Poverty: Integrating poverty reduction objectives into its work, providing support to countries designing and implementing poverty reduction strategies.

The IMF’s core functions include:
Monitoring and Analysis: Conducting regular economic assessments of member countries, identifying potential risks, and providing policy recommendations.
Lending and Financial Assistance: Providing loans to member countries facing balance of payments difficulties, supporting economic stability.
Technical Assistance and Capacity Building: Offering programs to strengthen economic institutions, improve policy making frameworks, and enhance economic management.
Research and Policy Dialogue: Conducting research and analysis on economic issues, providing policy insights and recommendations, and fostering cooperation among policymakers.

Question 31

Bretton Woods Institutions

Explain the goals and the role of the World Bank.

Answer 31

The World Bank Group operates through five distinct institutions, each with its own specialised mandate:
The International Bank for Reconstruction and Development (IBRD) concentrates on providing loans to middle-income and creditworthy developing countries, often for large-scale infrastructure projects.
The International Development Association (IDA) focuses on supporting the poorest developing countries, offering concessional loans and grants with more flexible repayment terms.
The International Finance Corporation (IFC) focuses on private sector development, providing loans, equity, and advisory services to businesses in developing countries.
The Multilateral Investment Guarantee Agency (MIGA) provides political risk insurance and guarantees to foreign investors operating in developing countries.
The International Centre for Settlement of Investment Disputes (ICSID) provides an impartial forum for resolving disputes between investors and host governments.

The World Bank Group’s work is guided by two overarching goals:
End extreme poverty: The Bank seeks to eradicate extreme poverty, defined as living on less than $1.90 per day, by 2030. This ambitious goal is centred on improving the lives of the world’s poorest people, particularly women and children.
Boost shared prosperity: Beyond eradicating extreme poverty, the World Bank aims to foster shared prosperity, ensuring that economic growth benefits everyone and reduces inequality. This goal focuses on inclusive growth, expanding opportunities for the poor and vulnerable, and promoting equitable access to services and resources.

In pursuit of these goals, the World Bank Group employs a range of strategies, including:
Finance: Providing loans, grants, and technical assistance to developing countries for projects in infrastructure, education, health, agriculture, and climate change adaptation.
Knowledge: Producing and sharing knowledge through research, analysis, and publications to inform policy decisions and improve development outcomes.
Policy dialogue: Engaging with governments and stakeholders to promote sound policies and reforms that foster sustainable and inclusive growth.
Capacity building: Strengthening the capacity of developing country institutions to manage resources effectively, implement policies, and deliver essential services.

Question 32

Bretton Woods Institutions

Explain the goals and the role of GATT/WTO.

Answer 32

The General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), are international organisations that oversee the global trading system. They play a crucial role in promoting free and fair trade, fostering economic growth, and reducing poverty worldwide.

Goals of GATT/WTO
Promote free trade: GATT/WTO aim to reduce or eliminate trade barriers such as tariffs, quotas, and subsidies, which hinder the flow of goods and services across borders.
Enhance predictability and stability: GATT/WTO agreements establish clear rules and regulations for international trade, providing a predictable and stable environment for businesses to operate.
Foster economic growth: Free and open trade is believed to stimulate economic growth by increasing competition, encouraging innovation, and expanding market opportunities.
Reduce poverty: By boosting economic growth, GATT/WTO aims to alleviate poverty and improve living standards in developing countries.
Promote sustainable development: GATT/WTO agreements address environmental and labour standards, ensuring that trade activities are conducted in a sustainable and responsible manner.

Role of GATT/WTO
Negotiating trade agreements: The WTO’s main function is to negotiate trade agreements among its member countries. These agreements cover a wide range of trade issues, including tariffs, intellectual property, services, and investment.
Dispute settlement: GATT/WTO provides a dispute settlement mechanism to resolve trade disputes between member countries. This mechanism ensures that countries adhere to the agreed-upon trade rules and helps maintain a fair and rules-based trading system.
Administering trade agreements: GATT/WTO oversees the implementation and enforcement of the WTO agreements, ensuring that member countries comply with their commitments.
Technical assistance and capacity building: GATT/WTO provides technical assistance and capacity building programs to help developing countries participate effectively in the global trading system.
Transparency and monitoring: GATT/WTO maintains transparency by publishing trade data and reports, and it monitors the global trade environment to identify potential challenges and opportunities.

Question 33

Economic integration

List and describe major stages of regional economic integration. Give examples of regional integration groups representing each stage.

Answer 33

Preferential Trading Area (PTA): PTAs are the most basic form of economic integration, where participating countries agree to lower tariffs or other trade barriers on specific goods or services. This is done to increase trade between members and promote economic growth.
Example: Asia-Pacific Economic Cooperation (APEC)

Free Trade Area (FTA): FTAs go further than PTAs by removing all tariffs and other trade barriers between member countries. This creates a single market for goods and services, where products can move freely without restrictions.
Example: North American Free Trade Agreement (NAFTA)

Customs Union: Customs unions go beyond FTAs by establishing a common external tariff (CET) on goods imported from non-member countries. This means that all member countries have the same trade policy towards the rest of the world.
Example: Central American Common Market (CACM)

Common Market: Common markets are similar to customs unions, but they also allow for the free movement of factors of production, such as labor and capital. This means that workers and businesses can move freely between member countries to seek better opportunities.
Example: European Economic Area (EEA)

Economic Union: Economic unions go beyond common markets by harmonising economic policies between member countries. This includes policies on taxation, social welfare, and environmental protection.
Example: European Union (EU)
Or Economic and Monetary Union (EMU): EMUs are a subset of economic unions that also have a common currency. This means that member countries use the same currency, and their monetary policies are coordinated by a central bank.
Example: Eurozone

Political Union: A political union is the ultimate goal of regional economic integration. It involves the merging of political institutions and the creation of a supranational government that has authority over member countries. This would lead to a single political entity with a single constitution, a single parliament, and a single executive.
Example: Not yet achieved, but considered the ultimate goal of many regional integration initiatives

Question 34

Economic integration

Based on 4 examples, explain positive consequences of regional economic integration you consider the most important ones.

Answer 34

1. Increased trade and investment: Regional economic integration typically leads to a reduction in trade barriers, such as tariffs and quotas. This makes it easier and cheaper for businesses to trade with one another, which can lead to increased trade and investment within the region. For example, the North American Free Trade Agreement (NAFTA) has been credited with increasing trade between the United States, Canada, and Mexico by over 500% since it was implemented in 1994.
2. Improved economic efficiency: Regional economic integration can also lead to improved economic efficiency by allowing firms to specialise in the production of goods and services that they are best at producing. This can lead to lower production costs and higher quality products, which can benefit consumers. For example, the European Union (EU) has been credited with improving the competitiveness of European businesses by allowing them to operate in a larger and more integrated market.
3. Increased competition: Regional economic integration can also increase competition within the region by exposing firms to new competitors from other countries. This can lead to lower prices for consumers and greater innovation. For example, the Association of Southeast Asian Nations (ASEAN) has been credited with increasing competition in the region, which has led to lower prices and better quality products for consumers.
4. Enhanced political cooperation: Regional economic integration can also lead to enhanced political cooperation between countries in the region. This can help to resolve conflicts peacefully and promote stability in the region. For example, the African Union (AU) has been working to promote political cooperation and economic integration in Africa.

Question 35

Economic integration

Based on 4 examples, explain negative consequences of regional economic integration you consider the most important ones.

Answer 35

1. Diversion of trade: Regional economic integration can lead to trade diversion, which occurs when a country diverts its trade from non-member countries to member countries in order to take advantage of lower tariffs or other trade preferences. This can hurt non-member countries and make it more difficult for them to compete with member countries. For example, NAFTA has been criticised for diverting trade away from Latin America and towards the United States.

2. Erosion of national sovereignty: Regional economic integration can lead to a loss of national sovereignty, as member countries agree to adopt common rules and regulations that may conflict with their own domestic laws. This can be a concern for countries that are wary of losing their independence or control over their own economies. For example, the EU has been criticised for its strict rules on food safety and environmental protection, which some countries believe are too burdensome.

3. Impact on labour markets: Regional economic integration can have a significant impact on labour markets, as firms move production to countries with lower labour costs. This can lead to job losses in countries with higher labour costs, and it can also make it more difficult for workers to find new jobs. For example, the North American Free Trade Agreement has been blamed for job losses in the United States manufacturing sector.

4. Increased inequality: Regional economic integration can exacerbate existing income inequality within and between countries. This is because it can favour large multinational corporations over small businesses, and it can also lead to the concentration of wealth in the hands of a few wealthy individuals. For example, the World Bank has found that income inequality has increased in many countries that have implemented regional trade agreements.

Question 36

International development

Explain differences between developed and developing countries based on the most important criteria.

Answer 36

Economic Indicators:

GDP per capita: Developed countries generally have a much higher GDP per capita than developing countries. This means that the average person in a developed country enjoys a higher standard of living, with more disposable income and access to goods and services.

Economic development: Developed countries have a more diversified and advanced economy, with a strong industrial base and a focus on technology and innovation. They also have a well-developed financial system and a strong infrastructure.

Industrialization: Developed countries are highly industrialised, with a large manufacturing sector that produces goods for domestic consumption and export. Developing countries, on the other hand, tend to have a more agricultural economy, with a focus on producing raw materials for export.

Social Indicators:

Life expectancy: Developed countries generally have a higher life expectancy than developing countries. This is due to a number of factors, including better healthcare, nutrition, and sanitation.

Literacy rate: Developed countries have a high literacy rate, which means that the majority of the population can read and write. This is important for economic development and social progress.

Education levels: Developed countries have a well-educated population, with a high proportion of people completing secondary and tertiary education. This contributes to a skilled workforce and a strong economy.

Political Indicators:

Political stability: Developed countries tend to be politically stable, with a strong legal system and a functioning government. This provides a stable environment for businesses and investment.

Rule of law: Developed countries adhere to the rule of law, which means that there is a strong respect for laws and regulations. This promotes fairness and accountability in government and business.

Human Rights: Developed countries generally have a good record on human rights, with strong protections for civil and political liberties. This creates a more just and equitable society.

Question 37

International development

Based on 4 convincing arguments and examples, explain positive consequences of globalisation for developing countries.

Answer 37

1. Increased Trade and Investment:

Globalization has opened up new markets and opportunities for developing countries to export their products and services to the global marketplace. This increased trade has led to increased economic growth and job creation in these countries. For instance, China’s rapid economic development over the past few decades can be attributed, in part, to its embrace of globalization and its success in exporting manufactured goods to developed countries.

2. Enhanced Access to Technology and Knowledge:

Globalization has facilitated the flow of technology and knowledge across borders, enabling developing countries to access advanced technologies and expertise that would have been otherwise unavailable or unaffordable. This has led to improved productivity, innovation, and overall economic development. For example, the rise of the Indian IT industry can be traced back to its ability to tap into the global pool of technological knowledge and expertise, allowing it to become a major provider of IT services to companies worldwide.

3. Improved Infrastructure and Development:

Globalization has attracted foreign direct investment (FDI) into developing countries, which has contributed to the improvement of infrastructure, such as roads, bridges, ports, and telecommunications networks. This improved infrastructure has facilitated trade, transportation, and communication, further enhancing economic growth and development. For instance, the construction of new highways and railways in Africa has opened up remote regions to trade and investment, promoting economic development in those areas.

4. Accelerated Poverty Reduction:

Globalization has played a role in reducing poverty in developing countries by increasing economic opportunities, improving access to education and healthcare, and empowering women. For example, the decline in extreme poverty worldwide by over half since 1990 is partly attributed to the positive effects of globalization on developing economies.

Question 38

International development

Based on convincing arguments and examples, explain positive consequences of globalisation for developed countries.

Answer 38

Enhanced Innovation and Competitiveness: Globalisation has spurred innovation and competitiveness among developed countries by exposing them to a wider range of ideas, technologies, and markets. This cross-pollination of knowledge has led to the development of new products, services, and processes, driving economic growth and productivity. For instance, the European Union’s Single Market has facilitated the exchange of ideas and technologies among member states, fostering innovation and competitiveness across the region.

Access to Lower-Cost Labor and Resources: Globalisation has enabled developed countries to access lower-cost labour and resources from developing countries, reducing production costs and improving their overall competitiveness. This has led to increased exports, job creation in developed countries, and a wider range of affordable goods and services for consumers. For example, many multinational corporations have outsourced manufacturing to countries like China and India, taking advantage of their lower labour costs while retaining research and development activities in developed markets.

Diversification of Markets and Customer Bases: Globalisation has expanded the reach of developed countries’ products and services into new markets, diversifying their customer bases and broadening their revenue streams. This has helped them mitigate risks associated with relying solely on domestic markets and has contributed to overall economic stability. For instance, the rise of e-commerce has enabled companies in developed countries to reach consumers worldwide, expanding their market potential exponentially.

Increased Investment Opportunities: Globalisation has opened up new investment opportunities for businesses and individuals in developed countries. They can now invest in emerging markets, diversifying their portfolios and potentially reaping higher returns. This has fueled economic growth in developing countries while also generating profits for investors in developed nations. For example, many pension funds in developed countries have invested in emerging market bonds and equities, seeking higher returns than those available in domestic markets.

Question 39

International development

Based on 4 convincing arguments and examples, explain negative consequences of globalisation for developing countries.

Answer 39

Increased Income Inequality:
Globalisation has exacerbated income inequality within and between developing countries. Multinational corporations have often relocated production to developing countries where labour costs are lower, leading to job losses in developed countries and a concentration of wealth in the hands of a few in developing countries. For instance, the rise of sweatshops in developing countries has resulted in low wages and poor working conditions for many workers, while benefiting multinational corporations and a small class of wealthy individuals in these countries.
Environmental Degradation:
Globalisation has contributed to environmental degradation in developing countries by increasing pollution, deforestation, and resource depletion. The extraction of raw materials and the production of goods for export often come at the expense of environmental protection, harming local ecosystems and communities. For example, the mining industry in developing countries has caused water pollution, soil contamination, and habitat destruction.
Erosion of Cultural Identity:
Globalisation has led to the erosion of cultural identity in developing countries as local traditions and values are increasingly influenced by Western culture. The dominance of Western media, products, and lifestyles can threaten the preservation of unique cultural heritage and practices. For instance, the widespread adoption of English as a lingua franca has marginalised local languages and cultural expressions.
Dependency on Foreign Investment:
Developing countries often become overly reliant on foreign investment, making them vulnerable to economic fluctuations and political instability in developed countries. This dependency can hinder domestic economic development and weaken national sovereignty. For example, when developed countries experience economic downturns, foreign investment in developing countries may decline, leading to job losses and economic hardship.

Question 40

International development

Based on 4 convincing arguments and examples, explain negative consequences of globalisation for developed countries.

Answer 40

Job Losses and Declining Manufacturing Base:
One of the most significant concerns about globalisation among developed countries is the potential for job losses and the decline of the manufacturing sector. As businesses increasingly outsource production and services to developing countries with lower labour costs, many manufacturing jobs in developed countries have been lost. This has led to increased unemployment and social unrest in some regions. For instance, the decline of the American manufacturing industry has resulted in the loss of millions of jobs and has contributed to the rise of populism and anti-trade sentiment.
Erosion of Labor Standards and Deteriorating Working Conditions:
Globalisation has raised concerns about the erosion of labour standards and the deterioration of working conditions in developed countries. The increased competition from companies in developing countries that employ low-wage workers has pressured businesses in developed countries to lower their labour costs and reduce employee benefits. This has led to a decline in the quality of jobs and has exacerbated income inequality within developed nations. For example, the rise of the gig economy, characterised by low wages, irregular work schedules, and limited benefits, has affected many workers in developed countries.
Cultural Homogenization and Loss of Cultural Diversity:
Globalisation has been criticised for promoting cultural homogenization and threatening the diversity of cultures in developed countries. The increasing influence of global media, brands, and lifestyles has led to concerns about the loss of unique cultural identities and traditions. For instance, the proliferation of American fast food chains and clothing brands in developed countries has raised concerns about the disappearance of local cuisine and fashion styles.
Increased Vulnerabilities to Economic Shocks and Global Crises:
Globalisation has made developed countries more vulnerable to economic shocks and global crises. The interconnectedness of the global economy means that downturns in one region can quickly spread to other parts of the world. For example, the 2008 financial crisis originated in the United States but had severe repercussions for economies around the world. Developed countries are also increasingly exposed to risks such as pandemics and cyberattacks, which can have a devastating impact on their economies.

Question 41

International development

Explain reasons for the rising position of developing countries in the global economy. Provide arguments and examples.

Answer 41

Rapid Economic Growth: Developing countries have experienced remarkable economic growth in recent decades, outpacing many developed nations. China, for instance, has maintained an average annual GDP growth rate of over 10% for the past four decades, lifting millions out of poverty and transforming its economy into a global powerhouse. Other developing countries, such as India, Brazil, and Indonesia, have also experienced substantial economic growth, fueled by industrialization, urbanisation, and expanding trade.

Increasing Globalisation: The integration of developing countries into the global economy has been a key driver of their rising economic prominence. Trade liberalisation, financial globalisation, and cross-border investments have opened up new markets and opportunities for developing countries, enabling them to export their goods and services to a wider global audience. This has led to increased foreign direct investment (FDI) flows into developing countries, which have helped to finance infrastructure projects, improve productivity, and foster innovation.

Growing Middle Class: The burgeoning middle class in developing countries represents a significant consumer base for domestic and international businesses. As incomes rise and living standards improve, a growing number of people in developing nations have the disposable income to purchase goods and services beyond basic necessities. This expanding consumer base has fueled demand for products and services across a wide range of sectors, from consumer electronics to luxury goods, creating new opportunities for businesses operating in developing markets.

Technological Advancements: Technological advancements have played a crucial role in the rise of developing countries. The adoption of information and communication technologies (ICTs), such as mobile phones and the internet, has revolutionised communication, commerce, and education in developing regions. These technologies have connected people, facilitated trade, and enabled access to knowledge and information, empowering individuals and businesses alike.

Investment in Education and Infrastructure: Developing countries have made significant investments in education and infrastructure, recognizing their importance for long-term economic development. Improving educational systems has enhanced human capital, boosting productivity and innovation. Investing in infrastructure, such as transportation networks, energy systems, and telecommunications infrastructure, has improved connectivity, reduced transportation costs, and facilitated trade and economic activity.

Question 42

International development

Explain different reasons for the development gap between different countries. Give examples.

Answer 42

1. Physical factors

Geography: Countries with difficult terrain, harsh climates, or limited natural resources may face challenges in developing their economies. For instance, landlocked countries often have higher transportation costs and reduced access to markets.
Example: Rwanda, a landlocked country in Eastern Africa, has made significant progress in economic development despite its geographical constraints. However, its reliance on exports through neighboring countries can be affected by political instability or trade disputes.

Resource endowment: Countries with abundant natural resources, such as oil or minerals, may experience the “resource curse.” Exploitation of these resources can lead to corruption, conflict, and a neglect of other sectors of the economy.
Example: Nigeria, a country rich in oil reserves, has struggled to translate its natural wealth into sustainable development. Political corruption, economic mismanagement, and social unrest have hampered efforts to improve living standards.

2. Economic factors

Investment: Countries with limited access to capital, such as foreign investment, may struggle to finance infrastructure development, education, and technology adoption.
Example: Ethiopia, a rapidly developing country in East Africa, has attracted significant foreign investment in recent years. This investment has helped to modernize its economy and create jobs, contributing to its impressive growth rate.

Trade patterns: Countries that are heavily reliant on exporting raw materials or low-value products may face a disadvantage in global trade. They may receive lower prices for their exports and encounter higher costs for imported manufactured goods.
Example: Bangladesh, a major exporter of textiles, has benefited from the global demand for clothing. However, its reliance on low-cost labor has limited its ability to move into higher-value manufacturing sectors.

3. Historical factors

Colonialism: Historical legacies of colonialism, such as unequal trade agreements, debt burdens, and political instability, can hinder a country’s development prospects.
Example: Many African countries still grapple with the effects of colonialism, including economic dependence, political corruption, and poor infrastructure. These challenges make it difficult to achieve sustainable development.

Institutional weaknesses: Weak institutions, such as inefficient bureaucracies, corrupt governance, and a lack of rule of law, can undermine a country’s ability to attract investment, promote economic growth, and ensure equitable distribution of resources.
Example: Afghanistan, a country with a long history of conflict and instability, faces significant challenges in developing its institutions. Building a strong and effective government is crucial for long-term economic development.

Question 43

International production

List and explain motives for internationalisation of a company.

Answer 43

Market seeking:
Expanding sales: A company may internationalise in order to expand its sales and reach a new set of customers. This can be done by selling products or services directly to consumers in foreign markets or by selling to other businesses.
Diversifying markets: By entering new markets, a company can reduce its dependence on its home market and diversify its risk. If the home market economy slows down or if there is a change in government policy, the company may still be able to generate revenue from its sales in other markets.
Avoiding saturation: If a company’s home market is becoming saturated, it may internationalise in order to find new growth opportunities.

Resource seeking:
Access to raw materials: Some companies internationalise in order to gain access to raw materials that are not available in their home country. This can be important for companies that manufacture products that require specific inputs.
Lower costs: By manufacturing products or services in countries with lower labour costs, a company can reduce its production costs. This can make its products more competitive in global markets.
Talent acquisition: Some companies internationalise in order to access a larger pool of talent. This can be important for companies that need to find highly specialised skills or expertise.

Strategic asset seeking:
Acquiring new technology: Companies may internationalise in order to acquire new technology or intellectual property from other companies. This can help them to stay ahead of the competition and develop new products or services.
Expanding marketing channels: Companies may internationalise in order to gain access to new marketing channels and distribution networks. This can help them to reach a wider audience and sell more products or services.
Building brand reputation: A company’s international presence can help to build its brand reputation and give it a competitive advantage.

Question 44

International production

Describe basic entry modes of internationalisation of a company

Answer 44

Exporting: Exporting is the most common way for companies to enter new markets. It involves selling products or services that are produced in the home country to customers in foreign markets.
Licensing: Licensing is a contractual agreement in which a company (the licensor) grants another company (the licensee) the right to use its intellectual property, such as technology, trademarks, or brand names, in a specific market or region.
Franchising: Franchising is a type of licensing in which the franchisor grants the franchisee the right to use its brand name, business model, and operating systems in a specific market or region.
Joint venture: A joint venture is a strategic partnership between two or more companies that share the ownership and control of a new company that is established to enter a new market.
Foreign direct investment (FDI): FDI is the establishment of a physical presence in a foreign market by a company from another country. This can involve setting up a new subsidiary, acquiring an existing company, or merging with another company.
Mergers and Acquisitions (M&As): The home-country firm buys part (merger) or all (acquisition) of the shares of an already existing production facility in the foreign country.
Greenfield Investment: The home-country firm establishes a brand-new production facility in the foreign country that it fully owns.
Subcontracting: The home-country firm contracts with a foreign firm to produce a product to certain specifications (materials, processes, and quality). Also known as outsourcing and contract manufacturing.

Question 45

International production

Explain the role of MNEs in the global economy. Give examples/case studies.

Answer 45

Multinational enterprises (MNEs) play a significant role in the global economy, influencing trade, investment, innovation, and employment patterns across countries. They operate in various industries, including manufacturing, technology, finance, and services, and have a global reach with subsidiaries in multiple countries.

Economic Impact
MNEs contribute to economic growth and development in host countries through various channels:
Job Creation: MNEs create employment opportunities directly by establishing subsidiaries and indirectly by stimulating local businesses that supply them.
Transfer of Technology: MNEs bring advanced technologies and management practices to host countries, which can enhance productivity and competitiveness.
Foreign Direct Investment (FDI): MNEs invest in host countries, bringing capital inflows that can fund infrastructure development, research and development, and economic diversification.
Exports and Imports: MNEs engage in international trade, both exporting their products and services to foreign markets and importing goods and services from different countries. This promotes global trade and integration.

Innovation and Technology
MNEs often possess cutting-edge technologies and expertise, which can lead to innovation and technological advancements in host countries. Their research and development (R&D) activities can create new products, processes, and services that benefit the overall economy.
Case Study: Samsung in South Korea
Samsung Electronics, a South Korean multinational electronics company, is renowned for its technological innovations. The company’s investments in R&D have led to the development of new products like smartphones, semiconductors, and TVs, which have boosted the South Korean economy and made Samsung a global leader in technology.

Social and Environmental Impact
While MNEs have positive economic impacts, they can also raise concerns regarding labour practices, environmental sustainability, and corporate social responsibility. It is crucial for MNEs to adhere to international labour standards, protect the environment, and engage in responsible business practices.
Case Study: Nestlé in Africa
Nestlé, a Swiss multinational food and beverage company, has been criticised for its agricultural practices and labour conditions in some African countries. The company has faced allegations of using child labour, employing low wages, and engaging in unsustainable farming practices. Nestlé has been working to address these concerns and improve its practices in Africa.

Question 46

International production

Explain the definition of a global value chain and a global value network.

Answer 46

A global value chain (GVC) refers to the full range of activities that economic actors engage in to bring a product to market. The global value chain does not only involve production processes, but preproduction (such as design) and post production processes (such as marketing and distribution).

What are GVCs?
* Companies used to make things primarily in one country. That has all changed. Today, a single finished product often results from manufacturing and assembly in multiple countries, with each step in the process adding value to the end product.
* Through GVCs, countries trade more than products; they trade know-how, and make things together. Imports of goods and services matter as much as exports to successful GVCs.
* GVCs integrate the know-how of lead firms and suppliers of key components along stages of production and in multiple offshore locations. The international, inter-firm flow of know-how is the key distinguishing feature of GVCs.
* How countries engage with GVCs determines how much they benefit from them.

A value network is a set of connections between organisations and/or individuals interacting with each other to benefit the entire group. A value network allows members to buy and sell products as well as share information.
* Value networks are connections between individuals or individuals and corporations in which their interactions benefit the group.
* Members in a value network can buy and sell from one another as well as exchange important and relevant information.
* The primary advantage of a value network includes the way a business or individual applies the resources, influence, and insight of their network connections.
* Value networks help their members to grow value and consist of internal (e.g. research and development) and external (e.g. customers) resources.

Question 47

International production

Provide an example of GVC with insights into its impact on developed and developing countries.

Answer 47

Example: Global Value Chain (GVC) in Electronics Manufacturing(📱)
Description:
In the electronics manufacturing industry, a GVC involves the production and assembly of electronic devices across multiple countries, each contributing specific components or stages to the final product. For instance, consider the production of a smartphone.

Stages in the GVC:
Design and Innovation (Developed Country):
Developed countries often lead in design and innovation. The initial stages of creating the smartphone, including the development of cutting-edge technology and software, may occur in a developed country like the United States or South Korea.
Component Manufacturing (Developing Country):
Developing countries, such as China or Vietnam, play a crucial role in manufacturing components. These could include the production of microprocessors, display screens, and other electronic parts.
Assembly (Developing Country):
Another developing country, like China, may handle the assembly of the smartphone. Here, various components from different countries are put together to create the final product.
Distribution and Marketing (Developed Country):
The developed country where the company is headquartered often manages the distribution and marketing of the finished product. This could involve sales, branding, and customer support.

Impact on Developed Countries:
Innovation and High-Value Tasks:
Developed countries benefit from leading in innovation and high-value tasks, securing a competitive edge in designing cutting-edge technologies.
Market Access and Profits:
Developed countries, especially the headquarters of multinational corporations, control market access and receive a significant share of the profits from the final product.

Impact on Developing Countries:
Job Creation and Economic Growth:
Developing countries experience job creation and economic growth through participation in component manufacturing and assembly, contributing to employment opportunities.
Technology Transfer:
Involvement in GVCs allows developing countries to benefit from technology transfer, as they acquire knowledge and skills in manufacturing and assembly processes.
Dependency and Wage Pressures:
Developing countries may face challenges such as dependency on specific industries and wage pressures as they often handle labour-intensive stages of production.

Question 48

International Finance

Give examples of factors influencing flexible exchange rates. Explain how these factors impact exchange rates.

Answer 48

1. Inflation Rates
Changes in market inflation cause changes in currency exchange rates. A country with a lower inflation rate than another’s will see an appreciation in the value of its currency. The prices of goods and services increase at a slower rate where the inflation is low. A country with a consistently lower inflation rate exhibits a rising currency value while a country with higher inflation typically sees depreciation in its currency and is usually accompanied by higher interest rates.

2. Interest Rates
Changes in interest rate affect currency value and exchange rate. Forex rates, interest rates, and inflation are all correlated. Increases in interest rates cause a country’s currency to appreciate because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates

3. Country’s Current Account / Balance of Payments
A country’s current account reflects balance of trade and earnings on foreign investment. It consists of a total number of transactions including its exports, imports, debt, etc. A deficit in the current account due to spending more of its currency on importing products than it is earning through sale of exports causes depreciation. Balance of payments fluctuates the exchange rate of its domestic currency.

4. Government Debt
Government debt is public debt or national debt owned by the central government. A country with government debt is less likely to acquire foreign capital, leading to inflation. Foreign investors will sell their bonds in the open market if the market predicts government debt within a certain country. As a result, a decrease in the value of its exchange rate will follow.

5. Terms of Trade
Related to current accounts and balance of payments, the terms of trade is the ratio of export prices to import prices. A country’s terms of trade improves if its exports prices rise at a greater rate than its imports prices. This results in higher revenue, which causes a higher demand for the country’s currency and an increase in its currency’s value. This results in an appreciation of the exchange rate.

6. Political Stability & Performance
A country’s political state and economic performance can affect its currency strength. A country with less risk for political turmoil is more attractive to foreign investors, as a result, drawing investment away from other countries with more political and economic stability. Increase in foreign capital, in turn, leads to an appreciation in the value of its domestic currency. But, a country prone to political confusions may see a depreciation in exchange rates.

7. Recession
When a country experiences a recession, its interest rates are likely to fall, decreasing its chances to acquire foreign capital. As a result, its currency weakens in comparison to that of other countries, therefore lowering the exchange rate.

8. Speculation
If a country’s currency value is expected to rise, investors will demand more of that currency in order to make a profit in the near future. As a result, the value of the currency will rise due to the increase in demand. With this increase in currency value comes a rise in the exchange rate as well.

Question 49

International Finance

List and explain the reasons for and effects of different types of financial crises. Provide empirical examples.

Answer 49

Crisis type
Characteristics
Examples

Hyperinflation
A rapid increase in the overall price level of a country, typically defined to be 40 percent or higher on an annual basis.
Zimbabwe, 1998–2009

Balance of payments and currency crises
A large devaluation or rapid depreciation in the value of a domestic currency in response to balance of payments difficulties.
Mexico, 1994–1995, and Brazil, 1999

Asset price deflation
A sustained and large decline in the prices of financial assets.
Japan, 1990, and United States, 2007–2009

Banking crises
The occurrence of bank runs and/or the merger, closure, or government takeover of banking institutions.
Argentina, 2001

External debt crises
Sovereign default on debt obligations to foreign creditors or substantial restructuring of this debt.
Mexico, 1982

Domestic debt crises
Sovereign default on debt obligations to domestic creditors or substantial restructuring of this debt.
Argentina, 1989

Question 50

List and describe at least 4 examples of non-economic reasons behind decisions on international economic relations between countries.

Answer 50

Political Considerations:
Political factors play a significant role in shaping international economic relations. Countries may form alliances or engage in economic cooperation based on shared political ideologies, diplomatic relations, or geopolitical considerations. For example, countries with similar political systems or aligned foreign policy goals may be more inclined to strengthen economic ties.
National Security Concerns:
National security considerations often influence economic decisions between countries. Strategic partnerships may be formed to enhance security, share intelligence, or address common threats. Conversely, economic sanctions or trade restrictions may be imposed as a means of exerting political pressure in response to perceived security risks.
Environmental and Social Values:
Countries may base economic decisions on shared environmental and social values. This can include collaboration on sustainable development projects, adherence to certain environmental standards, or joint initiatives to address global challenges like climate change. Economic relations may be influenced by a commitment to ethical practices and social responsibility.
Cultural and Humanitarian Factors:
Cultural and humanitarian considerations can impact economic relations. Countries may prioritise partnerships with those sharing similar cultural values or engage in economic cooperation to address humanitarian crises. For instance, countries may provide economic aid, participate in joint development projects, or support each other during natural disasters based on shared humanitarian principles.
Human Rights and Rule of Law:
Decisions on international economic relations can be influenced by considerations related to human rights and the rule of law. Countries may choose to engage economically with partners that uphold human rights standards and adhere to a transparent legal framework. Conversely, violations of human rights or a lack of legal transparency in a trading partner may lead to reevaluation or restrictions in economic relations.