International Economics Flashcards
Disadvantages of globalisation (6)
Growing inequality
Higher structural unemployment
Environmental costs
Trade imbalances
Risk of external shocks
Less cultural diversity
Advantages of globalisation (5)
Lower prices
Benefits of trade
Greater employment
Large economies of scale
Free movement of labour and captial
Advantages of specialisation (5)
Larger range of goods and services
Greater output
Greater quality
Benefits of trade
Reduces problem of scarcity
Terms of trade
Indicates the quantity of exports that must be sold to purchase a given level of imports
Factors influencing the terms of trade (short run)
Change in demand/supply of exports/imports
Inflation rates
Exchange rate movements
Factors influencing the terms of trade (long run)
Incomes
Productivity
Technology
Trading bloc
A group of countries that join together and agree to increase trade between themselves
Free trade area
No trade barriers
Can trade with other countries
Customs union
No trade barriers
Common external barrier
Common market
No trade barriers
Common external barrier
Free movement of labour and capital
Globalisation
The process in which national economies have become increasingly integrated and interdependent
Causes of globalisation (5)
Trade liberalisation
Trading blocs
Growth of MNCs
Technological advances
Greater mobility of labour and capital
Absolute advantage
When a country can produce a product using fewer factors of production than another nation
Comparative advantage
A country should specialise in the goods and services it can produce at the lowest opportunity cost, and then trade with another country
Specialisation
When a worker, firm, region or country produces a narrow range of goods and services
Terms of trade equation
(Weighted average of export prices) x (Weighted average of import prices) x100
Monetary union
No trade barriers
Common external barrier
Free movement of labour and capital
Common currency and central bank
World Trade Organisation (WTO)
International organisation that regulates world trade
WTO’s ideal world trade (5)
Non-discriminatory
Free from barriers/protectionism
Predictable
Promotes fair competition
Beneficial for developing countries
Role of WTO (7)
Set and enforce rules of international trade
Resolve trade disputes
Provide a forum for negotiating trade liberalisation
To monitor further trade liberalisation
Increase transparency of decision making process
Help developing countries benefit
Cooperate with other major economic instituions
How WTO conflicts with trading blocs (5)
Distort world trade
Averse effects on non-member states
Inefficient allocation of resources
Increased protectionism
WTO loses power as trading blocs become more powerful
Tariff
Tax on imports
Quota
Quantity limit on amount of imports
Trade subsidy
Subsidy given to domestic suppliers
Aim of trade subsidy
To reduce costs of production → passed onto consumer as lower prices → makes firm more competitive
Non-tariff barriers
Voluntary export restraint (countries limit exports to each other
Intellectual property laws (patents, copyright etc)
Technical barriers (health and safety etc)
Financial protectionism (govt. tells banks to prioritise local firms when allocating loans)
Hidden protectionism (discrimination against foreign workers)
Exchange controls (limit of capital flows between countries)
Currency intervention (competitive devaluation)
Balance of Payments
Measures the inflows and outflows of money into and out of a country
Components of the current account
Trade in goods (trade balance)
Trade in services (trade balance)
Income e.g. remittances (income balance)
Transfers - govt. fees e.g. aid, EU payments (income balance)
Causes of current account surplus (6)
Exporting more than importing
Recession
Competitive exports (deflation/disinflation/high quality exports)
High level of natural resources
Exports worth more than imports
High levels of exports
Causes of current account deficit (6)
Importing more than exporting
Sustained economic growth
Uncompetitive exports (inflation/poor quality products)
Low level of natural resources
Exports worth less than imports
Low levels of exports
Components of financial account (3)
FDI
Portfolio investment
Reserves
Capital account
Minor payments/transfers
what is an effective exchange rate/trade weighted
average movement of exchange rate based on values of trade with main trade partners
Advantages of a floating exchange rate (4)
Reduces need to hold large foreign currency reserves
Freedom to set interest rates
Automatic correction
Less risk
Floating exchange rate
Currency value set by market
No govt. intervention
No target for exchange rate
Speculation causes change in floating exchange rate
e.g. British Pound
Disadvantages of floating exchange rate (2)
Can be volatile - reduces FDI
A lower, more competitive exchange rate does not guarantee a current account surplus
Fixed exchange rate
Govt. fixes currency value to another currency
Central bank must hold sufficient currency reserves
e.g. Chinese Yuan
Advantages of a fixed exchange rate
Stability attracts FDI
Stability controls inflation
Leads to lower borrowing costs
Less speculation
Disadvantages of a fixed exchange rate
Cannot use interest rates in macro policies (monetary policy)
Developing countries may not have sufficient foreign currency reserves to fix
Devaluation of exchange rate leads to cost-push inflation
Managed exchange rate
Currency value set by market forces
Central bank occasionally intervenes
Currency is a key target of monetary policy
e.g. Japanese Yen
Competitive devaluation intentions
Make exports cheaper and imports more expensive
Increases growth
Increases inflation
Improved current account
Revaluation
When the value of the currency is adjusted
Appreciation
When the value of the currency increases
Devaluation
When the value of the currency is lowered in a fixed exchange rate system
Depreciation
When the value of the currency falls
Factors influencing exchange rates
Inflation
Speculation
Other currencies
Govt. finances
Balance of payments
International competitiveness
Government intervention in the currency markets - interest rates (hot money)
An increase in interest rates is more attractive for foreign investors
This increases demand for currency, appreciating the value of the currency
Government intervention in the currency markets - quantitative easing
Government intervention in the currency markets - foreign currency transactions
Buying and selling foreign currency to manipulate domestic currency
International competitiveness
The ability of a nation to compete successfully overseas and to sustain improvements in living standards and output
Components of international competitiveness
Price competitiveness
Non-price competitiveness
Ability to attract FDI
Unit labour costs =
Total labour cost / output
Relative export prices
Relative export prices
Factors that influence international competitiveness (8)
Unit labour costs
Labour flexibility
Labour skills
Tax regimes
Innovation
Infrastructure
Regulation
Economic stabilility
Advantages of protectionism
Reduces trade deficit
Protects infant industries
