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Econ -T4 - Macro > International Economics > Flashcards

International Economics Flashcards

1
Q

What is Globalisation?

A

increased cultural, economic and social integration of countries

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2
Q

What are the 4 key features of Globalisation?

A
  • ↑Trade as proportion of GDP
    –> especially before 2008 financial crisis
  • ↑FDI
    –> Global companies spread production facilities to other countries
  • ↑Capital flows
    –> money between countries due to investment
  • ↑Movement of people
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3
Q

6 Causes of Globalisation?

A
  • ↓Transportation costs –> containerisation –> ↑EOS
  • ↑Cost of Communication –> internet
  • ↑World trade barriers –> WTO
  • Opening up of China + collapse of communism
  • Growth of trading blocs
  • ↑Importance of TNC’s –> offshoring
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4
Q

6 Impacts of Globalisation

A
  • ↑ Living Standards –> specialisation - ↑comparative advantage - ↑Output
    –> ↓Environment have effects on Standards
  • Inequality - between countries↓, inside countries ↑ - D for unskilled workers in developed countries↓
  • Government - ↑Tax revenue, however tax avoidance
  • Producers -
    TNC’s –> ↑EOS –> ↑Profits + ↑Tech –> ↑Productivity
    Local - uncompetitive - shut down
  • Consumers - ↓Prices, ↑C.S., ↑Choice
  • Workers - ↑Employment Opportunities,
    –> TNC’s exploit workers in developing countries
    –> migration of workers –> little ↑wages in Developing
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5
Q

What is an Absolute Advantage?

A
  • Country can produce more of one product than another country with same resources
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6
Q

What is a Comparative Advantage? + law of comparative advantage

A
  • A country can produce a good with a lower opportunity cost than another country

–> Trade between two countries can be beneficial if countries specialise in good they have comparative advantage in (even if one has absolute advantage in both)

Assumptions
- Constant returns to scale - PPFs are straight
- No transport costs
- No trade barriers
- Externalities ignored
- Perfect mobility of Factors of Production

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7
Q

What are the 5 assumptions made in law of comparative advantage? + What are the limits to comparative advantage?

A

Assumptions
- Constant returns to scale - PPFs are straight
- No transport costs
- No trade barriers
- Externalities ignored
- Perfect mobility of Factors of Production

limits
- Free trade not fair trade - rich countries exert monopsony power- force developing countries to accept low prices
- Law of comparative advantage based off unrealistic assumptions

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8
Q

Advantages (4) + (8) Disadvantages of specialisation and trade

A

Ad
- ↑Living Standards - ↑employment due to ↑output
- ↓Prices, ↑C.S., ↑Choice
- ↑Transfer of management expertise + tech –> ↑Productivity
- ↑EOS e.g. containerisation

Dis
- Deficit in trade of goods if country is uncompetitive
- Dumping - Country with Surplus of goods, ‘dumps’ surplus in other country - local producers bankrupt + dependent on imports
- ↑Unemployment
- ↑disease - e.g. COVID due to migration
- TNC’s monopoly used to exploit consumers
- Unbalanced development - only sector with comparative advantage in country develops, limit overall econ growth
- TNC’s exploit monopsony power on producers
- Infant industries unable to compete

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9
Q

Formula for Terms of Trade?

A

ToT = index of Export prices / Index of Import price x 100

  • price of countries exports relative to price of imports
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10
Q

4 Factors influencing countries Terms of Trade

A
  • rate of inflation relative to other countries
  • Productivity relative to other countries
  • Tarrifs
  • Exchange rate
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11
Q

How does ToT have an impact on standard of living

A
  • if Exports are high –> higher incomes and ability to buy cheaper imports.
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12
Q

If Price of Imports / Exports changed what happens to ToT?

A
  • ↑P of M or ↓P of X –> deterioration
  • ↓ P of M or ↑P of X –> Improvement
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13
Q

Effect of ↑ToT on country?

A
  • ↑Standard of Living –> Import more for same exports
  • ↓Current account of balance of Payments –> ↓Competitiveness of goods
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14
Q

What are the Causes of changes in the ToT

A
  • Change in the D and S conditions
    –> YED effects (income elasticity)
    –> agricultural (developing countries) are inelastic (%△Dq< %△P)
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15
Q

What is a trading bloc? + examples

A

group of countries that agree to reduce / eliminate trade barriers between them

  • APEC (Asia-Pacific Economic Cooperation)
  • EU
  • NAFTA (North American Free Trade Agreement) (Can, US, Mexico)
  • BRICS (Brazil, Russia, India, China, South Africa)
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16
Q

What are the 4 types of trading blocs

A
  • Free trade areas –> trade barriers removed
  • Customs unions –> trade barriers removed, common external tariffs on goods from non-member countries
  • Common Markets –> trade barriers removed, common external tariffs on goods from non-member countries (customs union) + free movement of Factors of production (Labour)
  • Monetary Union - common market w/ common currency e.g. Eurozone
17
Q

Costs (2) + Benefits (3) to trade Blocs excluding Mon. Union

A

Costs
- Trade diversion –> in blocs restrictions / tarrifs on external goods, trade diverted away from more efficient producers outside bloc to less efficient within bloc
- Distortion of Comparative advantage –> trade barriers against non-members - ↓Specialisation + ↓World output

Benefits
- Trade creation –> Removal of trade barriers, ↑Trade
- ↑FDI - TNC’s unrestricted selling to consumers in bloc
- ↑Economic power - Large bloc better negotiating position with other countries / blocs

18
Q

Cost (5) and Ben (6) for Monetary Unions?

A

Costs
- Trade diversion –> trade diverted away from more efficient producers outside bloc to less efficient within bloc
- Distortion of Comparative advantage –> ↓Specialisation + ↓World output

  • Transition costs –> One-off costs from changing currency e.g. menus
  • Loose independent Monetary policy –> cannot control interest rates
  • Loose Exchange Rate Flexibility

Benefits
- Trade creation –> Removal of trade barriers, ↑Trade
- ↑FDI - TNC’s unrestricted selling to consumers in bloc
- ↑Economic power - Large bloc better negotiating position with other countries / blocs

  • Eliminate Transaction costs –> costs from changing currencies to trade
  • Price transparency –> consumers compare prices easier
  • Eliminate currency fluctuation between countries –> ↑Investment by Firms, more stable
19
Q

What is the role of the WTO?

A

World trade organisation
- Promote Free trade
- Settle trade disputes between member countries

20
Q

List 10ish reasons for restrictions on free trade / protectionism?

A
  • Correct deficit in trade in goods
  • Prevent dumping
  • Reduce risk from problems in global economy
  • Limit monopoly power of global companies
  • Protect infant industries
  • Prevent sectoral imbalance - industries with comparative advantage develop faster than those without –> Protect declining industries
  • Protect strategically important industries
  • Retaliation against unfair trade practises
  • Human Rights reasons
  • Political reasons e.g. North Korea or Russia
21
Q

What is protectionism?

A

Restrictions on free trade

22
Q

What are the most commonly forms of trade protectionism

A
  • Tariffs,
  • Subsidies to domestic producers
  • Quotas
  • Administrative barriers
23
Q

Definition of a tariff?

A

A tariff is a tax on imported goods / services to raise the price

24
Q

What is the effect of tariffs on domestic producers

A
  • Domestic producers have to pay tariff when good/service enters the country
  • Raises cost of production
  • These increase costs are passed to consumers as an increased prices
  • Higher prices allows some domestic firms to increase output (law of supply)
  • Meaning inefficient domestic producers are producing at expense of more efficient global producers
  • Increased domestic output can increase employment
25
Q

What is the effect of a tariff on Global producers

A
  • Inefficient domestic producers are producing at expense of more efficient global producers
  • fewer cars imported to country means revenue falls for foreign producers
26
Q

Draw tariff diagram, explain diagram.

A
  • Price of World supply increases due to tariff
  • Means the imports decrease from Q2-Q1 –> Q4-Q3
  • Imports ↓ meaning C.A. Improves
  • Producer (domestic) surplus ↑ –> less structural unemployment
  • Consumer Surplus ↓
  • Net Welfare Gain ↓ –> deadweight loss of box 2+4 (2 = Production inefficiency, 4 = consumption inefficiency)
  • Box 3 = tariff revenue –> can be reinvested by gov into education infrastructure etc.
27
Q

Explain effects of tariffs Vs. subsidy on domestic producers, consumers, and government

A
  • Domestic producers
    –> Revenue increases to Pw x P3
    –> Domestic producer surplus increases by box 2
    —-
    Subsidy would increase international competitiveness through decreasing costs.

Domestic consumers
- Consume fewer products at higher price
–> Consumer surplus decreased by areas 1,2,3,4
- Standard of living ↓ as value of income ↓
- Increase production –> employment ↑ and wages increasing for employees
—-
Subsidy would lower prices

Government,
- tariff Imposed creates tax revenue box 3
- can be reinvested into education, infrastructure etc.
—
Subsidy would cost government, create Opportunity cost

28
Q

Quota definition + Where r they set?

A

Quota is a physical limit on imports
–> e.g. in 2022 UK extended quota on steel imports to protect employment in domestic steel industry

  • Limit set below free market level of imports
    –> raises market price, can create shortages?
29
Q

What is the benefit of a quota?

A

Domestic firms benefit are able to supply more due to lower level of imports
- Increase employment

30
Q

Subsidy definition

A

Government gives grant to producers to reduce cost of production
- Lowers cost for domestic producers

31
Q

How do subsidies benefit domestic producers?

A

Lowers costs for Domestic producers
- producers can increase output at lower pice
–> increases international competitiveness
–> level of exports increases
–> result in increased domestic employment

32
Q

Explain protecting declining industries as an argument for protectionism?

A

e.g. Agriculture and manufacturing in HIC (high income countries).
–> Reduce structural unemployment caused by occupational and geographic immobilities
–> this assumed perfect mobility for factors of production.

33
Q

Explain protecting infant industries as an argument for protectionism?

A

e.g. new, small, inefficient industries (in LIC).
–> help transition away from primary product dependency
–> Long-run benefits

34
Q

Explain Retaliation against unfair trade practices as an argument for protectionism?

A

e.g. Against China providing subsidies to reduce cots (Samsung or Hyundai)
–> China intellectual property right theft / copyright

35
Q

What is the balance of payments

A

record of all financial transactions between a country and rest of world

  • Two main components; Current Account, Capital and Financial Account
    –> Current Account = shows countries day to day transactions with others.
    –> Capital and Financial Account = long-term investments and short-term capital flows
36
Q

What is the current account made up from?

A
  • Trade in goods and services balance –> Value of goods + services E - Value of M
  • Investment income –> income earned from assets overseas (interest, profits, dividends) - income paid to foreigners for assets in UK
  • Current transfers –> payments received from foreign institutions / citizens - payments made abroad e.g. taxes, foreign aid

+ = surplus
- = deficit

37
Q

What is the capital and financial account made up of?

A
  • FDI –> investment into by foreign –> out by UK comps.
  • Portfolio investments in shares / bonds –> purchase of UK bonds by foreigners - foreign shares by UK
  • Short-term capital flows –> into UK - out of UK
  • Changes in foreign currency reserves
38
Q

4 Causes of Current Account deficit?

A
  • Low productivity –> relative
  • Outsourcing of manufacturing –> to developing countries were labour lower cost
  • ↑Exchange rate relative to other countries
  • ↑Econ growth –> ↑Imports
39
Q

What methods can be used to decrease current account imbalance?

A
  • Expenditure-reducing policies –> deflationary fiscal policies + monetary policies –> ↓AD, ↓Imports –> policies to ↓AD
  • Expenditure-switching policies –> tariffs, quotas, export subsidies –> policies to switch AD
  • Depreciation of country’s currency
  • Supply-side policies –> e.g. ↓Cooperation tax, ↑Infrastructure, ↓Regulations

Econ -T4 - Macro (6 decks)

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