International Economics Flashcards
What is Globalisation?
increased cultural, economic and social integration of countries
What are the 4 key features of Globalisation?
- ↑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
6 Causes of Globalisation?
- ↓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
6 Impacts of Globalisation
- ↑ 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
What is an Absolute Advantage?
- Country can produce more of one product than another country with same resources
What is a Comparative Advantage? + law of comparative advantage
- 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
What are the 5 assumptions made in law of comparative advantage? + What are the limits to comparative advantage?
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
Advantages (4) + (8) Disadvantages of specialisation and trade
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
Formula for Terms of Trade?
ToT = index of Export prices / Index of Import price x 100
- price of countries exports relative to price of imports
4 Factors influencing countries Terms of Trade
- rate of inflation relative to other countries
- Productivity relative to other countries
- Tarrifs
- Exchange rate
How does ToT have an impact on standard of living
- if Exports are high –> higher incomes and ability to buy cheaper imports.
If Price of Imports / Exports changed what happens to ToT?
- ↑P of M or ↓P of X –> deterioration
- ↓ P of M or ↑P of X –> Improvement
Effect of ↑ToT on country?
- ↑Standard of Living –> Import more for same exports
- ↓Current account of balance of Payments –> ↓Competitiveness of goods
What are the Causes of changes in the ToT
- Change in the D and S conditions
–> YED effects (income elasticity)
–> agricultural (developing countries) are inelastic (%△Dq< %△P)
What is a trading bloc? + examples
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)
What are the 4 types of trading blocs
- 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
Costs (2) + Benefits (3) to trade Blocs excluding Mon. Union
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
Cost (5) and Ben (6) for Monetary Unions?
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
What is the role of the WTO?
World trade organisation
- Promote Free trade
- Settle trade disputes between member countries
List 10ish reasons for restrictions on free trade / protectionism?
- 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
What is protectionism?
Restrictions on free trade
What are the most commonly forms of trade protectionism
- Tariffs,
- Subsidies to domestic producers
- Quotas
- Administrative barriers
Definition of a tariff?
A tariff is a tax on imported goods / services to raise the price
What is the effect of tariffs on domestic producers
- 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
What is the effect of a tariff on Global producers
- Inefficient domestic producers are producing at expense of more efficient global producers
- fewer cars imported to country means revenue falls for foreign producers
Draw tariff diagram, explain diagram.
- 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.
Explain effects of tariffs Vs. subsidy on domestic producers, consumers, and government
- 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
Quota definition + Where r they set?
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?
What is the benefit of a quota?
Domestic firms benefit are able to supply more due to lower level of imports
- Increase employment
Subsidy definition
Government gives grant to producers to reduce cost of production
- Lowers cost for domestic producers
How do subsidies benefit domestic producers?
Lowers costs for Domestic producers
- producers can increase output at lower pice
–> increases international competitiveness
–> level of exports increases
–> result in increased domestic employment
Explain protecting declining industries as an argument for protectionism?
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.
Explain protecting infant industries as an argument for protectionism?
e.g. new, small, inefficient industries (in LIC).
–> help transition away from primary product dependency
–> Long-run benefits
Explain Retaliation against unfair trade practices as an argument for protectionism?
e.g. Against China providing subsidies to reduce cots (Samsung or Hyundai)
–> China intellectual property right theft / copyright
What is the balance of payments
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
What is the current account made up from?
- 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
What is the capital and financial account made up of?
- 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
4 Causes of Current Account deficit?
- Low productivity –> relative
- Outsourcing of manufacturing –> to developing countries were labour lower cost
- ↑Exchange rate relative to other countries
- ↑Econ growth –> ↑Imports
What methods can be used to decrease current account imbalance?
- 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
