international economics

Question 1

what is the definition of international competitiveness

Answer 1

the ability of a nation to comepete successfully overseas in order to sustain improvements in living standards

Question 2

what 3 factors determine a country’s competitiveness

Answer 2

price competitiveness
- if not price competitive relative to other countries then nation suffers to sell and compete

non price competitiveness
- if price competitiveness lacking, or unit labour costs are high, non price factors can allows country to become competitiveness overseas

ability of nation to attract FDI (factors of prod)
- capital, businesses, workers from abroad

Question 3

what are the 3 main measures of competitiveness

Answer 3

• unit labour costs !!
  total labour costs divided by output
  -if output increases and TLC remain constant, drives down LB, keeping prices relatively low and improving price competitiveness

global competitive index

terms of trade
- index of export prices divided by imports of import prices
x 100
- greater number = better terms of trade condition

Question 4

what is the definition of globalisation

Answer 4

process in which national economies have become increasing integrated and interdependent

Question 5

what are the causes of globalisation

Answer 5

trade liberalisation
trading blocs
growth of MNCs
technological advances
mobility of labour + capital

Question 6

what are the benefits of globalisation

Answer 6

increased international competitiveness (integrated) = DECREASED pressure on PRICES = higher efficiency =lower costs
- consumer = greater welfare + consumer surplus + greater market size = choice + quality
- businesses = access raw materials through lower prices and costs

benefits of trade occur
- deepening of trading blocs and WTO
- better growth and tax rev + econ dev
- greater employment (firms grow in size, potential increase = increases workers, and higher incomes)
- larger economies of scale (market size bigger, can exploit size, increase output and lower costs = higher profits - innovation)

Question 7

what are the problems of globalisation

Answer 7

greater inequality
- demand for unskilled labour has decreased in developed countries, increasing the earnings gap between highest-paid and lowest-paid workers
- BUT inequality between countries has fallen

higher structural unemployment
- globalisation happening fast, more integrated, struggle to compete with other nations = businesses going into decline = structural unemployment (losing incomes)

ennv costs - economic growth has led to foreign firms taking advantage of depleting resources = degraded natural resources (rivers - dumping waste)
- lack of sustainability

Question 8

what is absolute advantage

Answer 8

a country can produce more of one product than another country can with the same amount of resources

Question 9

what is comparative advantage

Answer 9

can produce a good with a lower opportunity cost than that of another country

Question 10

what are the assumptions made in the law of comparative advantage

Answer 10

• constant returns to scale (PPFs drawn in straight lines)
• no transport costs
• no trade barriers
• perfect mobility of FOP between different uses
• externalities ignored

Question 11

what does the law of comparative advantage state

Answer 11

a country should specialise in the production of a good or service at the lowest opportunity cost
- then trade (to be beneficial there should be a suitable exchange rate)

Question 12

what are the limitations of comparative advantage

Answer 12

no transport costs
- countries may have huge transport costs which can distort comparative adv (countries further away will have to pay lots to receive the good)

no economies of scale
- but if does have CA and supply world market, they may benefit from huge economies of scale + exploit adv for longer
- BUT a country w/o CA, able to exploit EOS better than country with CA = DISTORTS CA (EOS = lower LRAC = lower prices)

rate of inflation - tariffs + quotas put on goods where has CA, selling abroad is made difficult = distorts CA

exchange rate
- strong CA but strong exchange rate = distorts CA

Question 13

advantages of specialisation and trade

Answer 13

• higher living standards + increased employment = increased world output
• lower prices (= higher consumer surplus + choice)
• transfer of management expertise and tech
• EOS

Question 14

disadvantages of specialisation and trade

Answer 14

• deficit on the trade in goods and services balance if country’s goods and services are uncompetitive
• danger of dumping (firms in countries with surpluses of goods ‘dump’ them on other countries - local products go bankrupt - LR more dependent on M)
  BOTH result in increased UNEMPLOYMENT

Question 15

what are the Short run factors influence the terms of trade

Answer 15

change in demand/ supply of X/M
- increased demand for exports = increased price = improvement of terms of trade

relative inflation rates
- high = increased price of exports = improvement of terms of trade BUT REDUCE COMPETITIVENESS

changes in exchange rates - stronger / weaker

Question 16

what does the terms of trade tell a country

Answer 16

the quantity level of exports that need to be sold in order to purchase a given level of input

• decreased terms of trade = price of given basket of exports can buy less imports than before

Question 17

what causes a decrease in the terms of trade

Answer 17

increase price of imports
OR
decrease price of X

Question 18

what are the LR factors that can influence the terms of trade

Answer 18

incomes
- developed countries grow + richer = incomes rise, demands for manufactured goods rise (luxury goods - income elastic)
- primary commodities, demand will not rise as near as much as rise in what they import (developed countries export commodities) = LT DETERIORATION

productivity + tech
- if both rise = both lower costs of prod = lower prices in exports
= DETERIORATION but IMPROVES COMPETITIVENESS

Question 19

what is a trading bloc and one example

Answer 19

group of countries, usually within a geographical region, designed to significantly reduce/ remove trade barriers between themselves

• COMESA (common market for Eastern and Southern Africa)

Question 20

what are the different types of trading blocs

Answer 20

• free trade areas (trade barriers are still removed between them but each member can impose trade restrictions on non - members

customs unions - free trade between countries combined with common external tariff on goods from countries outside customs union

common market - same as customs unions + free movement of factors of prod (labour) between member countries

monetary unions - custom unions that adopt a common currency (eurozone)

Question 21

what are the costs of regional trade agreements

Answer 21

trade diversions - occurs when trade is diverted from a more efficient exporter (low cost producers outside bloc) towards a less efficient producer (high-cost producers within the bloc)

distortion of CA
- trade barriers against non-members likely to cause a decrease in specialisation + fall in world output

Question 22

what are the benefits of trading blocs

Answer 22

trade creation
increased FDI (TNCs gain unrestricted access in selling goods to consumer in bloc)
increased economic power

Question 23

what are the key roles of the WTO (world trade organisation)

Answer 23

• promote free trade
• settle trade disputes between member countries

Question 24

reasons for restricting free trade

Answer 24

• prevent dumping (product sold abroad to below average cost/ below price charged to domestic consumers)
• reduce unemployment
• reducing risk of disruption resulting from problems in global economy
• limit monopoly power of global companies

Question 25

what are the 4 trade barriers

Answer 25

tariffs (+ customs duties = taxes on imported goods)
quotas (limits on the quantity of product imported)
subsidies to domestic producers (reduce costs of prod = supply left)
non tariff barriers - healthy + safety regulations, env reg, bureaucracy

Question 26

what are 2 measures to reduce a country’s current account deficit

Answer 26

expenditure-reducing policies
- deflationary fiscal and monetary policy = decrease AD = decreased imports

expenditure-switching policies
- tariffs, quotas and export subsidies

devaluation/ depreciation of currency

supply-side policies - most EFFICIENT (reduction corp tax, improved infr, training education, reduce reg)

Question 27

what is a global trade imbalance

Answer 27

when some countries have large current account deficits while other countries have large current account surpluses

Question 28

how could a persistent current account deficit be undesirable

Answer 28

• country’s goods/ services are uncompetitive
  = increasing rate of unemployment
  = could be forced to borrow foreign currency from other countries
  AND if under a system of floating exchange rates = depreciation

Question 29

how could a persistent current account surplus may be undesirable

Answer 29

• inflation (because of increased AD) - may imply living standards are falling (less goods and services available for domestic consumption)
• could cause appreciation in value of currency - goods and services become less competitive

Question 30

what is a floating exchange rate system

Answer 30

exchange rate determined by the market forces (supply + demand)

Question 31

what is a fixed exchange rate system

Answer 31

country’s currency is fixed against those of other currencies

Question 32

what is a managed exchange rate system

Answer 32

essentially a floating exchange rate but one which is subject to intervention by the Central Bank in foreign exchange market in order to influence exchange rate of currency

Question 33

what is a revaluation

Answer 33

country decides to INCREASE X rate of currency under a FIXED X rate

Question 34

what is an appreciation

Answer 34

INCREASE in X rate of currency under a system of floating X rate

Question 35

what is a devaluation

Answer 35

country DECREASES X rate of currency under a FIXED X rate

Question 36

what is a depreciation

Answer 36

DECREASE in X rate of currency under a FLOATING X rate

Question 37

factors influencing floating exchange rates

Answer 37

relative inflation rates
- higher inflation rate than competitors = purchasing power falls relative to competitors = LR its value will fall ~(PPP)

relative interest rate
- higher interest rates than others = attracts money into banks from abroad = increased demand for currency = rise in value

current account balance - INCREASE in deficit = supply of money increase relative to its demand = depreciation

FDI - country which is a net recipient of FDI = increase demand for currency = value appreciates

speculation - rises (expected state of economy)

Question 38

what does a depreciation/ devaluation cause on balance of payments

Answer 38

• deterioration in CA as demand of imports/ exports are price inelastic
• decrease in foreign currency price of country’s exports
• increase in domestic price of its imports

Question 39

what does the Marshall lerner condition state

Answer 39

depreciation/ devaluation of currency will lead to improvement in trade of balance if the sum of the price elasticities of demand for imports and exports is LESS THAN 1

Question 40

why would governments want to use policies to imporve international competitiveness

Answer 40

To rebalance economy
- can open up new avenues of growth (increased investment, export growth…)

for LT sustained growth

Question 41

how can gov spending on infrastructure and tax incentives as part of supply side policies be used to improve international competitiveness

Answer 41

gov spending on infrast
- transport infrastructure
- improves efficiency of doing business (moving goods and services easier + cheaper)
- lower costs for business
- improves prod efficiency
= lower prices (improving price comp)
- improved infr = attracts FDI

tax incentives
- lower corp tax (attracts FDI) = increased retained profits of business (used to invest on new capital, innovation, R+D)
- increases efficiency of business = lower costs of prod = lower prices (price comp better) and new innovation = improves non price comp
reduced INCOME taxes
- increase flexibility + size of labour force + improve productivity
- tax allowance of investment (increase = incentive for business to put more money aside to use to invest

Question 42

how may deregulation and gov spending on education as part of supply side policy to improve international competitiveness

Answer 42

deregulation
- taking away unnecessary regulations reduced costs of prod businesses
- improves productive efficiency
- lower prices = improve price competitiveness

gov spending on education (training for skills, spending on apprenticeships schemes)
- target productivity = drives down unit labour costs = lower prices
- if indv worker are more productive in producing products at high quality = improves non price competitiveness

Question 43

what are some issues with supply side policies in improving international competitiveness (limit international competitiveness in the future

Answer 43

opportunity costs
- maybe corp and income taxes may have to go up in the future, cuts on education and infrastructure = limiting international competitiveness - losing price comp

no guarantee such policies will work - for example increased retained profits for firms, may not be used for investment and may instead use them to increase wages or save them - limit international comp)

time lags
- education (15 years to have an impact)
- in the ST if the country isn’t competitive then it will be sustained

relative concept
- competitive = more competitive RELATIVE to another country
- if other country is using policies at a more aggressive (lowering corp tax more) and intensive level then this country won’t have the competitive gains planned

Question 44

what does the J curve show

Answer 44

in the ST devaluation/depreciation might case a deterioration in CA of balance of payments (X to y)
BECUASE
- demand for M is price inelastic if firms have stocks
- demand for X is price inelastic if consumers take time to adjust to new, low prices