International Economics Flashcards
What are the main feature of globalisation?
(What does it cause)
•increased international trade
•Transnational corporations
•Global supply chains
•labour migration
What are factors contributing to globalisation?
•Improvements in transport eg containerisation - unit cost
• Free trade - less barriers to trade
• Abolition of capital controls - mergers + aquisitions
Impact of globalisation?
Consumers, workers, producers
Consumers: low prices, more choice
Workers: increased opportunities, more competition from low cost countries
Producers: access to more markets, economies of scale, spread risks, FDI, more competition
What assumptions are made for comparative advantage?
•constant returns to scale
•perfect factor mobility
•no transport costs
•no artificial trade barriers eg tariffs
Advantages and disadvantages of specialisation + Trade?
Advantages:
•Quality
•Price - efficiency, econ of scale
•Less dominance for national monopolies
•Opportunities to explore foreign market
Disadvantages:
• Over-dependence - price falls, cut offs
• Structural unemployment - foreign competition
• Environment
• Loss of sovereignty
Factors influencing patterns of trade?
•Comparative advantage - specialise if there is an advantage
•Impact of emerging economies - Cheap imports, more market for exports
•Trading Blocs
•ERs
What are terms of trade?
(Definition + formula)
Definition: measures the ratio of export price to import price
Terms of trade = Index of X / Index of M
Factors influencing the terms of trade?
• Relative productivity compared with trading partners
• Relative inflation - higher or lower than competition
• ERs - cost of X + Ms
Impacts of changes to terms of trade?
• Economic growth - increases value of Xs and decrease value of Ms
• Inflation - More money
What is a trading bloc?
A group of countries that agree to remove restrictions on international trade
What are the 4 types of trading blocs?
1) Free trade area (FTA) - no barriers between members
2) Customs Union - FTA with a common external tariff
3) Common market - A cu with other forms of integration eg free labour + capital movement
4) Monetary union - Shared currency and monetary policy
Advantages and disadvantages of trading blocs?
Advantages:
• Specialisation - comparative advantage, increased output
• Reduced competition - inefficient firms driven out
• Larger markets
• more jobs
• more choice for consumers
Disadvantages:
• Distort world trade - tariffs
• Loss of resources to more successful countries - labour + capital
• Lessen sovereignty - shared monetary policy
Why are barriers to trade imposed?
• Independency during conflict
• Diverse economies disirable
• Maintain national heritage eg Canada lumber, whiskey Scotland
• political links eg USA cuba
Economic arguments for restrictions on free trade?
• Danger of over-specialistation - primary product dependency, sudden change in demand, volatility
• Protecting infant industries - need protection before global competition
• protect declining industries - structural unemployment
• prevent unfair competition - eg china subsidised solar panels - tariff
Impacts of protectionist policies?
• Lower living standards - increased prices, allocative inefficiency
• Greater equality - less rise in Y
• Tariff revenue for govt
• less competition for producers
What are the 3 sections of balance of payments?
(What are they)
• Current account - Measures trade in goods + services
• Capital account - Records capital transfers, non-financial assets
• Financial account - Tracks financial assets eg FDI
Causes of a current account deficit?
• Relative low productivity - unit cost, price, more Ms
• High relative inflation
• High domestic growth, low overseas growth - cheap Ms
• High rising ERs - Xs relatively expensive, Ms cheaper
Causes of a current account surplus?
• High productivity
• Low ER
• Low inflation
• Low domestic growth
How is a deficit resolved?
Expenditure reducing:
• Decrease AD - lower spending on Ms
• Firms expand overseas
• Monetary policy - increased IRs, reduce spending in Ms
Expenditure switching:
• switching spending from Ms towards domestic goods + services
• protectionism - eg tariffs
• Devaluation - increased international competitiveness
- PED must be elastic
- immediately after deficit will worsen
• Supply side policy - deregulation, infrastructure
What are the two currency valuation systems?
1) Floating system - Markets determines the ER, forces of S+D
2) Fixed ER system - ER is fixed by government
- Dirty float
- Adjustable
What determines demand for £?
(Why do foreigner wish to buy)
• To buy UK goods and services - Influences on demand for Xs influence demand for £
• To put money into financial account - Traders buy to anticipate rise, FDI
What determines supple of £?
(Why do uk residents wish to sell)
• To buy overseas goods + services
• To move capital into overseas economies - investing overseas
How do governments influence (floating) Exchange rate values?
• open market operations - Govt instruct bank to buy/sell £, eg would sell £ to devalue (more supply)
• Change interest rates - increased IRs increased demand for £
What two ways is international competitiveness measured?
• Relative unit labour costs - low cost, increased competitiveness
• Relative export prices - high price, low competitiveness
