International Economics

Question 1

What are the main feature of globalisation?
(What does it cause)

Answer 1

•increased international trade
•Transnational corporations
•Global supply chains
•labour migration

Question 2

What are factors contributing to globalisation?

Answer 2

•Improvements in transport eg containerisation - unit cost
• Free trade - less barriers to trade
• Abolition of capital controls - mergers + aquisitions

Question 3

Impact of globalisation?
Consumers, workers, producers

Answer 3

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

Question 4

What assumptions are made for comparative advantage?

Answer 4

•constant returns to scale
•perfect factor mobility
•no transport costs
•no artificial trade barriers eg tariffs

Question 5

Advantages and disadvantages of specialisation + Trade?

Answer 5

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

Question 6

Factors influencing patterns of trade?

Answer 6

•Comparative advantage - specialise if there is an advantage
•Impact of emerging economies - Cheap imports, more market for exports
•Trading Blocs
•ERs

Question 7

What are terms of trade?
(Definition + formula)

Answer 7

Definition: measures the ratio of export price to import price

Terms of trade = Index of X / Index of M

Question 8

Factors influencing the terms of trade?

Answer 8

• Relative productivity compared with trading partners
• Relative inflation - higher or lower than competition
• ERs - cost of X + Ms

Question 9

Impacts of changes to terms of trade?

Answer 9

• Economic growth - increases value of Xs and decrease value of Ms
• Inflation - More money

Question 10

What is a trading bloc?

Answer 10

A group of countries that agree to remove restrictions on international trade

Question 11

What are the 4 types of trading blocs?

Answer 11

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

Question 12

Advantages and disadvantages of trading blocs?

Answer 12

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

Question 13

Why are barriers to trade imposed?

Answer 13

• Independency during conflict
• Diverse economies disirable
• Maintain national heritage eg Canada lumber, whiskey Scotland
• political links eg USA cuba

Question 14

Economic arguments for restrictions on free trade?

Answer 14

• 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

Question 15

Impacts of protectionist policies?

Answer 15

• Lower living standards - increased prices, allocative inefficiency
• Greater equality - less rise in Y
• Tariff revenue for govt
• less competition for producers

Question 16

What are the 3 sections of balance of payments?
(What are they)

Answer 16

• Current account - Measures trade in goods + services
• Capital account - Records capital transfers, non-financial assets
• Financial account - Tracks financial assets eg FDI

Question 17

Causes of a current account deficit?

Answer 17

• 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

Question 18

Causes of a current account surplus?

Answer 18

• High productivity
• Low ER
• Low inflation
• Low domestic growth

Question 19

How is a deficit resolved?

Answer 19

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

Question 20

What are the two currency valuation systems?

Answer 20

1) Floating system - Markets determines the ER, forces of S+D

2) Fixed ER system - ER is fixed by government
- Dirty float
- Adjustable

Question 21

What determines demand for £?
(Why do foreigner wish to buy)

Answer 21

• 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

Question 22

What determines supple of £?
(Why do uk residents wish to sell)

Answer 22

• To buy overseas goods + services
• To move capital into overseas economies - investing overseas

Question 23

How do governments influence (floating) Exchange rate values?

Answer 23

• open market operations - Govt instruct bank to buy/sell £, eg would sell £ to devalue (more supply)
• Change interest rates - increased IRs increased demand for £

Question 24

What two ways is international competitiveness measured?

Answer 24

• Relative unit labour costs - low cost, increased competitiveness
• Relative export prices - high price, low competitiveness

Question 25

What factors influence international competitiveness?

Answer 25

• Labour productivity - unit of labour cost
• Real exchange rate - Low ER, lower price of Xs
• Non-wage labour costs - eg national insurance
• Labour market regulation - Min wage

Question 26

What are benefits of being internationally competitive?

Answer 26

• Increased real national income (growth) - Increased Xs
• Lower demand deficient unemployment
• Improve trade accounts
• Deflationary - More demand for £