International Economics Flashcards
Is there a precise definition of globalisation
No, it is used to refer to a variety of ways in which countries are becoming more and more closely integrated, not just in the economic sense, but also culturally and politically.
Tell me what is consider one of the best definitions of globalisation in the economics sense
The definition is by Peter Jay, who was the BBCs economics correspondent in 1996: ‘the ability to produce any good or service anywhere in the world, using raw materials, components, capital and technology from anywhere, sell the resulting output anywhere and place the profits anywhere.
Is globalisation a new phenomenon
No because there have been many periods in history when there was considerable integration between countries, for example, during the height of the Roman Empire.
However, the pace of global integration has increased considerably over the last 50 years.
How, in the economic sense, is globalisation characterised
An Increase in trade as a proportion of world GDP.
Increased movements of financial capital and people between countries.
Increased international specialisation and division of labour. It is increasingly common for parts and components of products to be made in different countries and for assembly to occur in another country.
The growing importance of global or transnational companies (TNCs)
An increase in foreign direct investment (FDI)
Define foreign direct investment
(FDI) is cross border investment by a business in one economy with the objective of obtaining a lasting interest in an enterprise resident in another economy. It may involve the acquisition by a business in one country of a business in another country.
List to me the factors contributing to globalisation
A variety of factors have contributed to the increased economic integration of countries:
Fall in transport costs
Decline in cost of communications
Lowering of trade barriers
Collapse of communism and the opening up of China
Transnational (global) companies
Growth in the number and size of trading blocs (regional trade agreements)
Tell me how the following factor has contributed to globalisation/increased economic integration of countries: fall in transport costs
One of the most significant factors Is the fall in transport costs. In real terms the price of transporting goods has decreased significantly, enabling goods to be imported and exported more cheaply.
Tell me how the following factor has contributed to globalisation/increased economic integration of countries: decline in the cost of communications
Coupled with a fall in transport costs has been a decline in the cost of communications. In particular, the cost of using the internet has fallen greatly over the last 20 years and its availability has increased.
Tell me how the following factor has contributed to globalisation/increased economic integration of countries: the lowering of trade barriers
The lowering of trade barriers since the Second World War has been a major factor in the growth of world trade. The world trade organisation (WTO) - formerly the general agreement on tariffs and trade - has been responsible for negotiating reductions in tariffs and other barriers to trade in rounds of talks, the most recent of which is the Doha round.
Tell me how the following factor has contributed to globalisation/increased economic integration of countries: the collapse of communism and the opening up of China
Both the collapse of communism and the opening up of China to world trade have contributed to globalisation. Countries which were previously not open to FDI became much more integrated into the world trading system.
Tell me how the following factor has contributed to globalisation/increased economic integration of countries: transnational companies
Transnational (global) companies have taken advantage of the reduction in trade barriers and the development of the internet to organise trade on a global scale.
Tell me how the following factor has contributed to globalisation/increased economic integration of countries: growth in the number and size of trading blocs (trade agreements)
It has resulted in increased trade between the member countries of these blocs.
Tell me about an impact of globalisation on countries to do with the law of comparative advantage
Free trade enables the application of the law of comparative advantage, which suggests that, when countries specialise in the goods in which they have a comparative advantage (i.e the goods can be produced at a lower opportunity cost), then world output and living standards will increase. It is evident that the growth of world trade in both goods and services has been associated with increased growth in real GDP.
However, the global financial crisis that became particularly evident in 2008 led to a period of deglobalisation, in which countries adopt protectionist policies in an attempt to protect domestic employment. This leads to a decline in specialisation and trade. More recently, trade has recovered.
Tell me an impact of globalisation on countries to do with inequality
Globalisation has been associated with increased inequality within developed countries. As much manufacturing has been transferred to developing countries, the demand for unskilled workers has declined in developed countries, resulting in a fall in their wages relative to those of skilled workers.
Tell me how globalisation impacts on governments
If globalisation results in an increase in economic growth and, therefore, in incomes, then governments should receive extra tax revenues. However, transfer pricing by global companies may result in lower tax revenue from corporation tax.
Define transfer pricing
When a global company manages its accounting of internal transactions within the company to show the highest profits in the country in which corporation tax is lowest.
How can globalisation impact on producers
For producers, there are likely to be benefits in terms of lower production costs as a result of offshoring and also economies of scale.
How can globalisation impact on consumers
For consumers, globalisation may mean a wider choice of goods. Further, prices may be lower, leading to an increase in consumer surplus.
How can globalisation impact on workers
Globalisation has been criticised on the basis that it has promoted exploitation of workers, including the use of child labour. It is argued that globalisation has driven down wages (especially those of unskilled workers) as a share of GDP. Further, health and safety laws and regulations are usually less demanding in developing countries, which might have detrimental effects on the workforce.
How can globalisation impact on the environment
The external costs associated with increasing globalisation are becoming increasingly apparent, especially in relation to increased trade, air travel and environmental degradation. Global warming associated with various forms of pollution arising from increased trade is one example of external costs arising from increased globalisation.
Tell me about producing at an absolute and comparative advantage - the theory of comparative advantage
This law states that, even if one country has an absolute advantage in the production of all goods, it can still benefit from specialisation and trade if it specialises in the production of goods in which it has a comparative advantage (I.e if it specialises in the production of those products in which its opportunity cost is lowest). The crucial requirement is that there must be a difference in the opportunity cost of producing the products.
Define absolute advantage
When a country can produce more of a product than another country.
Define comparative advantage
When a country can produce a product at a lower opportunity cost than another country, so it has a relative advantage in producing that product.
Tell me about the assumptions underlying the theory of comparative advantage
No transport costs
No trade barriers
Constant returns to scale, ie. average cost of production is constant.
Perfect mobility of resources between users
Buyers/consumers have perfect knowledge.
To determine whether trade will be worthwhile, what must be calculated
The opportunity costs must be calculated.
If a country has a comparative advantage of a good it has a lower opportunity cost.
For trade to be beneficial, the terms of trade must lie between the opportunity cost ratios.
How are terms of trade measured
The terms of trade must lie between opportunity cost ratios for trade to be beneficial
The terms of trade are measured as follows:
(Index of export prices/index of import prices) x 100
You should note that, if the opportunity costs were the same, then there would be no benefit from specialisation and trade.
Tell me the limitations of the principle of comparative advantage
Transport costs might outweigh the benefits of comparative advantage
Similarly, trade barriers might distort comparative advantage
Increased specialisation and production might result in rising average costs caused by diseconomies of scale.
However, despite these limitations, many economists support the view that free trade brings net benefits to the global economy.
Tell me the advantages of specialisation and trade
Efficient resource allocation: specialisation and free trade based on comparative advantage result in an efficient allocation of resources
Higher world output and, therefore, higher living standards.
Lower prices and more choice for consumers
Incentive for domestic producers to become more efficient
Larger markets for firms, enabling them to benefit from economies of scale.
Tell me the disadvantages of specialisation and trade
The law of comparative advantage is based on unrealistic assumptions
For developing economies, specialisation in the production of primary products might prevent diversification into more productive manufacturing industries
There is a danger of over dependence on imports, especially those of strategic importance.
A country’s goods and services may be uncompetitive, resulting in a persistent trade deficit.
How do you calculate opportunity cost
The amount of the one good not chosen to be produced divided by the quantity of the good being chosen to be produced
List to me the factors that influence patterns of trade
Changes in comparative advantage
Emerging economies
Trading blocs and bilateral trading agreements
Changes in relative exchange rates
Tell me how the following factor can influence patterns of trade: changes in comparative advantage
Comparative advantage may change as a result of factors such as changes in labour skills and productivity, discovery of new natural resources and the adoption of new technology
Tell me how the following factor can influence patterns of trade: emerging economies
The pattern of world trade has also been greatly affected by the growth of emerging economies, for example China, which is now a major manufacturer.
Tell me how the following factor can influence patterns of trade: trading blocs and bilateral trading agreements
Since the Second World War there has been a significant growth in the number and size of trading blocs. Given that most of these have free trade between member countries and that customs unions have common external tariffs, trading blocs have had an important influence on the pattern of world trade. Similarly, bilateral trade agreements (agreements between 2 countries) have also affected trade patterns
What’s a bilateral trade agreement
Agreements between 2 countries
Define trading bloc
A group of countries that trade freely but protect themselves from imports from non-members
Tell me how the following factor can influence patterns of trade: changes in relative exchange rates
A long term change in a country’s exchange rate against those of other countries will affect the relative competitiveness of that country’s goods and services and so will influence trading patterns. For example, if country A’s currency depreciates against those of other countries, then its goods and services will become more competitive and so its exports are likely to increase and imports decrease relative to those of other countries.
What’s the calculation of the terms of trade
The terms of trade (T/T) are calculated by using the following formula:
T/T = index of export prices/index of import prices x 100
Therefore, the terms of trade is the relationship between the price of exports and the price of imports or the rate at which exports exchange for imports.
Define terms of trade
The average price of a country’s exports relative to the average price of its imports.
List to me the factors that influence a country’s terms of trade
Relative inflation rates
Changes in raw material prices
Changes in exchange rate
Tariffs
Dependency on primary products
Tell me how the following factor influences a country’s terms of trade: relative inflation rates
If the uk inflation rate is higher than that of its trading partners then export prices will be rising relative to import prices, so causing a rise in the UKs terms of trade.
Tell me how the following factor influences a country’s terms of trade: changes in raw material prices
For a developed country which imports most of its raw materials, a rise in imported raw material prices would cause a fall in its terms of trade.
Tell me how the following factor influences a country’s terms of trade: changes in exchange rates
If a country’s exchange rate increases relative to those of other countries then its export prices would rise and its import prices would fall, so causing its terms of trade to increase.
Tell me how the following factor influences a country’s terms of trade: tariffs
If a country imposes a tariff on imported goods then this would cause an increase in import prices and so would result in a fall in the country’s terms of trade.
Tell me how the following factor influences a country’s terms of trade: dependency on primary products
If a country is dependent on primary products then according to the Prebisch-Singer hypothesis it may find that its terms of trade decrease over time.
How can changes in a country’s terms of trade affect living standards
An upward movement in the terms of trade is usually referred to as an ‘improvement’ because it implies that the country has to export less to buy a given quantity of imports. This implies a higher standard of living for the citizens of that country. In contrast, a fall in the terms of trade is referred to as a ‘deterioration’ because it implies that more must be exported to gain a given quantity of imports, which, in turn, implies a fall in living standards.
How can changes in a country’s terms of trade affect the balance of payments on current account
An upward movement in a country’s terms of trade would decrease the competitiveness of its goods and services because its export prices would be rising relative to its import prices. Consequently, the country’s balance of payments on the current account is likely to deteriorate. In turn, this could cause a depreciation in its exchange rate.
How can changes in a country’s terms of trade affect the rate of inflation
A fall in a country’s terms of trade may be associated with a higher rate of inflation if the fall was caused by an increase in the price of imported raw materials.
How can changes in a country’s terms of trade affect developing countries
Resource-rich developing countries sometimes suffer from what is called the ‘resource curse’. This arises because ownership of minerals and fuels causes an appreciation in the exchange rates of the currencies of these countries and, in turn, an increase in the terms of trade. This results in a loss of competitiveness of their manufactured goods and services, leading to slower economic growth than might otherwise have been the case.
What are regional trade blocs
Intergovernmental associations that manage and promote trade activities for specific regions of the world. Trading blocs may take several forms:
Free trade areas
Customs unions
Common markets
Monetary unions
What are the forms trading blocs can take
Free trade areas
Customs unions
Common markets
Monetary unions
What’s a free trade area
Trade barriers are removed between member countries, but individual members can still impose tariffs and quotas on countries outside the area. An example is the North Atlantic free trade area (NAFTA)
What are customs unions
The characteristics of custom unions include free trade between member states and a common external tariff on goods imported from outside the bloc. Examples include the European Union (EU) and the customs union of Russia, Belarus and Kazakhstan (formed in 2010)
What are common markets
These are customs unions but with the added dimension that it is not only goods and services that can be moved freely within the area (between member states), but also factors of production (especially labour). Examples include Mercosur and the East African common market.
What are monetary unions
These are customs unions that adopt a common currency. The eurozone area of the EU is an example of such a union.
List the costs of regional trade agreements
Trade diversion
Distortion of comparative advantage
Loss of independent monetary policy
Tell me how trade diversion is a cost of regional trade agreements
Trade may be diverted away from low cost producers outside the bloc to high cost producers within the bloc because of the existence of tariffs on goods from outside the bloc.
Tell me how the distortion of comparative advantage is a cost of regional trade agreements
The existence of trade restrictions on goods from countries outside the agreement will distort comparative advantage and lead to a less efficient allocation of resources, lowering global economic growth.
Tell me how the loss of independent monetary policy is a cost of regional trade agreements
This would be relevant to countries in monetary unions which would be unable to control their own interest rates and exchange rates.
Tell me the benefits of regional trade agreements
Trade creation. The removal of trade barriers between member countries of the bloc will result in increased specialisation and trade between them
Increase in FDI. Global companies may wish to invest inside a trading bloc to avoid trade restrictions
Tell me the further benefits that monetary unions might enjoy
Elimination of transaction costs. In other words, there would be no costs involved in changing currencies when goods are imported or exported.
Price transparency. A single currency means that consumers have the ability to compare prices more easily across national borders.
Elimination of currency fluctuations between member countries. This eliminates uncertainty and might help to attract FDI
What are the two key functions of the WTO
To promote free trade among the 188 member countries through so called ‘rounds of talks’
To settle trade disputes between members
What are the possible conflicts between regional trade agreements and the WTO
The existence of trading blocs has two significant consequences:
Trade creation
Trade diversion
While trade creation is a goal of the WTO, the trade diversion which results from regional trade agreements is clearly not
Nevertheless, it may be argued that the growth in both the number and size of regional trade agreements has contributed to the WTO goal of promoting free trade.
List me the reasons for restrictions on free trade (protectionism)
To protect infant industries
To protect geriatric industries
To ensure employment protection
To prevent dumping
To correct a balance of payments deficit on current account
To restrict imports from countries whose health and safety regulations and environmental regulations are less stringent
For strategic reasons
To raise tax revenue
In retaliation
What does the term protectionism refer to
Measures designed to limit free trade.
Tell me about the reason to restrict free trade: to protect infant industries
This argument might be particularly relevant to developing countries that are in the process of industrialisation. Without protection, infant industries might be unable to compete because they have yet to establish themselves and are too small to benefit from economies of scale.
Tell me about the reason to restrict free trade: to protect geriatric industries
These are industries that might demand protection so that they have time to restructure and rationalise production, which would enable them to become competitive once again. Typically, these occur in developed economies that are losing their comparative advantage.
Tell me about the reason to restrict free trade: to ensure employment protection
Cheap imports might threaten jobs in the domestic economy and workers might demand that the government takes action to limit imports.
Tell me about the reason to restrict free trade: to prevent dumping
‘Dumping’ refers to goods being exported to another country at below the average cost of production. It is a form of predatory pricing and, if it can be proved, is illegal under the WTO rules. This is one of the few arguments in favour of protectionism that can be justified in terms of economic theory because it unfairly distorts comparative advantage.
Define predatory pricing
A deliberate strategy by a firm aimed at driving competitors out of the market by setting its prices below average variable costs.
Tell me about the reason to restrict free trade: to correct a BoP deficit on current account
Restrictions on imports might help to reduce the imbalance between the value of imports and the value of exports. However, under a system of floating exchange rates, it is possible that this correction will happen automatically.
Tell me about the reason to restrict free trade: to restrict imports from countries whose health and safety regulations and environmental regulations are less stringent
Some argue that developing countries might have an unfair competitive advantage because production is not subject to the same laws and regulations that apply to developed countries, so enabling them to produce at a lower cost.
Tell me about the reason to restrict free trade: for strategic reasons
A country might introduce protectionist policies on goods of strategic importance in time of war so that it is not dependant on imports. Food, defence equipment and energy are items frequently used as examples of such goods.
