International Economics Pt2

Question 1

What’s a trading bloc?

Answer 1

A group of countries that protect themselves from imports of non-members. E.g, the EU.

Question 2

What are preferential trading areas?

Answer 2

Where protectionism is reduced on some but not all goods traded between member countries.

Question 3

What are free trade areas?

Answer 3

Occur when members agree to reduce or eliminate trade barriers on all goods between member countries.

Question 4

What are customs unions?

Answer 4

Involves the removal of tariff barriers between members and the acceptance of a common external tariff against non-members.

Question 5

What are common markets?

Answer 5

They aim to establish a single market, the same way in which there is a single market within an individual economy.

Question 6

What are monetary unions?

Answer 6

Two or more countries with a single currency, with an exchange rate that is monitored and controlled by one central bank or several central banks with closely coordinated monetary policy

Question 7

What’s the eurozone?

Answer 7

The European Central Bank distributes notes and coins, sets interest rates, maintains a stable financial situation and manages the foreign currency reserves.

Question 8

What’s an economic union?

Answer 8

The final step of economic integration. There will be a
common market with coordination of social, fiscal and monetary policy.

Question 9

What are the advantages of trading blocs?

Answer 9

More choice
More jobs
More competition
More protection
Larger customer market
More specialisation
More output
Economies of scale

Question 10

What are the disadvantages of trading blocs?

Answer 10

It can distort world trade.
May be a reduction in competition if inefficient firms are driven out.
Increased inequality.
Potential retaliation.
Less national sovereignty.

Question 11

What’s trade creation?

Answer 11

When trade is created by the joining of a trading bloc. It’s when consumption shifts from a high cost domestic producer to a low cost partner producer.

Question 12

What’s trade diversion?

Answer 12

Occurs where consumption shifts from a lower cost producer outside the trading bloc to a higher cost producer within it.

Question 13

What’s the role of the WTO?

Answer 13

Bring trade liberalisation.
Ensure countries act to trade agreements.

Question 14

What’s the capital account?

Answer 14

It mainly records transfers of immigrants and emigrants taking money abroad or bringing to the UK, or government transfers such as debt forgiveness to Third World countries.

Question 15

What’s the financial account?

Answer 15

It’s split into three main parts:
Foreign direct investment (FDI), portfolio investment and reserves (gold/foreign currency).

Question 16

What are the short term causes of deficits and surpluses?

Answer 16

Levels of consumer demand.
Exchange rates.
Relative inflation.

Question 17

What are the medium term causes of deficits and surpluses?

Answer 17

Changes in comparative advantage.

Question 18

What are the long term causes of deficits and surpluses?

Answer 18

Capital investment.
Productivity.
Deindustrialisation.
Corruption.
Natural resources.
International competitiveness.

Question 19

What policies can be used to reduce trade deficits?

Answer 19

Monetary and fiscal policy that reduces AD.

Supply side policies that increase productivity.

Question 20

What’s the exchange rate?

Answer 20

The purchasing power of a currency in terms of what it can buy of other currencies.

Question 21

What’s a free floating system?

Answer 21

Where the value of the currency is determined purely by market demand and supply of the currency, with no target set by the government and no official intervention in the currency markets. E.g, UK

Question 22

What’s a managed floating system?

Answer 22

Where the value of the currency is determined by demand and supply but the Central Bank will try to prevent large changes in the exchange rate on a day to day basis. E.g, Swiss Franc

Question 23

What’s a fixed system?

Answer 23

When a government sets their currency against another and that exchange rate does not change e.g, gold standard.

Question 24

What are the changes in a currency called?

Answer 24

An appreciation/depreciation of the currency is an change in the value of the currency using floating exchange rates.

A revaluation/devaluation of the currency is when the currency is changed against the value of another under a fixed system.

Question 25

What’s the demand for pounds (floating systems) determined by?

Answer 25

The amount of British goods that foreigners want to buy .
The number of foreigners wanting to invest in the UK, visit the UK or place their money in British banks.
The amount of speculation on the pound.

Question 26

What’s the supply for pounds (floating systems) determined by?

Answer 26

The amount of foreign goods people in the UK want to buy.
The number of British firms that want to invest abroad.
The amount of British people wanting to go on holiday abroad or place their money in foreign banks.
The amount of speculation on the pound.

Question 27

How can the government influence the value of their currency?

Answer 27

Interest rates.
Gold and foreign currency reserves.

Question 28

What’s competitive devaluation/depreciation?

Answer 28

Where a country deliberately intervenes in foreign exchange markets to drive down the value of their currency to provide a competitive boost to their exporting industries.

Question 29

What’s the Marshall-Lerner condition?

Answer 29

It states that the sum of the price elasticities of imports and exports must be more than one (i.e. elastic) if a currency devaluation is to have a positive impact on the trade balance.

Question 30

What are the measures of international competitiveness?

Answer 30

Unit labour costs
Global competitiveness index
Terms of trade

Question 31

What are the 8 factors influencing international competitiveness?

Answer 31

Unit labour costs
Labour flexibility
Labour skills
Tax regimes
Innovation
Infrastructure
Regulation
Economic stability

Question 32

What are the benefits of being competitive?

Answer 32

Current account surpluses
More foreign investment
Higher employment
Economic growth

Question 33

What are the drawbacks of comparative advantage?

Answer 33

It can be easily lost.
Countries may become dependant on others.

Question 34

What’s international competitiveness?

Answer 34

The ability of a nation to compete overseas and to sustain improvements in living standards and output. It includes price competitiveness, non-price competitiveness and the ability to attract factors of production (FDI).

Question 35

What are the pros of floating exchange rates?

Answer 35

Less need for currency reserves
Freedom for domestic monetary policy
Useful instrument for Macroeconomic adjustment
Partial automatic transaction for a trade deficit
Reduced risk of currency speculation

Question 36

What are the cons of floating exchange rates?

Answer 36

Volatility
Self-correction of trade deficits unlikely

Question 37

What are the pros of fixed exchange rates?

Answer 37

Less uncertainty
Some flexibility permitted
Reductions in the cost of trade
Discipline on domestic producers

Question 38

What are the cons of fixed exchange rates?

Answer 38

Interest rate effects
Large level of foreign currency reserves needed
Speculative attacks if exchange rates are set too high/low