international economics (term four) Flashcards
what if Australia didn’t trade ?
no imports - less choice
no exports - less economic growth & employment
no competition - higher prices
shortages & surpluses of products
inefficiency
decreased output (GDP)
economic contraction
why is trade important ?
access to imports - increased consumer satisfaction & standard of living
markets for exports - increased economic growth & employment
specialization - increased output
economies of scale
trade surplus
exports are greater than imports - prima facie, the economy should expand
trade deficit
imports are greater than exports - prima facie, the economy should contract
why nations trade ?
supplement their own resources
compensate of differing factor endowments (unequal distribution of resources, human skills, capital & technology)
desire for an improved standard of living
profit motive
stakeholders positively impacted by international trade
economy - economic growth
consumers - more choice & lower prices
workers - job opportunities
businesses - imported capital & incentive to compete
exporters - economies of scale
government - more taxes
stakeholders negatively impacted by international trade
workers & local businesses - workers become unemployed if local businesses cannot compete with foreign competition
stakeholders positively impacted by multi-national companies
consumers (short-term) - lower prices (mnc’s achieve economies of scale & innovate)
workers - job opportunities (local employment in host countries)
stakeholders negatively impacted by multi-national companies
consumers (long-term) - higher prices (mnc’s monopolize & gain market share)
government - less taxes (mnc’s transfer price to avoid tax)
environment - degradation & destruction
transfer price
price charged for goods between two subsidiaries of one multi-national company located in different countries
complexity of international trade
different currencies have different purchasing powers & levels of inflation
different cost structures have different methods of production, domestic market sizes & transport costs
different social & technical aspects have different customs, tastes & requirements
different government policies have different motives for personal profit & welfare leading to inequality
sustainable economic growth
rate of growth that increases production, consumption & income (current & future standards of living)
full employment
socially acceptable rate of unemployment (everyone who wants a job has a job)
price stability
little variation in prices (minimal inflation)
sustainable development
rate of growth that cares for the environment & future generations
internal stability
state of the economy where there is full employment & price stability
external stability
state of the economy where financial obligations to the rest of the world are met through government policy measures
composition of trade
what we trade
direction of trade
where & with whom we trade
primary products
products with minimal to no processing
no price mark-up
(e.g. agriculture)
simply transformed goods
intermediate goods used as inputs for other products
minimal price mark-up
(e.g. leather)
elaborately transformed goods
finished products
high price mark-up
(e.g. vehicles)
percentage change expression
[(new - old) / (old)] x 100
opportunity cost expression
(give up) / (gain)
absolute advantage
a nation’s ability to produce at a lower direct resource cost than another nation
comparative advantage
a nation’s ability to produce at a lower opportunity cost than another nation
adam smith’s theory
trade should only occur if two nations have absolute advantage in two separate products
david ricardo’s theory
trade should occur even if one nation has absolute advantage in both products
absolute & comparative advantage assumptions
two nations producing two goods or services
fixed technology
perfectly mobile resources
no transport costs
heckscher-ohlin theory
composition & direction of trade are based on factor endowments
nations exports products where they have large factor endowments
nations import products where they have small factor endowments
competitive advantage
a nation’s ability for its industries to innovate & upgrade
diamond of national advantage
factor conditions - advantage in factors of production (e.g. infrastructure investment or specialized workforce training)
demand conditions - developed domestic market (clear view of consumer demand to help anticipate international market needs)
related & supporting industries - efficient & internationally competitive supplier industries
firm strategy, structure & rivalry - company creation, management & domestic rivalry need to be disciplined, flexible & conducive to innovation
globalization
growing integration of national economies to form a single interdependent global economy
globalization positives
lower prices - economies of scale, lower transport costs & lower labor costs
greater variety - freedom of trade & improved communication
globalization negatives
inequality - widening gap, host countries abandoned & local businesses deposed
environmental harm - degradation & pollution
globalization measures
trade intensity
capital flow
exchange rate
law of one price
trade intensity expression
[(new - old) / (old)] x 100
multi-national company
enterprises that operate in more than one country but are managed from a home country
multi-national company characteristics
twenty-five percent of revenue derives from outside the home country
headquarters based in the home country
offices & workers in host country
why multi-national companies exist ?
ninety percent of global demand is not met through local supply
why location of natural factor endowments are important ?
multi-national companies source from nations with an abundance of resources to produce
(e.g. mineral reserves or cheap labor)
successful examples of digital & other innovation
l’oréal’s digital try-on app for make-up
philips innovating low-cost, solar-powered solutions for low-income populations
how infrastructure integration including logistics are important ?
multi-national companies need efficient methods of getting the product from the source to the consumer
e.g. distribution centres
government incentives
financial incentives include grants or loans
fiscal incentives include lower tax rates or tax holidays
other incentives include subsidies or free trade zones
trade theory link to multi-national companies
location of natural factor endowments :
hecksher-ohlin theory - factor endowments
comparative advantage - lower opportunity cost
digital & other innovation :
competitive advantage - factor conditions, related & supporting industries
infrastructure integration including logistics :
competitive advantage - factor conditions, related & supporting industries
government incentives :
competitive advantage - demand conditions, firm strategy, structure & rivalry
comparative advantage - lower opportunity cost
absolute advantage - lower direct resource cost
positives of technological change on multi-national companies
production is faster & cheaper
economies of scale can be achieved
promotes innovation (competitive advantage)
negatives of technological change on multi-national companies
loss of jobs
causes of tax minimization strategies for multi-national companies
high tax rates
opportunity to profit shift to low-tax countries through transfer pricing
effects of tax minimization strategies for multi-national companies
loss of tax revenue for governments
leads to heavier tax on alternative sources (e.g. individuals)
transfer pricing link to tax avoidance by multi-national companies
multi-national companies manipulate the transfer price to profit shift into low-tax jurisdictions
how resolution of global political conflicts impact multi-national companies ?
increased global trade
more opportunity to maximize efficiency & achieve economies of scale
access to more factor endowments
why consumer information requests from mult-national companies are changing ?
consumers want increased accountability & transparency from multi-national companies
(e.g. where their product came from, who made their product, how their product was made & how their product impacts the environment)
world trade organization
only international organization dealing with the rules of trade between nations
164 member states
promote free trade by lowering tariffs & barriers, police trade agreements, mediate trade disputes & impose trade sanctions
ensure trade flows smoothly, predictably & freely
international monetary fund
organization fostering global monetary co-operation & securing global financial stability
189 countries
economic surveillance & reporting, providing loans to build international reserves, to stabilize currencies & to restore conditions for strong economic growth, work with governments to improve economic growth, to create jobs & to modernize economic policies & institutions
ensure the system of exchange rates & international payments that enable countries to trade is stable
the world bank
five institutions funding developing countries
189 member countries
provide technical & financial support to developing countries, end extreme poverty & increase the income of the poor
end extreme poverty & promote shared prosperity in a sustainable way
