International Economics- Theme 4

Question 1

What are the characteristics of globalisation?

Answer 1

• increase in trade as a proportion of world GDP
• increased movements of financial capital + people between countries.
• increase international specialisation and division of labour
• growing importance of global transnational companies (TNCs)
• increase in foreign direct investment (FDI)

Question 2

Define Foreign direct investment.

Answer 2

investment made by a firm or individual in one country into business interests located in another country.

Question 3

How does a fall in transport costs contribute to globalisation?

Answer 3

In real terms price of transporting goods has decreased significantly, enabling goods to be imported and exported more cheaply.

Question 4

How does a decline in cost of communications contribute to globalisation?

Answer 4

In particular, cost of using internet has fallen greatly over the last 20 years and its availability has increased.

Question 5

How does lowering of trade barriers contribute to globalisation?

Answer 5

World trade Organization (WTO) has been responsible for negotiating reductions in tariffs and other barriers to trade in rounds of talks, the most recent of which is Doha Round.

Question 6

How does the collapse of communism and opening up of China to world trade contribute to globalisation?

Answer 6

Countries which were previously not open to FDI became more integrated into the world trading system.

Question 7

How does transnational companies contribute to globalisation?

Answer 7

They’ve taken advantage of reduction in trade barriers and development of internet to organise trade on global scale.

Question 8

How does a growth in number and size of trading blocs(regional trade agreements) contribute to globalisation?

Answer 8

Growth resulted in increased trade between member countries of these blocs.

Question 9

Impacts of globalisation and global companies on countries.

Answer 9

• free trade enables application of the law of comparative advantage, suggests that, when countries specialise in the goods in which they have comparative advantage, then world output and living standards will increase. Evidence that growth of world trade associated with increased growth in real GDP
• increased inequality within developed countries. Much manufacturing transferred to developing countries, demand for unskilled workers declined in developed countries, resulting in fall in their wages relative to those of skilled workers.

Question 10

Impacts of globalisation and global companies on governments.

Answer 10

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.

Question 11

Define transfer pricing.

Answer 11

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.

Question 12

Impacts of globalisation and global companies on producers.

Answer 12

Benefits: lower production costs as a result of offshoring and also economies of scale.

Question 13

Impacts of globalisation and global companies on consumers.

Answer 13

Globalisation may mean a wider choice of goods. Further, prices may be lower, leading to increase in consumer surplus.

Question 14

Impacts of globalisation and global companies on workers.

Answer 14

Globalisation criticised on basis that it has promoted exploitation of workers, including use of child labour. Argued that globalisation has driven down wages as a share of GDP. Further, health and safety laws and regulations are usually less demanding in developing countries, might have detrimental effects on workforce.

Question 15

Impacts of globalisation and global companies on the environment.

Answer 15

Although industrialisation + increased consumer living standards might lead to more pollution through increased production and increased car use, consumers might show more concern towards the environment as their average incomes increase.
Some of the negative impacts on the environment could include deforestation, water scarcity and land degradation.
Increased trade leads to higher emissions from the movement of the goods.

Question 16

Define absolute advantage.

Answer 16

When a country can produce more of a product than another country.

Question 17

Define comparative advantage.

Answer 17

When a country can produce a product at a lower opportunity cost than another country, so has a relative advantage in producing that product.

Question 18

What are the assumptions underlying the theory of comparative advantage?

Answer 18

• no transport costs
• no trade barriers
• constant returns to scale I.e average cost of production is constant.
• perfect mobility of resources between different uses
• buyers/consumers have perfect knowledge.

Question 19

How are the terms of trade calculated?

Answer 19

Index of export prices/index of import prices. X 100

Question 20

What are the limitations of the principle of comparative advantage?

Answer 20

• transport costs might outweigh the benefits of comparative advantage
• trade barriers might distort comparative advantage
• increased specialisation and production might result in rising average costs caused by diseconomies of scale.

Question 21

What are the advantages of specialisation and trade?

Answer 21

• efficient resource allocation: specialisation and 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

Question 22

What are the disadvantages of specialisation and trade?

Answer 22

• law of comparative advantage based on unrealistic assumptions
• danger of over dependence on imports, especially those of strategic importance
• country’s goods and services may be uncompetitive, resulting in persistent trade deficit
• for developing economies, specialisation in production of primary products might prevent diversification into more productive manufacturing industries.

Question 23

How do changes in comparative advantage influence the pattern of trade?

Answer 23

There has been a recent growth in the exports of manufactured goods from developing countries to developed countries. This is because developing countries have gained an advantage in the production of manufactured goods, due to their lower labour costs, so production shifted abroad.
deindustrialisation of countries such as the UK has meant the manufacturing sector has declined. This means that production of manufactured goods has shifted to other countries.

Question 24

How does impact of emerging economies influence the pattern of trade?

Answer 24

collapse of communism has meant more countries, especially developing countries, are participating in world trade.
As economies emerge, they take up a larger proportion of exports, since many develop through export-led growth. They also import more, since rising incomes means that consumers demand more goods and services.

Question 25

How does growth of trading blocs and bilateral trading agreements influence the pattern of trade?

Answer 25

With more trading blocs, trade has been created between members, but diverted from elsewhere. Trade creation occurs when a country consumes more imports from a low cost producer, and fewer from a high cost producer. Trade diversion occurs when trade shifts to a less efficient producer. They shift trade from one group to another.

Question 26

Define trading blocs.

Answer 26

A group of countries that trade freely but protect themselves from imports from non-members.

Question 27

How do changes in relative exchange rates influence the pattern of trade?

Answer 27

The exchange rate affects the relative prices of goods between countries, which is an important factor in determining whether consumers buy goods. A rise in the exchange rate of a country will decrease its exports and shift trade to another country.

Question 28

Define terms of trade.

Answer 28

The average price of a country’s exports relative to the average price of its imports.

Question 29

How does relative inflation rates influence a country’s terms of trade?

Answer 29

If Uk inflation rate higher than that of its trading partners then export prices will be rising relative to import prices, so causing rise in UK’s terms of trade.

Question 30

How do changes in raw material prices influence a country’s terms of trade?

Answer 30

For 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

Question 31

How do changes in exchange rates influence a country’s terms of trade?

Answer 31

If 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

Question 32

How do tariffs influence a country’s terms of trade?

Answer 32

If a country imposes a tariff on imported goods then this would result in a fall in the country’s terms of trade.

Question 33

How does dependency on primary products influence a country’s terms of trade?

Answer 33

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.

Question 34

Describe the impact of changes in a county’s terms of trade on living standards.

Answer 34

Upward movement in terms of trade usually referred to as an ‘improvement’ because it implies that country has to export less to buy a given quantity of imports. This implies a higher standard of living for citizens of that country.
Fall in terms of trade referred to as a ‘deterioration’ because implies more must be exported to gain given quantity of exports, which, in turn, implies fall in living standards.

Question 35

Describe the impact of changes in a country’s terms of trade on the balance of payments on current account.

Answer 35

Upward movement in country’s terms of trade would decrease 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 current account is likely to deteriorate. This could cause depreciation in its exchange rate.

Question 36

Describe the impact of changes in a country’s terms of trade on the rate of inflation.

Answer 36

Fall in a country’s terms of trade may be associated with higher rate of inflation if the fall was caused by an increase in the price of imported raw materials.

Question 37

Describe the impact of changes in a country’s terms of trade on developing countries.

Answer 37

Resource-rich developing countries sometimes suffer from 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 terms of trade. This results in loss of competitiveness of their manufactured goods and services, leading to slower economic growth.

Question 38

What are free trade areas?

Answer 38

Type of trading bloc where trade barriers are removed between member countries, but individual members can still impose tariffs and quotas on countries outside the area. For example the North Atlantic Free Trade Area (NAFTA)

Question 39

What are customs unions?

Answer 39

Type of trading bloc with free trade between member states and a common external tariff on goods imported from outside the bloc. Examples include the European Union and the customs union of Russia, Belarus and Kazakhstan.

Question 40

What are common markets?

Answer 40

Type of trading bloc that establishes free trade in goods and services, a common external tariff and allows free movement of capital and labour across borders. When the EU was established, it was a Common Market. EU citizens can work in any country in the EU.

Question 41

What are monetary unions?

Answer 41

These are customs unions that adopt a common currency. The eurozone area of the EU is an example.
Monetary unions use the same interest rate. The Euro, for example, floats against the US Dollar and the Pound Sterling. Member nations are required to control their government finances, so budget deficits cannot exceed 3% of GDP. This is one of the four convergence criteria countries have to meet in order to join the Euro. The other three are:
- Gross National Debt has to be below 60% of GDP
- Inflation has to be below 1.5% of the three lowest inflation countries
- The average government bond yield has to be below 2% of the yield of the
countries with the lowest interest rates. This ensures there can be exchange rate stability.

Question 42

Explain how trade diversion is a cost of regional trade agreements.

Answer 42

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.

Question 43

Explain how distortion of comparative advantage is a cost of regional trade agreements.

Answer 43

Existence of trade restrictions on goods from countries outside the agreement will distort comparative advantage and lead to less efficient allocation of resources, lowering global economic growth.

Question 44

Explain how loss of independent monetary policy is a cost of regional trade agreements.

Answer 44

This would be relevant to countries in monetary unions which would be unable to control their own interest rates and exchange rates.

Question 45

Explain how trade creation is a benefit of regional trade agreements.

Answer 45

Removal of trade barriers between member countries of the bloc will result in increased specialisation and trade between them

Question 46

Explain how increase in FDI is a benefit of regional trade agreements.

Answer 46

Global companies may wish to invest inside a trading bloc to avoid trading restrictions.

Question 47

Explain how elimination of transactions cost will further benefit monetary unions of regional trade agreements.

Answer 47

There would be no costs involved in changing currencies when goods are imported or exported.

Question 48

Explain how price transparency will further benefit monetary unions of regional trade agreements.

Answer 48

Single currency means that consumers have the ability to compare prices more easily across national borders.

Question 49

Explain how eliminations if currency fluctuations between member countries will further benefit monetary unions of regional trade agreements.

Answer 49

This eliminates uncertainty and might help to attract FDI

Question 50

Describe the role of the World Trade Organisation (WTO) in trade liberalisation.

Answer 50

• to promote free trade among the 188 member countries through is-called ‘rounds of talks’
• to settle trade disputes between members.

Question 51

What are the possible conflicts between regional trade agreements and the WTO?

Answer 51

Trading blocs might distort world trade or adversely affect those who do not belong to them. There could be inefficient allocation of resources as a result of policies such as the EU CAP.
Conflicts between blocs could lead to rise in protectionism. A common external tariff contradicts the WTO’s principles, since although there is free trade between members, protectionist barriers are imposed on those who are not members.
Some countries might argue that the WTO is too powerful, or that it ignores the problems of developing countries. This could be since developed countries do not trade completely freely with developing countries, which limits their ability to grow.

Question 52

Explain why restriction on free trade is used to protect infant industries.

Answer 52

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.

Question 53

Explain why restriction on free trade is used to protect geriatric industries.

Answer 53

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.

Question 54

Explain why restriction on free trade is used to ensure employment protection.

Answer 54

Cheap imports might threaten jobs in the domestic economy and workers might demand that the government takes action to limit imports.

Question 55

Explain why restriction on free trade is used to prevent dumping.

Answer 55

‘Dumping’ refers to goods being exported to another country at below the average cost of production. It’s a form of predatory pricing and, if it can be proved, is illegal under the WTO rules

Question 56

Define predatory pricing.

Answer 56

A deliberate strategy by a firm aimed at driving competitors out of the market by setting its prices below average variable costs.

Question 57

Explain why restriction on free trade is used to correct a balance of payments deficit on current account.

Answer 57

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’s possible that this correction will happen automatically.

Question 58

How do tariffs restrict trade?

Answer 58

Type of restriction on trade, they are taxes on imported goods.
Once tariff imposed, price paid by consumers rises so increasing consumer surplus, domestic output rises so increasing producer surplus, Imports fall.

Question 59

How do quotas restrict trade?

Answer 59

Import quotas place a physical restriction on the amount of goods that can be imported. They have similar effects to those of tariffs , in that the price of imported goods will rise and domestic producers should gain more business. However, unlike tariffs, government doesn’t receive any revenue.

Question 60

How do subsidies to domestic producers restrict trade?

Answer 60

Grants given to domestic producers by the government artificially lower their production costs, so enabling their goods to be more competitive. Subsidies therefore act as barrier to trade.

Question 61

How do non-tariff barriers restrict trade?

Answer 61

These take variety of forms, including labelling, health and safety regulations, environmental standards and documentation in country of origin. In effect, such regulations increase costs of foreign producers and so act as a barrier to trade.

Question 62

What are the impact of protectionist policies on consumers?

Answer 62

Higher prices and less choice.

Question 63

What are the impact of protectionist policies on producers?

Answer 63

Less incentive for domestic producers to become more efficient.

Question 64

What are the impact of protectionist policies on governments?

Answer 64

Government would receive tax revenue from tariffs but subsidies to domestic producers would incur a cost on taxpayers. Once such barriers are introduced, it might prove to be difficult to remove them because of the adverse effect on domestic producers.

Question 65

What are the impact of protectionist policies on living standards?

Answer 65

Protectionism results in less efficient resource allocation because trade barriers distort comparative advantage and reduce specialisation, which will result in lower world output and therefore, lower living standards.

Question 66

What are the impact of protectionist policies on equality?

Answer 66

Trade barriers imposed by developed countries on goods from developing economies could increase inequality between two sets of countries.

Question 67

Define balance of payments.

Answer 67

A record of all financial transactions between one country and other countries. The main components of the BofP are the current account and the capital and financial account.

Question 68

Define protectionism.

Answer 68

Protectionism is the act of guarding a country’s industries from foreign competition, by imposing restrictions on free trade.

Question 69

What’s the current account composed of?

Answer 69

• trade balance
• the income balance ( now renamed primary income)
• current transfers (now renamed secondary income)

Question 70

What is the trade balance?

Answer 70

The value of goods and services exported minus the value of goods and services imported. Can be separated into the trade in goods balance and the trade in services balance.

Question 71

What is the income balanced (now renamed primary income)?

Answer 71

Income flows into the country from non-residents minus income flows out of the country from residents to non-residents. Income refers to compensation to employees and investment income, for example.

Question 72

What are current transfers (now renamed secondary income)

Answer 72

Relates to items such as food aid and the UK’s contribution to the EU’s common agricultural policy.

Question 73

What is the capital and financial account?

Answer 73

This compromises transactions associated with changes of ownership of the UK’s foreign financial assets and liabilities. A key factor influencing the financial account is FDI. Also included are portfolio investment in shares and bonds, changes in foreign exchange reserves and short term capital flows, often referred to as ‘hot money’ flows, associated with speculation. Balance on this account should exactly offset current account balance.

Question 74

What are causes of current account deficits?

Answer 74

• relatively low productivity, meaning that country’s goods and services are not competitive internationally.
• relatively high inflation rate
• overvalued exchange rate
• dependence on highly priced imported raw materials
• relocation of manufacturing industries to low-wage countries
• protectionism by other countries.

Question 75

What are the causes of the current account surpluses?

Answer 75

• relatively high productivity, meaning that country’s goods and services more internationally competitive
• relatively low inflation rate
• undervalued exchange rate
• abundance of minerals, fuels and agricultural produce which is high demand by other countries
• relocation of manufacturing industries from high-wage countries
• protectionist policies designed to reduce imports.

Question 76

What are the main reasons for the UK’s current account deficit?

Answer 76

• high value of sterling 1996-2008
• continuous economic growth 1992-2008, uk has high MPI so rising real incomes led to significant increase in imports
• relatively low productivity of UK’s workers, resulting in higher average costs
• relocation of manufacturing to countries with lower labour costs.

Question 77

How are supply-side policies designed to increase productivity and competition used to reduce a country’s imbalance on the current account?

Answer 77

These would help to improve competitiveness of country’s goods and services and so lead to increase in exports and decrease in imports. Examples include:

• education and training aimed at increasing productivity of work force
• tax breaks and investment allowances to stimulate purchase of capital equipment
• measures to promote small and medium sized businesses to promote competition
• privatisation, deregulation and contracting out of public services.

Question 78

How are expenditure-reducing policies used to reduce a country’s imbalance on the current account.

Answer 78

These could include deflationary fiscal policy. If direct taxes were raised the. Disposable income would fall, causing a fall in consumption and, consequently, a fall in imports, so resulting in an improvement in the balance of trade.

Question 79

How are expenditure-switching policies used to reduce a country’s imbalance on the current account?

Answer 79

• protectionist policies such as tariffs, quotas and subsidies to domestic producers.
• devaluation/depreciation of the country’s currency. Country with fixed exchange rate could devalue currency. However, under system of floating exchange rate, a depreciation of exchange rate of country’s currency could only be engineered by reducing interest rates or through QE, but these monetary tools wouldn’t be available to a government if the central bank were independent.

Question 80

Significance of global trade imbalances.

Answer 80

International trade has meant countries have become interdependent. Therefore, economic conditions in one country affect another country, since the quantity they export or import will change. A surplus or deficit on the current account could indicate an unbalanced economy, and it could mean the country is too reliant on other economies for their own growth. It could be difficult to attract sufficient financial flows in order to finance a current account deficit. This could make it unsustainable in the long run

Question 81

Define nominal exchange rate.

Answer 81

The number of units of the domestic currency that can purchase a unit of a given foreign currency.

Question 82

Define real exchange rate.

Answer 82

Calculated to measure the movements of competitiveness of country’s currency vis-à-vis another country’s currency on the basis of the inflation differential between the countries. Ie its the nominal exchange rate adjusted to reflect the different inflation rates in the countries of the 2 currencies concerned.

Question 83

Define effective exchange rates.

Answer 83

Estimated to measure the movements of a country’s currency value or average exchange rate in a basket of currencies of trading partner countries.

Question 84

Define trade-weighted exchange rate.

Answer 84

The average exchange rate of a basket of currencies, weighted by the amount of trade with each country.

Question 85

What is a floating exchange rate?

Answer 85

Under a system of floating exchange rates, market forces determine the value at which one currency exchanges for another.

Question 86

What is a fixed exchange rate?

Answer 86

Under a system of fixed exchange rates, the value at which one currency exchanges for another is fixed by the central bank or the government against another currency or a basket of currencies.

Question 87

What is a managed exchange rate?

Answer 87

Under a system of managed exchange rates, market forces determine the value at which one currency exchanges for another but intervention by the central bank influences the exchange rate of the currency.

Question 88

What is a revaluation of a currency?

Answer 88

Occurs under a system of fixed exchange rates, When the government decides to increase the value of its currency against other currencies.

Question 89

What is appreciation of a currency?

Answer 89

Occurs under a system of floating exchange rates when value of a currency increases against another currency as a result of the operation of market forces.

Question 90

What is devaluation of a currency?

Answer 90

Occurs under system of fixed exchange rates when government decides to decrease value of its currency against other currencies.

Question 91

What is depreciation of a currency?

Answer 91

Occurs under a system of floating exchange rates when value of a currency decreases against another currency as a result of the operation of market forces.

Question 92

How do relative inflation rates influence the exchange rate?

Answer 92

If country’s inflation rate higher than that of its major competitors then, according to PPP analysis, it would be expected that the value of currency would fall. The PPP rate is the rate at which a particular product would be sold at the same price in the UK and abroad when expressed in a common currency.

Question 93

How do relative interest rates influence exchange rate?

Answer 93

If the uk has higher interest rates than those of other countries, then foreigners with surplus balances are likely to place them in UK banks, so increasing the demand for sterling and causing the value of the pound to increase.

Question 94

How does the state of the economy influence exchange rates?

Answer 94

If, for example, the UK economy is performing well, this will increase the confidence of speculators and foreign investors, who will buy sterling, so causing its value to rise.

Question 95

How does the balance of payments on the current account influence exchange rate?

Answer 95

If persistent deficit on current account, then supply of currency would be high relative to demand for it and the value of the currency would be expected to fall. In practice, this factor not significant because flows of money associated with trade are small compared with ‘hit money’ flows and other transactions recorded in the financial account.

Question 96

How does political stability influence the exchange rate?

Answer 96

In developing countries, instability may cause a loss of confidence in the country’s currency.

Question 97

How does speculation influence exchange rates?

Answer 97

Exchange rate might be affected by speculation concerning a range of possible events, including factors such as the future state of the economy, a change in government or impending strikes. Eg if it’s expected that economy will recover from recession more quickly than originally thought, then speculators may buy sterling, so pushing up its value.

Question 98

Government intervention in currency markets through foreign currency transactions.

Answer 98

To bring appreciation in exchange rate, central bank would buy its currency on foreign exchange market in exchange for foreign currency. Increase in demand for domestic currency would cause increase in its value against foreign currencies.
To bring depreciation, central bank would sell its own country’s currency on foreign exchange market in exchange for foreign currency. Increase in supply would cause fall in value of currency against foreign currencies.

Question 99

Government intervention in currency markets through use of interest rates

Answer 99

Appreciation- central bank would raise interest rates, relative to other countries, makes it more attractive to invest funds in country because rate of return on investment higher. This increases demand for currency, causing an appreciation. This is known as hot money
Depreciation- central bank reduce interest rates, makes less attractive for citizens and foreign nationals to hold money in that country’s bank. Increase supply of currency on foreign exchange market and so reduce its value against other currencies.

Question 100

What is the meaning of competitive devaluations/ depreciation?

Answer 100

Sometimes referred to as currency wars because devaluation/depreciation by one country results in other counties taking measures to devalue their currencies.

Question 101

What are the effects of competitive devaluations/ depreciations?

Answer 101

• increase in rate of inflation because imports would become more expensive
• decline in world trade because of uncertainties associated with fluctuating exchange rates.
• countries could retaliate by imposing protectionist measures.

Question 102

What is the impact of a change in exchange rate on the current account of the balance of payments?

Answer 102

depreciation/ devaluation makes country’s goods and services more competitive and so should lead to an improvement in its current account. For there to be improvement in current account, the Marshall-Lerner condition must be filled. Could be a time lag, initially current account deteriorates since demand for imports is price inelastic because of contracts or stocks of goods. Also, demand for exports may be inelastic because takes time for consumers to adjust to price changes. In longer term, demand for both imports and exports may become more elastic and, if Marshall-Lerner condition fulfilled, current account will improve.

Question 103

What is the impact of a change in exchange rate on economic growth and employment/unemployment?

Answer 103

If increase in net exports following depreciation in value of a country’s currency against other currencies, then AD will increase, causing an increase in real output. In turn this should result in an increase in employment and a decrease in unemployment

Question 104

What is the impact of a change in exchange rate on the rate of inflation?

Answer 104

Following depreciation, inflationary pressures could arise from:

• increase in AD resulting from rise in net exports
• imported inflation, rise in import prices, especially of raw materials and commodities, is likely to increase costs of production, causing leftwards shift in AS curve and therefore increase in rate of inflation.

Question 105

What is the impact of a change in exchange rate on FDI flows?

Answer 105

Depreciation in exchange rate of country A’s currency against others would potentially make it more attractive for foreign companies to invest in that country because a unit of a foreign currency would buy more units of country A’s currency. However, if depreciation is indicative of a lack of confidence in the country’s then FDI inflows may not increase.

Question 106

Describe relative unit labour cost as a measure of international competitiveness.

Answer 106

This refers to the measurement of labour costs in one country relative to those in another country. To make international comparisons, the figures are converted into a single currency and expressed as an index number.

Question 107

Describe relative export prices as a measure of international competitiveness.

Answer 107

These might be affected by factors such as productivity (relative to other countries). This may be measured in terms of labour productivity, which is output per worker per hour worked.

Question 108

How does the real exchange rate influence international competitiveness?

Answer 108

There will be depreciation in real exchange rate if the nominal exchange rate falls or if the prices of goods abroad rise relative to prices in the home country. Therefore a fall in the real exchange rate will cause an increase in the competitiveness of a country’s good. In contrast, the real exchange rate will increase if the nominal exchange rate rises or if the UK price level rises relative to the foreign price level. consequently an appreciation of the real exchange rate is associated with a fall in the countries competitiveness

Question 109

Define real exchange rate.

Answer 109

The nominal exchange rate adjusted to reflect the different inflation rates of the currencies concerned.
Real exchange rate= (nominal exchange rate X domestic price level) / foreign price level.

Question 110

How do wage costs influence international competitiveness?

Answer 110

Wage costs most important cost of production for many industries. If wages higher in UK than in China, its likely that prices of goods in UK will be higher than those of China. However, relationship between labour productivity and wages is crucial in influencing unit labour costs.

Question 111

How do non-wage costs influence international competitiveness?

Answer 111

Include:
- national insurance contributions paid by employers
- health and safety regulations
- environmental regulations
- employment protection and anti-discrimination laws
- contributions into company pension schemes
These frequently much higher in developed countries than in developing countries and so have effect of reducing international competitiveness of goods and services from developed countries.

Question 112

How does labour market flexibility influence international competitiveness?

Answer 112

If labour market is flexible, this will improve competitiveness as businesses will be able to move labour in response to changes in demand and prevent unnecessary wage rises (a lack of flexibility would mean higher wages had to be offered to get people to move jobs). This keeps costs and prices low. Moreover, flexible and efficient managers will be able to manage change within the company and adapt production when demand for products changes.

Question 113

How does investment in infrastructure influence international competitiveness?

Answer 113

Investment in infrastructure improves productivity and ensures firms can deliver and produce their product reliably, cheaply and efficiently. Investment in research and development allows firms to develop new products, which increases competitiveness as other countries won’t have these products, and new technology, which reduces costs and increases efficiency

Question 114

What are the benefits of being internationally competitive?

Answer 114

• surplus on country’s current account of the balance of payments
• export led growth
• low levels of unemployment

Question 115

What are the problems of being internationally competitive?

Answer 115

Fall in international competitiveness likely to be reflected in a deterioration in the trade in goods balance of the balance of payments. In turn, this could result in an increase in unemployment, especially in industries in which exports are significant. A fall in exports could have a negative multiplier effect on GDP, so causing reduction in economic growth.