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AQA A-Level Economics Year 2 > International Economy and Trade > Flashcards

International Economy and Trade Flashcards

1
Q

Define comparative advantage

A

an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners

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2
Q

Define absolute advantage

A

where one country is able to produce a greater quantity of a good or service with the same quantity of inputs per unit time, than its competitors

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3
Q

What is meant by free trade?

A

trade without restrictions or regulations on imports or exports

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4
Q

What is meant by protectionism?

A

restricting imports from other countries through tariffs, quotas and/or government regulation

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5
Q

List 3 arguments in favour of free trade

A
  • theory of comparative advantage
  • leads to trade creation
  • increased exports
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6
Q

Explain how the theory of comparative advantage can be used as an argument in favour of free trade

A
  • free trade enables countries to specialise in goods where they have a comparative advantage
  • this increases economics welfare for all countries
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7
Q

Explain how increased exports can be used as an argument in favour of free trade

A
  • with free trade, there will be a lower tariff on domestic exports
  • enables a higher quantity of exports, boosting domestic jobs and economic growth
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8
Q

List 3 arguments in favour of protectionism

A
  • infant industry argument
  • senile industry argument
  • raise revenue for the government
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9
Q

Explain how the infant industry argument favours protectionism over free trade

A
  • if developing countries have industries which are relatively new, then at the moment they would struggle against international competition
  • however, if they invested in the industry then in the future they may be able to gain a comparative advantage
  • protection would allow developing industries to progress and gain experience to enable them to compete in the future
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10
Q

Explain how the Senile industry argument favours protectionism over free trade

A
  • if industries are declining and inefficient they may require significant investment to make them efficient again
  • protection for these industries would act as an incentive for firms to invest and reinvest themselves
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11
Q

What is a drawback of the Senile industry argument?

A

it could be said that protectionism is an excuse for protecting inefficient firms

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12
Q

State how protectionism can lead to greater government revenue, and then evaluate this point

A
  • import taxes can be used to raise money for the government
  • however, this will only be a relatively small amount of money
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13
Q

List 7 methods of protectionism

A
  • tariffs
  • quota
  • export subsidies
  • foreign exchange restrictions
  • embargoes
  • red tape
  • quality standards
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14
Q

What are foreign exchange restrictions?

A

where the government controls the purchase of / sale of currencies

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15
Q

What are embargoes?

A

where the government restricts commerce with specific countries or specific goods

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16
Q

Give an example of quality standards

A

quality standards on imported foreign foods

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17
Q

What are the 5 levels of economic integration (from least integrated to most integrated)

A
  • free trade area
  • customs union
  • common or single market
  • economic union
  • monetary union
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18
Q

What are the 2 key characteristics of a free trade area?

A
  • removal of tariffs and quotas on trade between member states
  • member states reserve the right to determine their own trade policy towards non-members
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19
Q

What are the 2 characteristics of a customs union?

A
  • removal of tariffs and quotas on trade between member states
  • member states agree to a common external tariff on trade with non-member states
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20
Q

What are the 3 characteristics of a common or single market?

A
  • removes restriction on free movement of labour and capital between member states
  • removes non-tariff barriers by harmonising product standard, employment laws, taxation policy, competition policy, etc
  • adoption of common policy in one or more areas
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21
Q

What are the 2 characteristics of an economic union?

A
  • greater degree of harmonisation and coordination of economic policies
  • some degree of centralisation of economic policies, in particular macroeconomic policies
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22
Q

What are the 2 characteristics of a monetary union?

A
  • extends macroeconomic policy coordination to the monetary field
  • the degree of monetary union can vary between a fixed system to semi fixed or the adoption of a common currency
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23
Q

Define quota, and what’s the purpose of a quota?

A
  • a quantity limit on the number of imports
  • incentivises greater domestic supply
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24
Q

Define economic integration

A

an arrangement among nations to reduce or eliminate trade barriers and coordinate monetary and fiscal policies

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25
Q

List 4 benefits/advantages of economic integration

A
  • consumer benefits
  • labour benefits
  • capital benefits
  • long-run benefits
26
Q

Explain how consumer benefits can arise from economic integration

A
  • lower costs and increased competition leads to lower prices
  • also, greater variety and innovation leads to increased consumer welfare
27
Q

Explain how labour benefits can arise from economic integration (for a single market)

A
  • increased labour mobility enables wage costs to converge
  • more likely to find a job/position that you want, thus greater welfare and more productive
  • unemployment to be spread more evenly between member states
28
Q

Explain how capital benefits can arise from economic integration (for a single market)

A
  • increased capital mobility increases relative supply in each country
  • enables businesses to grow and innovate
29
Q

Explain how long-run benefits can arise from economic integration

A
  • more innovation can take place in efficient markets
  • leads to R&D and economies of scale
  • good for consumers in LR
30
Q

List 3 disadvantages of economic integration

A
  • trade diversion
  • rising externalities
  • labour disadvantages
31
Q

Explain what is meant by trade diversion, and why is can be a disadvantage of economic integration

A
  • when tariff agreements cause imports to shift from low-cost countries to higher-cost countries
  • increased prices for consumers
  • more efficient non-members are crowded out by member states
32
Q

Explain how rising externalities can result from economic integration

A
  • associated with the free movement of people
  • places pressure on infrastructure and the insufficient supply of merit goods, such as healthcare and education
33
Q

Explain how labour may be disadvantaged as a result from economic integration

A
  • lower wages as migrant labour drives down local wages
  • quality of life may fall
34
Q

What are the 3 accounts in the BoP?

A
  • current account
  • financial account
  • capital account
35
Q

What are the 4 sections on the current account?

A
  • trade in goods
  • trade in services
  • primary income
  • secondary income
36
Q

What is meant by the trade balance?

A
  • trade in goods + trade in services
  • exports - imports
37
Q

What is meant by the income balance?

A

primary income + secondary income

38
Q

Give 2 examples of primary income

A
  • income from interest
  • income from shares and profits
39
Q

Give 2 examples of secondary income

A
  • EU payment
  • repatriation of wages
  • aid and grants
40
Q

What are the 2 sections of the financial account?

A
  • FDI
  • portfolio investment
41
Q

Give 2 examples of portfolio investment

A
  • corporate shares and bonds
  • government bonds
  • hot money
42
Q

What are the 3 sections of the capital account?

A
  • debt forgiveness
  • inheritance tax
  • death duties
43
Q

What is the sum of the current account, the financial account, and the capital account?

A

0

44
Q

What is the Marshall Lerner condition?

A

the Marshall Lerner condition states that a depreciation/devaluation of a currency will eventually lead to a net improvement in the trade balance on the BoP if the PEDx + PEDm > 1

45
Q

List 4 factors that affect the exchange rate

A
  • determined by supply and demand
  • the level of economic growth
  • the level of inflation
  • speculative demand
46
Q

What are the 2 types of causes of current account surpluses?

A
  • structural
  • cyclical
47
Q

List 3 causes of a structural current account surplus

A
  • significant long-run comparative advantage
  • trend rise in factor productivity
  • long-run rise in global prices of main exports
  • surplus of savings over investment
  • structural increase in net investment income
48
Q

List 3 causes of a cyclical current account surplus

A
  • depreciation of the exchange rate
  • strong consumer demand in key export markets
  • fall in prices of imported energy / FoP
49
Q

List 3 effects of current account surpluses

A
  • contributor to GDP
  • may cause demand-pull inflationary pressure
  • pressure on the currency to appreciate
50
Q

Explain what is meant by a cyclical trade deficit

A

one that occurs as a result of the trade cycle being in the growth/boom phase

51
Q

Explain what is meant by a structural trade deficit

A

long term in nature and occurs due to an underlying lack of productivity and international competitiveness in the economy

52
Q

What is meant by expenditure-reducing policies?

A

policies designed to control demand and limit spending on imports

53
Q

What is meant by expenditure-switching policies?

A

policies designed to change the relative prices of exports and imports - this causes changes in spending away from imports and towards domestic/export production

54
Q

List 3 reasons why a country may experience persistent deficits in the balance of trade in goods

A
  • high rate of inflation
  • appreciated exchange rate
  • low productivity
55
Q

Give 2 (general) points of evaluation for policies that are used to tackle a trade deficit

A
  • do they conflict with other macroeconomic objectives?
  • cost, opportunity cost and time lag involved
56
Q

List and explain 3 advantages of a floating exchange rate

A
  • less costly: as the governments aren’t required to hold vast reserves to protect currency value
  • market forces determine price / international competitiveness: no chance the rate is set too high or too low
  • complete control of interest rates to meet domestic economic objectives
  • acts as an automatic macroeconomic stabiliser
57
Q

List and explain 3 disadvantages of a floating exchange rate

A
  • reduced certainty: there is reduced price/cost certainty for imports and exports leading to decreased trade and decreased FDI
  • more speculation: which can lead to large fluctuations in the exchange rate and macroeconomic instability
  • less protection from the economic shock from imported inflation: occurs when a fall in the value of the currency leads to an increase in the costs of imports, some of which may be essential (food, oil, etc)
58
Q

List and explain 2 points of evaluation for whether a fixed or floating exchange rate is more beneficial

A
  • how economically developed the country is: many developing countries do not have sufficient foreign currency reserves to be able to maintain a fixed exchange rate
  • how export driven the economy is: if you rely heavily on exports (e.g. China) fixed may be better. If you rely more on domestic growth, floating may be better
59
Q

Define a currency union

A

an intergovernmental agreement that involves two or more states/countries sharing the same currency

60
Q

Give 3 advantages of currency unions

A
  • lower transaction costs trading within the currency union
  • greater certainty for firms investing in capacity to export to the currency union
  • greater incentive to increase productivity and keep inflation low, otherwise become uncompetitive (cannot manipulate exchange rate )
  • greater price transparency, easier to check different prices in same currency
61
Q

Give 3 disadvantages of currency unions

A
  • loss of independent monetary policy (e.g. in the EU, the ECB sets IR)
  • loss of ability to depreciate/devalue currency in recession
  • no lender of last resort: could reduce risk-taking and innovation (e.g. ECB unwilling to act as lender of last resort)
  • very large cost of leaving

AQA A-Level Economics Year 2 (11 decks)

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