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
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
3
Q
What is meant by free trade?
A
trade without restrictions or regulations on imports or exports
4
Q
What is meant by protectionism?
A
restricting imports from other countries through tariffs, quotas and/or government regulation
5
Q
List 3 arguments in favour of free trade
A
- theory of comparative advantage
- leads to trade creation
- increased exports
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
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
8
Q
List 3 arguments in favour of protectionism
A
- infant industry argument
- senile industry argument
- raise revenue for the government
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
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
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
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
13
Q
List 7 methods of protectionism
A
- tariffs
- quota
- export subsidies
- foreign exchange restrictions
- embargoes
- red tape
- quality standards
14
Q
What are foreign exchange restrictions?
A
where the government controls the purchase of / sale of currencies
15
Q
What are embargoes?
A
where the government restricts commerce with specific countries or specific goods
16
Q
Give an example of quality standards
A
quality standards on imported foreign foods
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
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
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
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
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
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
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
24
Q
Define economic integration
A
an arrangement among nations to reduce or eliminate trade barriers and coordinate monetary and fiscal policies
25
List 4 benefits/advantages of economic integration
- consumer benefits
- labour benefits
- capital benefits
- long-run benefits
26
Explain how consumer benefits can arise from economic integration
- lower costs and increased competition leads to lower prices
- also, greater variety and innovation leads to increased consumer welfare
27
Explain how labour benefits can arise from economic integration (for a single market)
- 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
Explain how capital benefits can arise from economic integration (for a single market)
- increased capital mobility increases relative supply in each country
- enables businesses to grow and innovate
29
Explain how long-run benefits can arise from economic integration
- more innovation can take place in efficient markets
- leads to R&D and economies of scale
- good for consumers in LR
30
List 3 disadvantages of economic integration
- trade diversion
- rising externalities
- labour disadvantages
31
Explain what is meant by trade diversion, and why is can be a disadvantage of economic integration
- 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
Explain how rising externalities can result from economic integration
- associated with the free movement of people
- places pressure on infrastructure and the insufficient supply of merit goods, such as healthcare and education
33
Explain how labour may be disadvantaged as a result from economic integration
- lower wages as migrant labour drives down local wages
- quality of life may fall
34
What are the 3 accounts in the BoP?
- current account
- financial account
- capital account
35
What are the 4 sections on the current account?
- trade in goods
- trade in services
- primary income
- secondary income
36
What is meant by the trade balance?
- trade in goods + trade in services
- exports - imports
37
What is meant by the income balance?
primary income + secondary income
38
Give 2 examples of primary income
- income from interest
- income from shares and profits
39
Give 2 examples of secondary income
- EU payment
- repatriation of wages
- aid and grants
40
What are the 2 sections of the financial account?
- FDI
- portfolio investment
41
Give 2 examples of portfolio investment
- corporate shares and bonds
- government bonds
- hot money
42
What are the 3 sections of the capital account?
- debt forgiveness
- inheritance tax
- death duties
43
What is the sum of the current account, the financial account, and the capital account?
0
44
What is the Marshall Lerner condition?
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
List 4 factors that affect the exchange rate
- determined by supply and demand
- the level of economic growth
- the level of inflation
- speculative demand
46
What are the 2 types of causes of current account surpluses?
- structural
- cyclical
47
List 3 causes of a structural current account surplus
- 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
List 3 causes of a cyclical current account surplus
- depreciation of the exchange rate
- strong consumer demand in key export markets
- fall in prices of imported energy / FoP
49
List 3 effects of current account surpluses
- contributor to GDP
- may cause demand-pull inflationary pressure
- pressure on the currency to appreciate
50
Explain what is meant by a cyclical trade deficit
one that occurs as a result of the trade cycle being in the growth/boom phase
51
Explain what is meant by a structural trade deficit
long term in nature and occurs due to an underlying lack of productivity and international competitiveness in the economy
52
What is meant by expenditure-reducing policies?
policies designed to control demand and limit spending on imports
53
What is meant by expenditure-switching policies?
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
List 3 reasons why a country may experience persistent deficits in the balance of trade in goods
- high rate of inflation
- appreciated exchange rate
- low productivity
55
Give 2 (general) points of evaluation for policies that are used to tackle a trade deficit
- do they conflict with other macroeconomic objectives?
- cost, opportunity cost and time lag involved
56
List and explain 3 advantages of a floating exchange rate
- 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
List and explain 3 disadvantages of a floating exchange rate
- 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
List and explain 2 points of evaluation for whether a fixed or floating exchange rate is more beneficial
- 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
Define a currency union
an intergovernmental agreement that involves two or more states/countries sharing the same currency
60
Give 3 advantages of currency unions
- 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
Give 3 disadvantages of currency unions
- 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
