International Economy and Trade Flashcards
Define comparative advantage
an economy’s ability to produce a particular good or service at a lower opportunity cost than its trading partners
Define absolute advantage
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
What is meant by free trade?
trade without restrictions or regulations on imports or exports
What is meant by protectionism?
restricting imports from other countries through tariffs, quotas and/or government regulation
List 3 arguments in favour of free trade
- theory of comparative advantage
- leads to trade creation
- increased exports
Explain how the theory of comparative advantage can be used as an argument in favour of free trade
- free trade enables countries to specialise in goods where they have a comparative advantage
- this increases economics welfare for all countries
Explain how increased exports can be used as an argument in favour of free trade
- with free trade, there will be a lower tariff on domestic exports
- enables a higher quantity of exports, boosting domestic jobs and economic growth
List 3 arguments in favour of protectionism
- infant industry argument
- senile industry argument
- raise revenue for the government
Explain how the infant industry argument favours protectionism over free trade
- 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
Explain how the Senile industry argument favours protectionism over free trade
- 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
What is a drawback of the Senile industry argument?
it could be said that protectionism is an excuse for protecting inefficient firms
State how protectionism can lead to greater government revenue, and then evaluate this point
- import taxes can be used to raise money for the government
- however, this will only be a relatively small amount of money
List 7 methods of protectionism
- tariffs
- quota
- export subsidies
- foreign exchange restrictions
- embargoes
- red tape
- quality standards
What are foreign exchange restrictions?
where the government controls the purchase of / sale of currencies
What are embargoes?
where the government restricts commerce with specific countries or specific goods
Give an example of quality standards
quality standards on imported foreign foods
What are the 5 levels of economic integration (from least integrated to most integrated)
- free trade area
- customs union
- common or single market
- economic union
- monetary union
What are the 2 key characteristics of a free trade area?
- removal of tariffs and quotas on trade between member states
- member states reserve the right to determine their own trade policy towards non-members
What are the 2 characteristics of a customs union?
- removal of tariffs and quotas on trade between member states
- member states agree to a common external tariff on trade with non-member states
What are the 3 characteristics of a common or single market?
- 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
What are the 2 characteristics of an economic union?
- greater degree of harmonisation and coordination of economic policies
- some degree of centralisation of economic policies, in particular macroeconomic policies
What are the 2 characteristics of a monetary union?
- 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
Define quota, and what’s the purpose of a quota?
- a quantity limit on the number of imports
- incentivises greater domestic supply
Define economic integration
an arrangement among nations to reduce or eliminate trade barriers and coordinate monetary and fiscal policies
List 4 benefits/advantages of economic integration
- consumer benefits
- labour benefits
- capital benefits
- long-run benefits
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
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
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
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
List 3 disadvantages of economic integration
- trade diversion
- rising externalities
- labour disadvantages
Explain what is meant by trade diversion, and why it 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
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
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
What are the 3 accounts in the BoP?
- current account
- financial account
- capital account
What are the 4 sections on the current account?
- trade in goods
- trade in services
- primary income
- secondary income
What is meant by the trade balance?
- trade in goods + trade in services
- exports - imports
What is meant by the income balance?
primary income + secondary income
Give 2 examples of primary income
- income from interest
- income from shares and profits
Give 2 examples of secondary income
- EU payment
- repatriation of wages
- aid and grants
What are the 2 sections of the financial account?
- FDI
- portfolio investment
Give 2 examples of portfolio investment
- corporate shares and bonds
- government bonds
- hot money
What are the 3 sections of the capital account?
- debt forgiveness
- inheritance tax
- death duties
What is the sum of the current account, the financial account, and the capital account?
0
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
List 4 factors that affect the exchange rate
- determined by supply and demand
- the level of economic growth
- the level of inflation
- speculative demand
What are the 2 types of causes of current account surpluses?
- structural
- cyclical
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
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
List 3 effects of current account surpluses
- contributor to GDP
- may cause demand-pull inflationary pressure
- pressure on the currency to appreciate
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
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
What is meant by expenditure-reducing policies?
policies designed to control demand and limit spending on imports
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
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
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
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
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)
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
- The impact of the ER change depends on the size and length of the change
Define a currency union
an intergovernmental agreement that involves two or more states/countries sharing the same currency
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
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
List and explain 3 advantages of fixed exchange rate
- Reduces ER uncertainty
- Firms are more likely to invest as they know the price of imports/exports with a fixed ER
- Government have an incentive to keep inflation low as they cannot rely on lowering ER to lower the price of exports.
- Avoid the impact of speculators
List and explain 3 disadvantages of fixed exchange rate
- Can conflict with other macro-objectives as a fixed ER is inflexible there may be greater costs to economic growth and employment
- Less flexibility - the ER will not fall with reduced demand for exports, to boost further export demand
- Current account imbalances are more likely and may need revaluation or devaluation
- May require higher or lower interest rates and foreign reserve trading
Define globalisation
Globalisation is the process by which the worlds economies and becoming more integrated in a single international market
List and explain 3 characteristics of global GDP
- Increased trade as a proportion of global GDP
- Increased movement of financial capital and people between countries
- Increased importance of MNCs and TNCs
- Increased international specialisation and division of labour
- increased FDI
List and explain 3 factors that have contributed to globalisation
- IT and communications - Allow companies to operate globally (e.g the internet has allowed global media presence)
- Improvements in transport infrastructure and operations - Quick, reliable and cheaper production methods and low-cost transportation (shipping containers/capital-intensive imports)
- TNCS and MNS (larger companies operating worldwide) - TNCs operate globally to increase profits as take advantage low labour costs/government incentives to locate in their country
List and explain the pros to workers from globalisation
MNCs create jobs and training (improve human capital)
Although sweatshops offer poor conditions/low wages - sometimes better than alternative life in absolute poverty
Increased labour mobility enables wage cost to converge
More likely to find a job they want, thus greater welfare and more productive
List and explain the cons to workers from globalisation
Increased migration= lower wages due to greater supply of workers puts pressure on public services and some of their earnings are sent back home -> quality of life might fall
Risk of unemployment as MNCs leave countries in search of lower costs
List and explain the pros to consumers from globalisation
Greater choice as they can buy from numerous sellers world-wide
Lower prices (comparative advantage/lower production costs)
Higher living standards due to above
List and explain the cons to consumers from globalisation
Rising global incomes leads to higher demand leading to higher prices
Supply chain issues (strike action, wars, covid - higher prices and delays in receiving goods)
Worry about loss of cultures
List and explain the pros to producers from globalisation
Access to more markers - higher revenue and profits
Lower risk for firms insolvency as risks spread in global market
Lower production costs e.g. low labour costs
List and explain the cons to producers from globalisation
Some producers less price competitive so will lose out (due to low economies of scale - due to small size)
More competitive = some may lose out, especially if inefficient
Risk of diseconomies of scale if become to large
List and explain the pros to the government from globalisation
Higher tax revenue potential if domestic firms make more profit from selling goods abroad
Higher incomes of workers/ higher employment in country if more migrants boost income - higher income tax revenues
List and explain the cons to the government from globalisation
Tax avoidance methods
If internal markets not competitive could lead to deindustrialisation (due to lack of comparative advantage against competition or cheap labour) which can cause structural unemployment and make the country more vulnerable to global impacts
Possible corruption - MNCs have power to bribe and lobby governments
List and explain the pros to the environment from globalisation
The world can work to tackle climate change and share ideas/tech
MNCs might develop greener ways to product improve their image
List and explain the cons to the environment from globalisation
Higher trade and production - more emissions.
Increased world production - increased demand for raw materials = running down of natural resources.
Less regulated countries are likely to see increased external costs eg pollution
What has the impact of globalisation showed from COVID
- Highlighted our reliance of global imports, food, clothing etc
- Need to boost domestic supply
- Reliance on investment abroad
What has the impact of globalisation from the financial crash
- Economy is very reliant on services as a result a crash In services sector is very damaging
-Focus on domestic supply or protect domestic producers from unfair competitor. - Austerity measures.
- Counties adopting protectionist measures to protect domestic economies and employment rate
Factors Influencing International Competitiveness
- Real exchange rate
- Labour costs
- Productivity
- Government laws and regulation
- Research and development
What are the assumptions with comparative advantage?
All countries have the same resources of land, labour, capital and enterprise
There are no transport costs
List and explain 3 benefits of joining the WTO
- Attracts FDI which increases employment/average income levels and technology
- Discourages dumping
- Increases trade and economic growth
- MNCs may contribute to a countries exports
What is the World Trade Organisation (WTO)
The WTO is a global organisation that seeks to promote free international trade between countries
List and explain 3 disadvantages of joining the WTO
- Cutting tariffs may prevent infant industries from growing up and building sufficient economies of scale to compete with MNCs on a global scale. This means that infant industries may not have a chance to grow and exploit their potential comparative advantage
- Ruled it is illegal to ban a good because of how it is produced which can stop countries from tackling child labour
- It takes years for conclusions to be made on trade disputes
- Structural unemployment
List 3 arguments against of protectionism
- Offer too much protection for infant industries so they do not have pressure to be competitive and productively efficient
- Import tariffs cause prices to rise, which reduces consumer surplus, impacts low earners most significantly
- Cost-push pressure
List 3 evaluation points of protectionism
- It depends on the price elasticity of demand for imports and the extent of the welfare loss
- It depends on the length of time of the protectionist policy
- It depends on the response of the trading partners - retaliation?
List and explain 3 consequences of imbalances on the balance of payments
- Unemployment could rise in exporting industries
- Aggregate demand will fall
- In the short run, it may be possible to finance the trade deficit by selling IK financial assets overseas or by borrowing abroad
Evaluate the impact of imbalances on the balance of payments
- How reliant the country is on international trade?
- How flexible are domestic industries to respond to an economic shock?
Name 3 factors influencing terms of trade
Relative inflation rates
Productivity of the country relative to others
Price of raw materials
Tariffs
Exchange rate
Define terms of trade
Ratio of a country’s export prices relative to the price of its imports
