Macro 29 Free trade and international competitiveness

Question 1

Define international trade?

Answer 1

The flow of goods and services across national borders.

Question 2

What are 3 advantages of free trade?

Answer 2

1. Lower prices due to competition.
2. Firms move FOP to another country that has a comparative advantage.
3. More productively efficient due to comparative advantages.

Question 3

What are 4 disadvantages of free trade?

Answer 3

1. Leakages from the circular flow.
2. Higher unemployment due to less domestic demand.
3. Worsens current account.
4. Less income tax and more benefits means worsening budget.

Question 4

how can the government soften the blow on unemployment from free trade?

Answer 4

• More investment in the north.
• Enterprise zones (tax breaks).

Question 5

Define the WTO?
(world trade organisation)

Answer 5

Dealing with the rules of free trade between countries (overseas)

Question 6

What are the roles of the WTO?

Answer 6

• Increase free trade.
• Decrease protectionism.
• Reduce disputes.

Question 7

When was the WTO formed and what was it called before?

Answer 7

Formed in 1995.
Was called GATT (General Agreement on Tariffs and Trade)

Question 8

Has the WTO been successful?
(YES)

Answer 8

1. Amount of free trade has increased significantly since the 1990’s and the induction of china in the WTO. China has a large manufacturing industry. This has increased incomes and improved living standards in these countries.
2. UK has benefited from growth in the golden period and inflation was stable. This was because of low prices from high competition and the free movement of labour.
3. Developing countries benefit from preferential access and so dont have to pay taxes. In return they have to endorse neo classical economics like less protectionism and more privatisation.

Question 9

Has the WTO been successful?
(NO)

Answer 9

1. Increased protectionism in the last 8 years, since the election of trump. He thought China was exporting too much and so imposed tariffs as china was reducing domestic employment.
2. Rulings by the WTO are often ignored, especially by america. The richest countries have too much power.
3. Problem for countries like ethiopia because they export low value goods like coffee and they decrease overtime - TOT deteriorates.
4. Protectionism still exists - especially for agriculture goods to protect farmers.

Question 10

define competitiveness?

Answer 10

A countries ability to compete successfully with other countries in the production of goods and services and therefore increase its net exports.

Question 11

Explain and evaluate “labour costs” as a cause of international competitiveness?

Answer 11

Fall in labour costs are passed onto consumers. This may occur from lowering minimum wage or flexible labour markets or open immigration laws.
- UK has the most flexible labour market in europe.
EVAL:
- Assumes costs are passed on.
- Trade unions might resist and they have recently tightened up in the UK.
- US is more deregulated and so more competitive.

Question 12

Explain and evaluate “exchange rates” as a cause of international competitiveness?

Answer 12

Fall in the value of the pound means exports become cheaper, as less foreign currency is needed to purchase UK goods.
EVAL:
- Increased COP will increase prices.
- A depreciation only works if the combined elasticity of imports and exports add up to more than one.
- A depreciation in the SR is unlikely to work because firms often buy in contracts. People also don’t notice changes.
- Germany produces better quality goods and so people will prefer their goods instead of UK goods.

Question 13

Explain and evaluate “Inflation” as a cause of international competitiveness?

Answer 13

A rise in interest rates will reduce consumption in the economy. This will lead to a fall in price level due to excess supply. Goods become more competitive.
EVAL:
- Time lag.
- Hot money will flow in, appreciating the pound, which will reduce competitiveness.

Question 14

Explain and evaluate “Productivity” as a cause of international competitiveness?

Answer 14

Subsidising firms means that firms can invest in capital goods or education/training. This will improve efficiency and allow firms to produce more per unit input. Prices will be passed on as they fall due to costs being spread out over a larger amount of goods.
- Firms have been reluctant to spend on machinery and successive governments have tried to improve productivity. The UK has the lowest productivity in the G7 since the financial crisis.
EVAL:
- TIme lag.
- Expensive, so not fundable currently as national debt is bad.