Macro L1 - 3 Flashcards
Globalisation:
The process of economics integration of different countries through growing freedom of movement across borders of goods, services, capital and people
Causes of globalisation:
- Trade liberalisation
- Trading blocs
- Growth of MNCs
- Technological advancements
- Mobility of labour
Trade liberalisation:
Removal of restrictions on free exchange of goods and services between nations
Types of trade liberalisation:
1) Bilateral
2) Consensus
3) Multilateral
4) Orthodoxy
Bilateral trade liberalisation:
Involving 2 parties, especially countries
Consensus:
General agreement
Multilateral trade liberalisation
Involves several parties, especially countries
Orthodoxy:
Authorised or generally accepted theory/practice
What is the WTO responsible for?
Responsible for negotiating reductions in tariffs and other trade barriers
MNC:
- Multinational corporation
- Business based in one country but does business in other countries
TNC:
- Transnational corporation
- Business that operates in many countries but does not have a centralised system
Advantages of globalisation:
- Lower prices as international competition has increased
- Benefits of trade –> greater growth + promotes economic development
- More employment as firms increase in size
- Benefits from large economies of scale
- Free movement of labour and capital (FDI)
- Technological transfers and innovations
Disadvantages of globalisation:
- Growing inequality –> top earners have own a lot of the wealth in world
- Higher structural unemployment due to deindustrialisation
- Environmental costs
- Limits gov ability to raise tax revenue
- Trade imbalances eg deficits + surpluses
- Greater risk of external shocks eg Financial Crisis of 2008
- Less cultural diversity –> similar goods and services everywhere
Evaluation of globalisation:
- About 1bn people live in countries where trade is less than 1/4 of GDP
- Shows not all parts of world are well integrated
Comparative advantage:
When a country produces good or service for lower opportunity cost than other countries
Industrialisation:
Development of industries in country/region on a wide scale
Deindustrialisation and what it causes:
Loss of industry that occurs due to loss of comparative advantage, causing structural unemployment
What does globalisation allow countries to do and how is this beneficial for consumers (+ evaluation)?
- Specialise in goods and services where they have comparative advantage
- Lower prices + increased choice
Evaluation: - Difficult to find other whether goods are produced ethically
How does globalisation limit gov’s ability to raise tax revenue?
- If one country reduces corporation tax, TNCs have incentive to relocate to that country
- Departure of TNCs reduces tax revenue (countries try to undercut taxes for this reason)
How does globalisation aid producers?
- Firms can expand beyond what is possible in one country
- Production can be shifted to most advantageous location
- More competition
- More choice of supplier
Offshoring:
Relocation of business process from 1 country to another
Bargaining power:
Capacity of one party to dominate the other in negotiation
Which workers gain from globalisation?
Workers in industries w/ comparative advantage
How do workers lose out because of globalisation?
- TNCs can threaten to offshore if workers demand wage rises
- Low skilled workers as industries they work in tend to become uncompetitive
Give one stat to show the environmental costs of globalisation (+ evaluation):
- Shipping creates between 2 and 3% of world’s total greenhouse gas emissions
Evaluation: - However, it provides opportunity for green technologies
Free trade:
International trade w/out restrictions
Protectionism:
Policy of restricting imports through trade restrictions
Reasons for use of trade restrictions (w/ examples):
1) Risk to national security eg Chinese technology companies leaving US more vulnerable to Chinese attacks
2) Public safety eg Japanese seafood after Fukushima disaster
3) Tax revenue (esp developing countries)
4) Protect domestic industries (employment)
5) Retaliation eg Trump v China
6) Preventing dumping eg China dumping steel
7) (Improve current account deficit)
8) (Avoid risk of over-specialisation)
Infant industry:
Industry that is new to a country but already established in others
What is the infant industry argument (+evaluation)?
- When developing country enters an industry, quality of goods will be low
- Nation would struggle to industrialise, as foreign imports would outcompete them
Evaluation: - If protectionism is used , it allows room for inefficiencies
Purposes of retaliatory protectionist measures:
1) To punish
2) Persuade other country to remove trade restrictions
3) Serve as warning to other countries
Dumping (+ evaluation):
- When an exporter sells below production costs
- Dumping is very hard to prove –> if proven that it is not taking place, there could be strict retaliation (trade talks may be more appropriate
Reasons for dumping:
- Excess capacity
- Failure to find a buyer
- Drive out domestic competition so they can dominate market
Evaluation of using protectionism to protect domestic employment:
If industry is already declining, gov is just elongated the process of natural disintegration that was going to happen anyway
Evaluation of using protectionism to improve current account deficit:
Expect very severe retaliation
How does protectionism avoid over-specialisation?
Allows country to delve into other industries in case current industries go into decline
Methods of protectionism:
1) Tariff
2) Quota
3) Subsidies to domestic producers
4) Embargo
5) Administrative barriers
Tariff:
Taxes on imports/exports (usually ad valorem + on imports)
Quota and its purpose:
- Limit on number of imports for a product allowed into a country
- Protect domestic firms
Reasons for providing subsidies to domestic producers:
- Encourage firms to grow in size
- Lower production costs to make products more competitive
- Can provide employment, income + tax revenue
Embargo w/ example:
- Official ban on trade or other commercial activity w/ particular country
- Ban on import of firearms
Administrative barrier:
Procedure that can inhibit trade if set in an arduous/laborious manner eg lots of paperwork
Subsidy:
State grant given to firms to encourage production
Export discipline:
Pushing companies to export instead of just selling domestically in order to determine which firms are actually using state protection to develop and innovate
Why is export discipline important?
- Selling within protected home market doesn’t reveal quality of goods produced
- Can only be observed in highly competitive international environments
What is the impact of protectionism on producers?
Producers gain an advantage over foreign competitors
What is the impact of protectionism on consumers?
- Embargoes and quotes limit choice
- Tariffs make goods more expensive
What is the impact of protectionism on workers?
- Higher job security if they receive protection benefit
- More unemployment if import focused firms go out of business/need to lower production costs
What is the impact of protectionism on govs?
- Greater revenue
- Increased gov spending as well
Disadvantages of protectionist measures:
What 2 assumptions are made in tariff diagrams?
1) Domestic producers are price-makers in their home markets
2) Every producer is a price-taker in international market
Autarky:
Policy of national self-sufficiency and non-reliance on imports/economic aid
Why is world supply perfectly elastic?
Global economy are price-makers
Why is price of world supply lower than price of domestic economy?
They have comparative advantage
Why does quantity supplied decrease from Q1 to Q2 on free trade diagram?
- Suppliers in domestic economy face fall in price from P1 to Pw
- Not all domestic producers can afford this price reduction and they leave the market
- Hence, quantity falls from Q1 to Q2
Why does quantity demanded increase on free trade diagram?
Price is lower (Pw)
