Macro - Theme 4

Question 1

What is meant by ‘Globalisation’?

Answer 1

The process in which national economies have become increasingly integrated and inter-dependent

Question 2

What are the factors contributing to Globalisation?

Answer 2

1. Trade Liberalisation - The growing strength and influence of organisations such as the World Trade
   Organisation (WTO), which advocates free trade, has contributed to the
   decline in trade barriers.
2. Trading Blocs - they promote free trade between members, increasing economic globalisation
3. Growth of MNCs - By growing, they have been able to take advantage of economies of
   scale, such as risk-bearing economies of scale. The spread of technological
   knowledge and economies of scale has resulted in lower costs of production.
4. Technological advancements - easier and cheaper to communicate, leading to world becoming more inter-connected. Better transport links and transfer of information has become easier.
5. Mobility of Labour and Capital - People can travel to work in other nations, for example where wages are higher. Capital can be moved from one nation to another more easily.

Question 3

What are the impacts of Globalisation on Individual Countries?

Answer 3

1. Income and Wealth Inequality - If the benefits and costs of globalisation are not evenly spread, some people may be benefitting/suffering more than others. Income inequality can increase between countries, as some countries gain more from globalisation than others.

Question 4

What are the impacts of Globalisation on Governments?

Answer 4

1. Greater tax revenue - such as tariffs
2. Lose sovereignty (power) - may join world organisations where they have to abide by their rules

Question 5

What are the impacts of globalisation on Producers?

Answer 5

1. Can reduce AC - switching to production with cheaper labour. Spread of technology has resulted in firms employing the most advanced machines and production methods.

Question 6

What are the impacts of Globalisation on Consumers?

Answer 6

1. Lower prices: as nations become integrated, there is a much bigger market and therefore more competition. Since firms will be attempting to be price competitive and therefore lower prices.
2. Rise in world GDP - increases consumer living standards and helps lift people out of absolute poverty
3. Some consumers gain more from globalisation than others - globally, there are fewer people in extreme poverty. But this is not the case for Sub-Saharan Africa, where inequality has increased.
4. Increased availability of goods and services - consumers have more choice and access to higher quality goods/services due to competition.

Question 7

What are the impacts of Globalisation on Workers?

Answer 7

1. Can travel to other countries looking for work, rather than just their home country
2. Can lead to structural unemployment - firms may shift production to other countries where labour is cheaper, leading to unemployment
3. Workers in the lower labour cost nations can benefit from more job opportunities due to firms moving production because although wages are low, it may pay more than working elsewhere like in agriculture. It can also lead to workers working in poor conditions due to MNCs exploiting them

Question 8

What are the impacts of Globalisation on the Environment?

Answer 8

1. Greater amounts of pollution because of increased transport and production
2. Deforestation and water scarcity as more resources are being used as firms grow

Question 9

What is meant by ‘Comparative Advantage’?

Answer 9

States that a country should specialise in the goods or services it can produce at the lowest opportunity cost., and then trade with another country.

Question 10

What is meant by ‘Absolute Advantage’?

Answer 10

When a country can produce a product using fewer FOPs than another nation

Question 11

What are the Assumptions and Limitations of Comparative Advantage?

Answer 11

1. Assumes a perfectly competitive market - reality is, it is unlikely and therefore the fully benefit of specialisation does not occur.
2. Does not consider the exchange rate when considering costs of production for both countries - if price of one good increases, it is more worthwhile to produce that good even if the country has a comparative advantage in producing another good
3. Comparative advantage is derived from a simple model - in reality, the global trade market is more complex

Question 12

What are the advantages of specialisation and trade in a world context?

Answer 12

1. Greater world output -> gain in economic welfare (level of prosperity and standard of living)
2. Higher quality - since production focuses on what people and businesses are best at
3. Wider variety of goods and services to choose from
4. Outward shift in PPF curve

Question 13

What are the disadvantages of specialisation and trade in a world context?

Answer 13

1. Less developed countries may use their non-renewable resources more quickly and run out
2. Countries may become over-dependent on the export of one commodity like wheat. If there is war, it can lead to a shortage of wheat in the country dependent on it from that country
3. Structural unemployment - since production moves abroad
4. Countries may be stuck in the production of one good/service - can’t develop further

Question 14

What are Trading Blocs?

Answer 14

Groups of countries that manage and promote trade between all participating countries, lowering barriers to trade

Question 15

What are the types of trading blocs?

Answer 15

1. Free trade area - where countries agree to trade with other members without protectionist measures. Allow members to exploit their comparative advantage, increasing efficiency.
2. Customs Union - countries in a customs union have established a common trade policy with the rest of the world. E.g. may use a common external tariff and have free trade between members
3. Common Market - establishes free trade in goods and services, a common external tariff and allows free movement of capital and labour across borders
4. Monetary Unions - members of monetary unions share the same currency

Question 16

What are the costs of regional trade agreements?

Answer 16

1. Trade creation and trade diversion - members within a trading bloc may stop importing from a cheaper producer outside the bloc to a more expensive producer within. Moreover, protectionist policies are often imposed on countries outside of the trading bloc, so trade is diverted from producers outside to within.

Question 17

What are the benefits of regional trade agreements?

Answer 17

1. Reduced transaction costs - no barriers to trade, so cheaper and simpler to trade
2. Enhanced competition - firms operate in a more competitive market, they become more efficient and there is better allocation of resources.
3. Migration - by being a member of the customs union, supply of labour has increased, can help with labour shortages. But, this can cause some countries to lose their best workers.

Question 18

What is the role of WTO in trade liberalisation?

Answer 18

1. Promotes world trade through reducing trade barriers and policing existing agreements
2. Settles trade disputes, by acting as the judge, and organises trade negotiations
3. Every member of WTO must follow the rules or will face trade sanctions
4. WTO, in addition to trade in goods, also covers trade in services and intellectual property rights
5. Problem is, all countries must agree to any new rules so every country has the power to veto an agreement

Question 19

What are the possible trade conflicts between regional trade agreements and the WTO?

Answer 19

1. Some may argue the WTO is too powerful, or ignores the problems of developing countries. Since developed countries do not completely freely trade with others, hindering their development.
2. Setting up a customs union or a free trade area can be seen to violate the WTO’s principle of having all trade partners being treated equally. Especially if a common external tariff is imposed, which contradicts the WTO’s policies

Question 20

Why are there restrictions on free trade?

Answer 20

1. Protectionism - the act of guarding a country’s industries from foreign competition
2. Infant industries need protection and support to grow, protectionism is short term until the industry grows and then they’re able to trade more freely
3. Protectionism can correct market failure by dealing with demerit goods and protect society from them
4. Some countries may impose trade restrictions as a form of retaliation against trade barriers imposed by other countries. For example, USA placing an external tariff on China’s exports can lead to China also placing one.

Question 21

What are the types of restrictions on trade? (tariffs)

Answer 21

1. Tariffs - taxes on imports to a country. Can lead to retaliation, so exports decrease. Impact of tariffs is that quantity demanded of domestic good increases while it decreases for imports. Leads to higher prices for consumers and reduced consumer surplus.
2. Quotas - limits the quantity of a foreign produced good that is sold in the domestic market. Leads to a rise in price of the good for domestic consumers, so demand falls.
3. Subsidies to domestic producers - makes domestic goods relatively cheaper than imports. Encourages domestic production to increases and average price falls.

Question 22

What are the types of restrictions on trade? (non-tariffs)

Answer 22

1. VERs ( voluntary export restraints) - when two countries make an agreement to limit the volume of exports from one another over a period of time.
2. Embargoes - Complete ban on trade with another particular country. Usually politically motivated.

Question 23

What are the impacts of protectionism?

Answer 23

1. Governments - taxes such as tariffs will increase government tax revenue
2. Consumers - Face higher prices and reduced variety. Since producers are not operating in a competitive market, have less incentive to lower their costs of production and therefore prices remain high. Loss of consumer surplus. Welfare loss.
3. Producers - imposes extra cost on producers, can lower output and damage the economy.
   Also, means inefficient domestic producers are kept in production while foreign, more efficient producers are left out.
4. Risk of retaliation from other countries, so countries might become hostile.

Question 24

What is meant by ‘Balance of payments’?

Answer 24

for a country, it is a record of all the financial transactions that occur between it and the rest of the world

Question 25

What is meant by ‘Exports’?

Answer 25

Exports are goods and services sold to foreign countries, and are positive in the balance of payments because they’re the inflow of money.

Question 26

What is meant by ‘Imports’?

Answer 26

Exports are goods and services bought from foreign countries, and are negative in the balance of payments because they’re the outflow of money.

Question 27

What is the balance of payments made up of?

Answer 27

1. Current account - includes all economics transactions between countries. Main transactions are goods and services, income and current transfers.
2. Capital account - involves transfers of the ownership of fixed assets
3. Financial account - involves investment. E.g. direct investment, portfolio investment and reserve assets are part of it

Question 28

What are the causes of deficits on balance of payments?

Answer 28

1. Appreciation of the currency - a stronger currency makes imports cheaper and exports relatively more expensive.
2. Economic growth - when consumer income increases, demand increases. Consumers can demand more for imports.
3. Deindustrialisation - In the UK, the manufacturing sector has been declining since the 1970s. The goods that the UK previously made domestically now have to be imported, which worsens the deficit.

Question 29

What are some measures to reduce a country’s deficit on balance of payments?

Answer 29

1. Increasing income tax - will lead to consumer’s have less disposable income and reduce demand for imports
2. Government can reduce spending - this would reduce AD, and lead to less imports. Forces domestic firms to increase exports, which helps improve the disequilibrium.
3. Taxes imposed on trading partners - can lead to rivalry, reducing demand for imports if prices rise

Question 30

What is meant by ‘Exchange Rate’

Answer 30

The value of one currency relative to another.

Question 31

What is meant by ‘Floating Exchange Rate’?

Answer 31

The value of the exchange rate is determined by the forces of supply and demand. The government doesn’t intervene, allowing it to fluctuate freely.

Question 32

What is meant by ‘Fixed Exchange Rate’?

Answer 32

The government or central bank sets a specific exchange rate and is committed to maintaining it. To keep the rate stable, they may buy or sell their currency.

Question 33

What is meant by ‘Managed Exchange Rate’?

Answer 33

Combine the characteristics of a fixed and floating exchange rate: authorities may sometimes intervene to influence the exchange rate. The currency fluctuates, but doesn’t completely flow freely as the central bank may buy/sell the currency to maintain a degree of stability.

Question 34

What is meant by ‘Revaluation’?

Answer 34

When the currency’s value is adjusted relative to a baseline, such as the price of gold.

Question 35

What is meant by ‘Appreciation’?

Answer 35

When the value of a currency rises relative to another currency. Each £ will buy more dollars for example.

Question 36

What is meant by ‘Depreciation’?

Answer 36

When the value of a currency falls relative to another currency. Each £ will buy less dollars for example.

Question 37

What is meant by ‘Devaluation’

Answer 37

When the value of a currency is officially lowered in a fixed exchange rate system.

Question 38

What are the factors influencing the floating exchange rate?

Answer 38

1. Inflation - lower rates of inflation makes exports more competitive, which increases demand for a country’s currency which causes it to appreciate.
2. Speculation - if speculators believe the currency will appreciate in the future, it’ll increase demand for the currency now because they believe they can make profit by selling it in the future.
3. Government finances - if a government is on the verge of defaulting, investors will lose confidence in the economy and sell their holdings of bond which will cause the currency to depreciate.