Recap sheet 3 Flashcards
Start with components of current account
What are the 5 types of trade bloc, in order or integration
- Free trade area
- Customs union
- Common market
- Monetary union
- Federal superstate
Describe characteristics of a free trade area
Goods and services are reduced or if not completely tariff free
Each member country can impose different tariffs on countries outside the bloc
Describe characteristics of a customs union
Free movement of goods and services
CET around the block-> can’t negotiate your own tariffs
Describe characteristics of a common market
Free movement of goods/ services/ labour/ capital
CET around bloc
Common set of rules and regulation, cannot distort CA
The UK is in a common market
Describe characteristics of a monetary union
Free movement of goods/services/ labour/ capital CET around bloc Common set of rules and regulations Share the same currency 1 monetary policy, 1 interest rate 1 bank Closest example is the Eurozone
Describe characteristics of a federal superstate
Free movement of goods/services/ labour/ capital CET around bloc Common set of rules and regulations Share the same currency 1 monetary policy, 1 interest rate 1 bank 1 fiscal policy Closest example is Greece being controlled
Disadvantage to trade with being in a free trade area
A business will set up in the country who offers the lowest tariff, and then export their goods to the bloc. Thus the country is gaining a comparative advantage
What is the most favoured nation principle
It means that the lowest tariff you offer to one country is the tariff that you should offer to the rest of the countries you trade with
What is the role of the WTO
To promote and police free trade agreements
Evaluation points of the WTO
- Seen as favouring the Western countries
- Massive time lag in setting up these tariffs
- More evident of regionalisation not globalisation
Advantages of the Uk membership in the EU
3
- All goods and services have access to common market
- > no protectionist measures -> reduces c.o.p
- > Economies of scale from selling to larger market
- > EU is worlds richest trade bloc - Domestic firms are protected by a CET
- > see trade creation inside the bloc
- > trade diversion outside the bloc - Free movement of Labour -> fills the skills gap
- > enables potential growth
- > increase in supply of workforce allows firms to reduce wages paid to workers -> decrease c.o.p
Disadvantages of Uk membership in the EU
- Domestic firms face higher competition
- > structural unemployment in inefficient industries - Cost of meeting higher regulations
- > less competitive with firms outside the bloc - Membership fee -> net contribution to EU budget
- > Opportunity cost to the gov
- > In the LR it is developing wealthy countries e.g. Poland
Advantages of monetary union
4
- Remove exchange rate uncertainty -> consumption/ investment
- > removes the last barrier to trade - Higher levels of FDI
-> can trade more freely
However FDI didn’t drop in the UK- other factors are more significant - No transaction costs involved
- > broker can’t take a fee, trade would be cheaper - Members of financial stability pact
- > Other countries obliged to bail you out if you are in financial difficulties
Disadvantages of a monetary union
- Different countries need different exchange rates
- > example of Greece and Germany - One exchange rate
Euro is quite strong -> expensive
Exports expensive ->not bad for Germany as they sell high quality goods - Cost of changing the currency
- > e.g machines and new notes
What are the four components of the current account
- Trade in goods
- Trade in services
- Transfer payments
- Investment income from abroad
What does a strong imbalance between trade in goods and trade in services mean
the country has a strong sectoral imbalance
How is a deficit on the current account balanced
A surplus on the capital account
What is the capital account made of
- Borrow
- Sale of assets
- Run down assets
Who’s debt is a deficit on the current account
The countries, not the government !!
Why is borrowing on the capital account not good
It will work in the SR to balance the B.O.P but in the long run it will lead to:
- Less interest earned from savings in foreign accounts
- Increased interest repayment to the countries borrowed from
- Firms profits being repatriated out of your country
Whats an expenditure reducing policy
Decrease consumption/ investment -> shift AD left
What are the two expenditure reducing policies
- Contractionary fiscal policy
Increase tax -> Decreases spending -> Leakage from circular flow -> Downward multiplier - Contractionary monetary policy
Increase interest rates -> increase incentive too save
Implications from expenditure reducing policies
- Contracting the size of the economy
- > tradeoff between growth and a balanced BOP - Domestic unemployment increases, caused by an decrease in consumer spending
- Exports increase -> Push factor, domestic consumers aren’t purchasing so businesses have to go elsewhere
- > however an increase in the interest rate increased hot money flows -> appreciating the currency-> less competitive
What are the three ways of reducing a deficit on the current account
Expenditure reducing
Expenditure switching
Supply side policies
What is an expenditure switching policy
Buying domestic goods rather than importing the good
Examples of expenditure switching policies
Non competitive purchasing
Inward looking policies -> Trump
Currency manipulation
Issues with expenditure switching
- Distorts comparative advantage -> Decrease world output -> inefficient allocation -> decrease S.O.L
- Trade retaliation
- Having a sectoral imbalance
- > cant actually switch as you don’t produce the good
How do supply side policies reduce a deficit on the current account
Make exports more competitive
-> infrastructure/ education
Issues with supply side policies
Expensive for the government
Massive time lag
Political implications
Issues with a sustained imbalance on the current account
- Without action the deficit can get worse
- Oversupply of the currency
-> to many imports / no demand for exports
-> Supply increases
£ depreciates, increase in imported inflation
-> demand for price inelastic goods won’t decrease - Shows a lack of competitiveness
- > quality/ price]
What are the ‘it depends on’ points of a sustained imbalance on the current account
- Depends on the size of the debt realtive to gdp
- A deficit shows people are spending, high S.O.L
- Depends on what’s being imported
- > e.g capital goods are good in the LR
