Section 13 - The International Economy

Question 1

Developed countries - definition

Answer 1

Developed countries are richer, industrialised countries such as the UK, Japan and Australia.
They have high GDP/capita figures.

Question 2

Less Economically Developed Countries (LEDCs) - definition

Answer 2

Developing countries, such as Colombia and Angola, largely rely on manufacturing, agriculture and other labour-intensive industries.
They’ll have low GDP per capita figures and lower standards of living than developed countries.

1. Low national income per head
2. Low levels of human capital
3. High unemployment
4. Poor infrastructure
5. Overdependence on exporting few commodities

Question 3

Emerging countries - definition

Answer 3

>Some developing countries are called emerging countries because they’re not yet developed, but are further along the development process than other developing countries - e.g. countries such as China, which are growing quickly but aren’t yet developed.

Question 4

Globalisation - definition

Answer 4

Globalisation is the increasing integration of economies internationally. It is the process by which the world becomes increasingly interconnected due to increased trade and cultural exchange.

Question 5

Main characteristics of globalisation

Answer 5

1. The free movement of capital and labour across international boundaries.
2. Free trade in goods and services between different countries (Trade Liberalisation)
3. The availability of technology and intellectual capital (e.g. the knowledge of employees) to be used (and patented) on an international scale.

Question 6

Globalisation - intro

Answer 6

>In the last 50 years, the scale and pace of globalisation has dramatically increased.
>Globalisation also involves political and cultural factors:
-E.g. international bodies such as the UK tend to lead to a convergence of political decision - i.e. there are more joint decisions made between countries, and more international competition.
-Examples of cultural globalisation include the spread of things such as McDonald’s and yoga across the world.

Question 7

Globalisation - other characteristics

Answer 7

1. International trade becoming a greater proportion of all trade.
2. An increase in financial capital flows between countries.
3. Increased integration of production - e.g. different parts of a product being produced in different countries.
4. A greater number of countries becoming involved in international trade.
5. An increase in foreign ownership of firms.
6. De-industrialisation of developed countries, and the industrialisation of developing/emerging countries.
7. More international division and movement of labour.

Question 8

Globalisation - other characteristics - what is meant by international division and movement of labour

Answer 8

>I.e. the labour used to produce products is divided between more countries or moves from developed to less developed countries. For example:

• Developing countries, particularly emerging countries, are increasingly obtaining the levels of skills and technology needed to produce goods for more developed countries. Furthermore, labour is also relatively cheap in developing/emerging countries compared to developed countries.
• These factors have led to foreign companies starting to produce goods in developing/emerging countries, especially if there are other appealing factors for foreign companies, such as a good transport network in the developing country.
• For example, India provides software development for many European companies.

Question 9

MNCs

Answer 9

>A key feature of globalisation is the growth of multinational corporations (MNCs).
>MNCs are firms which function in at least one other country aside from their country of origin.
>A.k.a TNCs.
>Factors which attract MNCs to invest in a country are:
-the availability of cheap labour and raw materials.
-good transport links.
-access to different markets.
-pro-foreign investment government policies.
>MNCs may choose to divide their operations and locate each part in the country with the lowest costs.
>For example, this can be done by offshoring and by outsourcing.

Question 10

Offshoring - definition

Answer 10

>Setting up a company abroad.

Question 11

Outsourcing - definition

Answer 11

>Subcontracting work to another organisation.

Question 12

Causes of globalisation

Answer 12

1. Trade liberalisation - this is the reduction or removal of tariffs and other restrictions on international trade (i.e. reducing protectionism). Countries might negotiate these trade agreements using the WTO.
2. The WTO has brought an increase in global product standards, e.g. through agreements on product standards, which allow consumers to have more confidence in imported goods.
3. A reduction in the real cost and time needed for the transportation of goods means that it’s cheaper to export and import. E.g. development of larger cargo ships.
4. Improvements in communications technology - e.g. the internet is making the communication needed for international trade easier and cheaper.
5. Firms, especially MNCs, wishing to increase profits. For example, this means they might invest in setting up a factory in a developing country where labour is cheaper. So there’s an increase in FDI by MNCs.
6. Firms expanding overseas to exploit economies of scale.
7. An increased number of MNCs and the growth of their significance and influence - e.g. as MNCs have a greater influence, there’s likely to be more international trade of goods and services, and more international investment.
8. Governments wishing to obtain the benefits of increased trade - so, e.g. a gov. might provide incentives for foreign firms to encourage them to invest in their country.
9. The opening of new/or more markets to trade and investment.
10. Growth in international trading blocs, e.g. there’s more trade now between EU countries.
11. Increasing investment by sovereign states - e.g. Norway invests some of its oil revenues in foreign companies.
12. More international specialisation - if countries specialise in making the products they’re best at , this will encourage international trade.
13. Containerisation - promotes international trade of goods by making shipping cheaper, sees firms exploiting EoS
14. Growth of BRICS (emerging economies): Brazil, Russia, India, China, South Africa

Question 13

Example of ‘the opening of new or more markets to trade and invest

Answer 13

>For example, following the collapse of the Soviet Union after the Cold War, many communist Eastern European countries previously had closed economies.
>Also China opening its economy to trade and then joining the WTO in 2001 has had a big impact on globalisation.

Question 14

Globalisation - benefits

Answer 14

1. Trade encourages countries to specialise in the goods and services they’re best as producing/providing which increases output.
2. So globalisation can allow countries to produce the things where they have a comparative advantage, leading to improvements in efficiency and the allocation of resources.
3. Producers can benefit from EoS and lower production costs because markets become bigger when countries trade. Global sourcing has also led to lower raw material costs.
4. Lower production costs are also sometimes passed on to consumers in the form of lower prices.
5. World GDP has risen as a result of globalisation due to many factors. E.g. increased efficiency means firms can increase output. Countries which aren’t open to trade have seen a reduction in their growth rates,
6. Globalisation provides consumers with a greater choice of goods and services to purchase.
7. Improved standards of living and reduced levels of absolute poverty in the world. A key reason for this is because levels of world employment have increase, as increased output has meant the creation of more jobs.
8. Increased growth and employment has helped governments achieve their macroeconomic objectives.
9. Increases in competition brought about by globalisation can lead to lower prices for consumers.
10. There has been an increased awareness of, and quicker response to, foreign disasters and global issues and their consequences.

Question 15

Globalisation - drawbacks

Answer 15

1. Globalisation is causing the price of some goods and services to rise - increasing world incomes lead to increasing demand for goods and services, so when supply is unable to meet demand, prices rise.
2. Globalisation can lead to economic dependency so this can lead to instability in economies - e.g. if the US economy goes into a recession and reduces imports, this may cause European economies to go into a recession too.
3. Increasing world trade has led to global imbalances in balance of payments accounts. These balances are unsustainable leading to calls for increased protectionism.
4. Specialisation can lead to overreliance on a few industries by an economy, which is risky.
5. Individual firms may be outcompeted by foreign firms and go out of business.

Question 16

MNCs - positive effects

Answer 16

>FDI by MNCs creates new jobs, and brings new skills and wealth to an economy. MNCs also buy local goods and services, leading to inflows of foreign currency.
>MNCs can benefit from economies of scale, helping them to be more efficient, i.e. they can produce products more cheaply.
>Some people believe MNCs raise living standards by providing employment.

Question 17

MNCs - negative effects

Answer 17

>Some people argue MNCs exploit workers in developing countries by paying them lower wages than in developed countries.
>MNCs can force local firms out of business - for example, because local firms might be unable to obtain similar economies of scale, they will be less competitive.
>MNCs can relocate rapidly and cause mass unemployment.
>They can withdraw profits from one country and place them in another with low tax rates - so the former country won’t be able to gain tax revenue from those profits.
>They can use their economic power to reduce choice and increase prices.
>MNCs can influence gov. policies in other countries to their advantage, which can be unfair to local people or unhelpful to the domestic economy.
>Governments may be forced to reduce corporate tax levels to attract or keep MNCs in their country.

Question 18

Globalisation - environment

Answer 18

>Environmental degradation has resulted from globalisation. E.g. international trade leads to an increase in the international transportation of goods - this means more fossil fuels are used, contributing to climate change and causing resource depletion.
>Carbon emissions are also increased by, for example, rising production levels of manufactured goods to meet rising global demand.
>Other threats to the environment that are linked to globalisation include:
-deforestation and increasing depletion of other non-renewable resources.
>Some people argue that international trade isn’t sustainable at current levels if its environmental impact is considerable.

Question 19

Consequences of globalisation

Answer 19

>Globalisation may have contributed to increasing levels of inequality within many countries (both developed and developing).
>In some emerging economies such as China and India, the gaps between their wealthiest and poorest citizens have increased significantly in recent years.
>MNCs can bring extra tax revenue to both developed and developing countries, but regulation is often needed (e.g. of transfer pricing) to make sure governments don’t lose out on this revenue. Imposing this regulation can be costly.
>Consequences differ for developing and developed countries.

Question 20

Transfer pricing

Answer 20

>Transfer pricing is setting prices for goods/services that are transferred between divisions of the same company.
>MNCs could try to manipulate these prices in order to save money on tax.

Question 21

Consequences of globalisation for developing/emerging countries

Answer 21

1. Health and safety laws are generally less strict in developing/emerging countries - MNCs may take advantage of this.
2. MNCs may exploit workers by offering very low wages.
3. Skilled workers often leave developing/emerging countries to work in more developed countries.
4. This reduces the developing country’s potential for economic growth.
5. However, globalisation creates jobs, reducing unemployment.
6. MNCs often bring more efficient production methods and technology to developing countries.
7. There’s an increase of investment in developing/emerging economies, e.g. through FDI.

Question 22

Consequences of globalisation for developed countries

Answer 22

>Cheap overseas production of goods has led to a severe reduction in some industries in developed countries, causing structural unemployment. E.g. cheap clothes from countries such as Bangladesh have contributed to the collapse of the textile industry in the UK.
>Such collapses lead to de-industrialisation, which has further impacts on economies - such as a fall in exports.
>The success of emerging economies, e.g. China and India, impacts on developed countries - for example, emerging economies’ share of global GDP has increased at the expense of more developed nations.
>Increased levels of imports result from increased trade and have a negative effect on a country’s BoP.
>Globalisation gives countries greater access to raw materials and semi-manufactured goods from other countries, which can be used in the production of domestic goods. These goods can then be exported r sold domestically.
>MNCs gain access to cheaper labour, which leads to lower CoPs and lower prices for consumers.

Question 23

International trade - definition

Answer 23

>The exchange of goods and services between countries (i.e. imports and exports).

Question 24

Advantages of international trade

Answer 24

>Countries can’t produce all the things they want and need because resources are unevenly distributed.
>International trade can give countries access to these resources and products they otherwise wouldn’t be able to use - countries can export goods in order to import the things they can’t produce themselves.
>By trading internationally, not only do a country’s consumers enjoy a larger variety of goods and services, but increased competition resulting from international trade can lead to lower prices and more product innovation - so people’s standards of living are raised by having more choice, and better quality and cheaper products.
>Additional markets allow firms to exploit more economies of scale - if the additional market mean there’s an increase in demand for their products.
>International trade can also expose firms to new ideas and skills - e.g. an MNC might bring new manufacturing skills to a developing country.

Question 25

What does international trade do?

Answer 25

>Allow countries to specialise

Question 26

International trade - specialisation

Answer 26

>International trade allows countries to specialise in the goods and services they’re best at producing.

Question 27

International trade - specialisation - why?

Answer 27

>Countries specialise because:

• They have the resources to produce the good or service efficiently.
• They’re better than other countries at producing the good or service.

Question 28

International trade - specialisation - advantages

Answer 28

>Specialisation has its advantages:

• Costs are reduced, which can be passed on to consumers in the form of lower prices.
• The world’s resources are used more efficiently.
• Global output is increased and living standards are raised.

Question 29

International trade - specialisation - disadvantages

Answer 29

1. Domestic industries may be forced to shut down because foreign firms are better at producing the goods or services provided by that industry.
2. Specialisation can lead to overreliance on one industry - if something happened to negatively affect that industry, it would have a severe impact on the whole economy.
3. Countries are vulnerable to cuts in the supply of goods that they don’t produce themselves.
4. Specialisation can have negative impacts on a country’s economy. E.g. if a country begins to specialise in a particular industry, other industries may decline, and workers from those industries may struggle to get work (as they might not have the relevant skills).

Question 30

International trade - disadvantages

Answer 30

1. Trading internationally usually involves higher transport costs.
2. Currency exchanges when trading abroad can carry costs, potentially resulting in financial losses.
3. There are other costs to firms that trade internationally, such as complying with other countries’ legal and technical requirements, translating legal documents, and advertising material, and performing market research for overseas markets.
4. International trade increases globalisation, which has its own disadvantages.

Question 31

Absolute advantage

Answer 31

>A country will have an absolute advantage when its output of a product is greater per unit of resource used than any other country.
>Through specialisation, more output is produced using the same amount of resources - so the cost per unit is reduced.

A country has absolute advantage if it produces more of a good than other countries from the same amount of resource

Question 32

Define comparative advantage

Answer 32

>Comparative advantage uses the concept of opportunity cost
>In this case, it’s the number of units of one good not made in order to produce one unit of the other good.
>A country has a comparative advantage is the opportunity cost of it producing a good is lower than the opportunity cost for other countries.
>The law of comparative advantage is based on several assumptions, which make it hard to apply to the real world.
>For example, it assumes that there are no economies or diseconomies of scale, there are no transport costs or barriers to trade, there’s perfect knowledge, and that factors of production are mobile. Also, externalities are ignored.

Question 33

Complete specialisation

Answer 33

>If countries specialise fully in the goods they have a comparative advantage in, allocating all their resources to one product, total output for one good will increase but for the other good it may fall.
>By only reallocating some resources, it’s possible to increase the output of both goods.
>Countries can split production then trade.
>By using partial specialisation, outputs are both greater than they were before specialisation.
>Countries are unlikely to specialise 100% - instead they produce at a level where their combined production of both goods is greater than without specialisation.
>For trade to benefit both countries, the terms of trade must be set at the right level.
>If the opportunity cost of production is the same in both nations, there would be no benefit from trade.

Question 34

Trade - main condition

Answer 34

>Usually, for trade to occur between 2 countries, both countries must benefit from trading, or at least not be any worse off than if they hadn’t traded. So, neither country will pay more for a good than it would cost them to produce it themselves, and neither will accept less for a good than it costs for them to produce it.
>Whether trade is beneficial or not depends on the opportunity cost ratios for each country.

Question 35

Terms of trade - definition

Answer 35

>A measure of the relative price of a country’s exports compared to its imports.

Question 36

Terms of trade

Answer 36

>A country’s terms of trade is the relative price of its exports compared to its imports.
>It is often described using an index number and calculated using the formula:
-(index of average price of exports) divided by (index of average price of imports) x 100.
>If the price of a country’s exports rises, but the price of its imports stays the same, its terms of trade index will increase.
>This increase will mean it’ll effectively become ‘better off’, as it will be able to afford more imports.
>And if a country’s terms of trade index falls, it’ll effectively be worse off.
>For example, during the recession in 2008-20, the UK’s terms of trade index fell - this was because the price of its imports rose more quickly than the price of its exports.

Question 37

Trade - developed countries

Answer 37

>Imports are crucial to maintaining high standards of living in developed countries.
>Products will often be cheaper when bought from abroad - e.g. due to increased competition and cheaper labour in developing countries.

Question 38

Trade - developing countries

Answer 38

>Developing countries can import goods they don’t have the technology to produce themselves, which results in a higher standard of living.
>Trade also gives these countries access to new materials, meaning new industries will be created because they can produce new products. This will help to improve the economies of developing countries.

Question 39

Trade - emerging countries

Answer 39

>Emerging economies will experience some of the benefits of both developed and developing countries.
>For example, emerging economies will be able to purchase cheaper products from developing countries, and they’ll also benefit from importing products and services they don’t have the technology to produce themselves.

Question 40

How can you measure globalisation?

Answer 40

• GNP
• GDP
• Remittances as % of GDP
• Number of MNCs
• Technological advancements i.e. the internet has promoted globalisation and let firms access larger markets
• Level of protectionism (less means more globalisation)
• Membership of free trade agreements
• Level of FDI
• Amount of (X-M) as % of GDP
• Migration/immigration flows
• Tourism as a % of GDP
• Foreign aid as % of GDP

Question 41

What is the argument FOR protectionism from globalisation (infant industries)?

Answer 41

newly developed domestic firms haven’t had the chance to grow and compete against larger, international rivals → a government might decide to intervene and place controls (tariff, quota etc.) → leverage to compete in future Short Term Protectionism and EoS
A criticism of this is that by allowing this, you are encouraging inefficiency which might distort the theory.

Question 42

What is the argument FOR protectionism from globalisation (sunset industries)?

Answer 42

Similar argument to infant industries - made for advanced industries to protect them from competition of infant industries. Some argue selective use of import controls as a supply side policy instrument to prevent deindustrialisation and encourage orderly structural change. To minimise the social and economic cost of the painful adjustment process.
But some may argue that those industries are naturally going to decline - delaying the inevitable and wasting resources.

Question 43

What is strategic trade theory?

Answer 43

A theory that suggests comparative and competitive advantage are developed by the government’s strategically nurturing industries or economic sectors. This justifies protecting industries whilst competitive advantage is built up, these skills then develop over to other sectors. Therefore, protectionism prevents exploitation by foreign-based monopoly. Some governments may use two types of strategic policy to help declining industries.

E.g. Trade adjustment assistance and other aid to workers but some export subsidies like agricultural products violate WHO rules.

Question 44

Argument FOR protectionism in the agricultural industry?

Answer 44

Monoculture erods efficiency and destroys comparative advantage that existed before specialisation took place.

(Monoculture: cultivation of a single crop in a given area)

Question 45

What are the risks of specialisation (FOR protectionism argument)?

Answer 45

If a country over-specialises, they will become vulnerable to sudden changes in demand => a lack of diversity in an economy so protectionism might encourage them to become more self-sufficient.

Question 46

What is the argument FOR protectionism (anti-dumping)?

Answer 46

a country decides to sell goods or services below their cost of production e.g. excess subsidies might mean an excess supply (sell them to other countries) → this will affect domestic firms who can’t compete with subsidies below cost = government retaliates with controls

dumping is hard to prove and is often created from subsidies or minimum prices

trade talks would be a good way to resolve this issue

Article 6 of the General Agreement on Tariffs and Trade protects countries from dumping.

Question 47

What is the argument FOR protectionism (employment)?

Answer 47

Trade unions argue that import controls are needed to stop multinationals from shifting capital to low-wage developing countries and exporting their output back to countries from which the capital was moved

Using second-best theory: they argue that employing resources perhaps inefficiently, protected by tariffs is better than leaving resources such as labour unemployed. This justification for protecting domestic industries and maintaining employment returned to prominence after the financial crisis around the time that Obama took the US presidency in 2009.

Question 48

What are positives of globalisation for LDCs?

Answer 48

Globalisation => higher FDI flows => AD increase => higher GDP +ve multiplier = employment, income, tax

FDI flows and MNC operations => transfer skills + technology => shifts LRAS and PPF outwards

Impact of cheap tech built by other countries rather than using scarce resources can be important for LDC (least developed country)
e.g. 2017 = China is largest investor of FDI in Africa (mineral mines in Congo, Ethiopa for dams/roads); Kenya launcehed own $3.8 billion China funded train

This FDI is essential for LDCs to boost infrastructure + improve geographical mobility

Globalisation allows for more export markets and therefore allows export-led growth for countries with a small domestic market (who can now enter the market)

Globalisation lets LEDCs have increased access to finance from investors abroad. According the Harrod-Domar model, the main constraint on economic growth and development is a lack of investment (which can be solved with increased finances).
e.g. LEDC firms and governments can issue international bonds to raise money - Kenya’s $3.8bn train line was funded by China. - Push for economic horizontal integration.

Technology transfers - LDCs benefit from transferred technology and medicine which are cheaper to import than produce domestically.

Question 49

What is the difference between horizontal and vertical integration?

Answer 49

Horizontal Integration: when a business grows by acquiring a similar company in their industry at the same point of the supply chain.
Vertical Integration: when a business expands by acquiring another company that operates before or after them in the supply chain.

Question 50

What are negatives of globalisation for LDCs?

Answer 50

Dumping - this is where developed countries will sell products below costs onto LDC markets. Over half anti-dumping cases brought to WTO are from LDCs complaining about MDCs

Brain drain- skilled workers moving away from an LDC country for better opportunities elsewhere - in search of higher wages.
Brain drain in short term could be costly who may lose their key workers in healthcare/education ⇒ disastrous consequences for economic growth. Long term remittances could add to GDP.

Poor conditions for workers - governments might compete in order to attract MNCs (who’ll create jobs)
Lower health, safety standards, lower corporate tax rates, easier labour laws can bring jobs to a country - but increase hazards for workers. E.g. Primark paid $10 million to victims of a factory collapse in Bangladesh where 100 people died.

Environmental concerns - MNCs extract natural resources in less developed nations as they might have less regulations and lower environmental standards. This will result in environmental degradation and negative externalities in the country.

‘Coca-colonisation’ - Concern that low paid employment of workers in LDCs for MNCs results in the destruction of local culture and identity

‘Glocalisation’ - reflects the idea that a global product will succeed if its adapted to local practices and cultural expectations

Question 51

MNCs and globalisation

Answer 51

Economies of scale

Having one large global market increases economies of scale

Drug companies spend a lot on research and development so if the costs can be spread across the world rather than just on the UK

It will be cheaper for everyone

Environmental damage

negative externalities like mining and air pollution will be produced by factories in LDCs

Employment

MNCs can create job in less developed countries but if working conditions are poor then this may be dangerous.

It depends on the opportunity cost of the workers involved to determine whether it is good or bad

Spread technology

FDI and MNC investment flows ⇒ transfer of technology ⇒ shift the LRAS out

Question 52

Draw a basic tariff diagram.

Answer 52

Difference between QS1 and QD1 is imports (because price can’t rise higher for excess demand)
A government will now introduce a tariff to shift the supply curve up.
The vertical distance between the world supply curve and sw+tariff is the value of the tariff
The price of the market rises
Domestic supply extends from Q1 to Q3 whilst demand contracts from Q2 to Q4
Excess demand remains but is less, and the smaller distance between Q2 and Q4 is the imports (squeezed)
The part above the new import section is the tariff revenue generated for government to collect.
Difference between (Q3 and Q4) x tariff = green box
Areas of welfare losses are the red triangles beside (deadweight welfare loss of consumer surplus) (trapezium)
Left is deadweight welfare loss of world efficiency.
All units after Q1 cost domestic producers more than world. Resources are being supplied to inefficient producers - should’ve gone to world suppliers.

Supply curves also represent the marginal costs of production.

Question 53

Break down the tariff diagram and explain each area.

Answer 53

Question 54

What are the main types of trade blocs?

Answer 54

Preferential trade area - Lower but not eliminate barriers among members

Free trade area - Eliminate internal barriers but maintain independent external barriers e.g. NAFTA

Customs union - Eliminate internal barriers, agree on common external barriers e.g. EU/Turkey or Russia/Kazakhstan/Belarus 2010

Common market - Eliminate internal barriers, adopt common external barriers, allow free movement of resources (labour) among members. E.g. Mercosur (Southern Cone Market), East African Common Market, West African Common

Economic union - Eliminate internal barriers, adopt common external barriers, free movement of resources, and a uniform set of economic policies e.g. EU

Full integration - E.g. The USA

Question 55

Positives of globalisation for MDCs

Answer 55

Export-led growth: globalisation lets countries develop further through export led growth and export led positive multiplier ⇒ e.g. South Korea developed over years with an export-led growth model

Better supply of labour: free flows of labour mean shortages can be filled and wage inflation can be avoided by creating a greater pool for firms to choose from

MDCs are the beneficiaries of ‘brain drain’

Increased competition and choice: Contestability (lowered barriers to entry) such as deregulation allows for: more access to foreign goods and services, more competition, lowering prices further globalisation means increased choice for consumers (e.g. plasma TV from Japan, BMW Germany)

Question 56

Negatives of globalisation for MDCs

Answer 56

Structural/regional unemployment:domestic firms overtaken by LDCs with lower costs - labour is a derived demand ⇒ regional unemployment e.g. ‘rust belt’ in USA lost car manufacturing

Exchange rate volatility: volatile speculative flows of hot money are the result of globalisation - changes in interest rates cause investors to take their money out of a currency in seconds frequent changes in exchange rates are hard to manage as an importer and exporter e.g. Swiss Franc in 2011 changed in value vs Euro by 30% in one day exchange rate volatility can make it difficult for MNCs to plan

Vulnerability to shocks: interdependency will make multiple countries vulnerable at one time = contagion

e.g. economic problems spreading through the Eurozone countries after the financial crisis of 2008

Question 57

Who are the Asian Tigers?

Answer 57

Singapore, Hong Kong, South Korea, Taiwan =industrialised rapidly esp. with SK and Taiwan in export-led growth (consumer and industrial electronics)

Question 58

What is the argument surrounding globalisation?

Answer 58

Anti-globalisation lobby believe that threatening to close down firms in MDCs and move to poorer countries may reduce wages and living standards in develop countries… Are the new jobs being created in the highly skilled service sector or menial, low paid, unskilled jobs?

Assumptions of this argument so far is that it is a win/lose situation.

Supporters of globalisation say world is a whole net winner, and that free trade leads to better allocation of resources and added benefits, technology has increased welfare

Question 59

What is the dependency theory argument?

Answer 59

Criticised by dependency theory - LDCs are being suppressed, have little capital because the system of world trade and payments is in favour of more developed economies.
E.g. ratio of a country’s export prices to import prices have moved in favour of industrialised countries rather than primary producers
Exceptions of this are: oil-producing non-industrial countries
They argue that the transfer of wealth and resources to richer countries is promoted by profit flows and interest payments

Question 60

Difference between a closed and open economy when it comes to the concept of comparative advantage

Answer 60

Closed economy - consumption will be limited to what a country can produce. The average costs of production will high in an economy with, a small population, as the absence of export markets means that economies of scale and long run production costs can’t be achieved

Open world economy - won’t face this problem as they trade raw materials with each other, reducing CoPs and this boosts their production possibilities.

Better EoS and long production runs

Higher standard of living and economic welfare
The principle of comparative advantage explains justifies the benefits of international specialisation and trade.

Question 61

Assume two countries exist in a world economy and both have 2 units of a resource. They can be switched from one industry to another (butter and guns).

Answer 61

A can produce 4 guns or 2 tonnes of butter whilst B can produce 1 gun or 6 tonnes of butter.
Therefore A has absolute advantage in gun production whilst B has the advantage in butter.
If they engage in production without specialisation (devoting half their available resources) then there are 5 guns in total and butter is at 8 tonnes. - without specialisation.
It is better for them to only produce a good where they have comparative advantage:

8 guns and 12 tonnes of butter

Output gains from specialisation is an extra 3 guns and 4 tonnes

Question 62

Absolute advantage example: for output gains to turn into output trade… vs turn into welfare gains

Answer 62

For output gains to translate into output trade there must be

Lower transport costs and administration costs (would not be worth it if these > output gains from specialisation)

For output gains to translate to welfare gains

Goods must be in demand in each importing country and assume they’re exporting their surplus supply as they’ve already met the demand of their own country =
double coincidence of wants not necessary when multiple countries participate

One could be vegan and the others are pacifists = lacking demand conditions

Question 63

Assumptions underlying principle of comparative advantage

Answer 63

The case for trade and case against import controls and other forms of protectionism depends heavily on these assumptions.

Each country’s FOPs are fixed and immobile - in the course of international trade finished goods rather than FOPs or inputs are assumed to be mobile between countries

Constant returns to scale: assumed that no matter what the unit it will result in 4 guns and 2 tonnes of butter but in reality increasing and decreasing returns to scale are both possible. Country who specialises in something where it has absolute advantage, it will increase its productive efficiency and advantage increases. Specialisation will erode efficiency and destroy a country’s initial advantage if it has decreasing scale. e.g. agriculture (overspecialisation resulting in monoculture)

Demand and cost conditions are relatively stable. Over-specialisation can make a country vulnerable to change and availability of raw materials or energy and costs. These can quickly eliminate a country’s earlier comparative advantage. Greater uncertainty about the future = weaker case for a country to specialise

Question 64

Further justifications of specialisation and trade

Answer 64

Global economic welfare increases if done in accordance with comparative advantage

cheaper prices and higher consumer surplus

increasing real incomes, purchasing power

free trade brings down cost-push inflationary pressure

Widening production and consumption possibilities

Ability to enjoy EoS, greater efficiency and lower costs

more scope for economies of scale, lower LRAC, lower prices, higher consumer surplus and increased demand for goods

improved allocative efficiency

Question 65

What is the argument FOR protectionism (domestic employment)?

Answer 65

industries might go into decline because of competition → controls to revive domestic firms

but if the industry is already going into decline or losing its comparative advantage relative to other countries, allow natural disintegration to happen?

Question 66

Other arguments about protectionism

Answer 66

PROTECT AGAINST UNFAIR LOW COST LABOUR ABROAD i.e. Asia

A country might decide to protect against imports coming in from a country they think has an unfair advantage (i.e. low labour costs)

PROTECT PRODUCT STANDARDS (strong argument)

prevent poor quality products entering the country

RAISE GOVERNMENT REVENUE (tariff) (strong argument)

increase tax revenue to increase welfare in developing countries for examples

IMPROVE A CURRENT ACCOUNT DEFICIT (boost growth) (weak argument)

can expect retaliation

reduce spending on imports

restricting imports will improve the CA deficit increase (X-M)

AVOID THE RISK OF OVER SPECIALISATION

Protecting → delve into other industry to develop other industries to make sure you have variety

CHANGE IN DEMAND OR COST CONDITIONS
Over specialisation may cause a country to become vulnerable to sudden changes in demand = lack of diversity in an economy so they might benefit from this

Question 67

What is the argument against protectionism?

Answer 67

Market Distortion - It may distort what once was considered a very allocatively efficient market. The effect on consumers is that price increases for them (Pw to Pw+t) = loss of CS → deadweight welfare loss
They also lose consumer choice (Q2 of W and D reduced to Q4 D)
Therefore, they will lose satisfaction, utility and personal welfare.

Production Inefficiency - Allocation of resources might worsen, left triangle is loss of world efficiency gains

Domestic suppliers waste, they have to produce at higher costs than world = inefficiency

Retaliation - Expect retaliation from the nation which you impose a tariff on e.g. China-US trade war

This will hurt consumers more and make exaggerate inefficiency

Distorts the benefits of free trade

Regressive - Consumers bear the burden of the tariffs

Usually, tariffs go on products that the poorer members of society need i.e. bread, milk, baby nappies

Equity and distributional effects worsen

DEPENDS ON: the size of the tariff, elasticity of demand and supply (diagram depends on)

Question 68

Draw an import quota diagram and explain

Answer 68

Question 69

What are the degrees of international economic integration?

Answer 69

Preference areas

Free trade areas

Custom unions

Common markets

Economic unions

Political unions

Full integration: the USA

Question 70

What are the advantages of trade blocs?

Answer 70

Protection from outside - Protectionist policies also allow the government to protect developing domestic industries from established foreign competitors i.e. China, India (who would overtake domestic demand if protectionism wasn’t high)

Removes tariffs and barriers - lowers the cost of transporting goods and services (exports) to other countries

Economies of scale - increased specialisation will lead to higher efficiency and therefore EoS e.g. bulk-buying; technical; financial (larger business has more negotiating power);

Trade creation - consumption shifts from a high cost producer to low cost e.g. France is most efficient at wine, UK joins the EU making it possible to import wine from France without paying the tariff -> efficiency gain to UK consumers

Question 71

What are the disadvantages of trade blocs?

Answer 71

Loss of state sovereignty - The trade bloc makes decisions for all members. It may conflict with the domestic economic interests of some member states. Also, the decisions may favor member countries with a more significant size of the economy.

Retaliation - non-member countries may retaliate and increase tariffs on their goods, meaning that the price of imports of certain goods will increase

Increases Trade Diversion - The trade bloc distorts the benefits of world trade. The inefficient firms within the bloc can still survive and are protected from competition from more efficient firms outside the bloc.

Question 72

Explain trade creation with a diagram.

Answer 72

Theory that derives from members joining a customs union (complete free trade within, with no external trade allowed)

Question 73

Explain trade diversion with a diagram.

Answer 73

Question 74

What is an example of trade diversion?

Answer 74

occurs when consumption shifts from a lower cost producer outside the trading bloc to a higher cost one within it e.g. Before the membership of UK in the EU, there is an identical tariff on lamb from any country - so it would import lamb from NZ rather than UK. But after joining, tariff is removed so consumption shifts toward UK lamb. Consequences of this would be a loss of world efficiency, gains and losses of welfare.

Question 75

What is the definition of economic integration?

Answer 75

A process whereby countries coordinate to reduce trade barriers and harmonise monetary and fiscal policy

Question 76

What is a preference area?

Answer 76

Preference areas - countries agree to levy/reduce tariffs on trade, only on certain goods and services. This is a very loose form of lowered protectionism.

e.g. EU with African/Carribean countries PTA

Question 77

What are free trade areas?

Answer 77

Free trade areas - an area where member countries abolish tariffs with each other but individual countries can enforce any tariffs they want on outside trade. An issue with this is that a country might import goods from lower external tariff then re-export to others tariff free. So complex rules prevent this. e.g. NAFTA (Mexico, USA, Canada)

Question 78

What is a customs union?

Answer 78

• groups of countries who can trade freely with one another and countries outside have a common tariff e.g. EU/Turkey or Russia/Kazakhstan/Belarus 2010
• without freedom of trade with countries outside the union (common external barriers in the way)

Question 79

What are common markets?

Answer 79

• custom unions with additional provisions to encourage trade and integration through free mobility of FOPS and harmonisation of trading standards and practices E.g. Mercosur (Southern Cone Market), East African Common Market, West African Common
• complete free movement within the common market e.g. EU, Caricom

Question 80

What are economic and monetary unions?

Answer 80

• add further harmonisation in areas of policy and development e.g. EU
• they adopto the same currency, same central bank and therefore same monetary policy e.g. Eurozone
• same policies and political policies e.g. UK (all governed by UK parliament)

Question 81

What are political unions?

Answer 81

• ultimate form of economic integration = submersion of separate national institutions
  Main difference between free trade areas and custom unions: whilst both have internal free trade, difference lies in the way tariffs are set up with external countries. Free trade areas can set whatever they want whilst custom unions share a common set price.

Question 82

Define ‘trading bloc’ and ‘bilateral/multilateral trade agreements’

Answer 82

Trade bloc - countries that join together and agree to increase trade between themselves

Bilateral/Multilateral Trade Agreement - agreement between countries to lower protectionism

Question 83

What is full integration?

Answer 83

completely harmonise all policy, political power -> full integration

e.g. UK (England, Scotland, Wales) with UK parliament being the one governing body

Question 84

Reasons for changes in the pattern of trade between UK and the rest of the world

Answer 84

Countries like the USA and UK had competitive and comparative advantage in manufacturing, so could industrialise earlier than newly industrialising countries i.e. China and India.

It would’ve seemed natural that the pattern of world trade was mainly between the North, who exported manufactured goods in exchange for foodstuffs and raw materials produced by countries whose comparative advantage lay in primary industries (South)

However, 19th century North-South pattern has tended toward North-North (USA and Europe) where developed industrial economies are mainly trading with each other. Slowly, NICs/emerging markets are being included as a fraction of the trade e.g. BRIC countries (Brazil, Russia, India, China) are responsible for exporting large quantities of goods and services to the North.

SK, China and India export manufactured goods to countries like UK and USA and import commodities like copper from developing countries like Zambia

2014, they imported growing fraction of crude oil from Saudi and Venezuela

Shift of manufacturing industry away from UK and USA to China and NICs shows changing competitive and comparative advantage and deindustrialisation of the UK

Small proportion of trade of North countries is with poorer countries in non-oil producing developing world

Question 85

What is the pattern of the UK’s international trade?

Answer 85

Over a 56 year period from 1955-2011 the pattern of UK’s international trade changed from North-South’ to ‘North-North’
They mainly trade with other developed countries in the North, especially the EU countries in 1955 only 15% of UK exports and 12.6% of UK imports were with eventual EU countries. 32.9% of UK exports and 31.4% UK imports from developing countries
2011: 47.4% and 50.6% were from EU, around 25% for imports and exports to developing countries (including emerging markets of India and China)
China is now the largest exporter of manufactured goods to developed economies like the UK
Eurozone: name used for the group of EU countries that have replaced their currencies with the euro. In 2015, 19 of 28 EU countries were in the eurozone
Note: data from ONS about the North-North and North-South patterns of UK trade is no longer published
They instead publish details of UK trade in goods with EU and non-EU countries