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Economy HL > The global economy > Flashcards

The global economy Flashcards

1
Q

What is international trade?

A

Exchange of goods, services, and resources between nations

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2
Q

Benefits of international trade?

A
  • Increased competition
  • Lower prices
  • Greater choice
  • Acquisition of resources
  • More foreign exchange earnings
  • Access to larger markets
  • Economies of scales
  • More efficient resource allocation
    -More efficient production
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3
Q

Absolute advantage?

A

When a country can produce a good or service using fewer resources than another country. Countries can benefit from specialization and international trade even if one party has absolute advantage in producing both products.

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4
Q

Comparative advantage?

A

When a country can produce a good or service at a lower opportunity cost than another country.

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5
Q

Sources of comparative advantage?

A
  • Factor endowments: Some countries naturally endowed to certain resources
  • Exchange rate fluctuations: Appreciation of domestic currency means imports are cheaper while exports become more expensive for foreign buyers
  • Price stability: Inflation in the domestic country causes demand for exports to fall while demand for imports will rise
  • Levels in technology: Latest access to machinery and technology more productive. High income countries will have more financial ability to invest in better technology so comparative advantage over low income countries
  • Investment in R&D: Countries that invest in R&D and innovation improves ability to increase productive capacity and lowers opportunity cost
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6
Q

Limitations of theory of comparative advantage?

A
  • Static model
  • No trade barriers
  • Prefect information
  • No transportation costs
  • Perfect mobility of resources
  • Goods / services homogenous
  • Constant returns to scale / no economies of scale
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7
Q

Trade protection

A

Government policies aimed to restrict imports to protect domestic producers: tariffs, quotas, subsidies, adminisrative barriers

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8
Q

Tariffs

A

Taxes imposed on imports. increasing price of foreign imports makes domestic goods / services more price competitive and attractive for domestic consumers

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9
Q

Tarrifs effects on stakeholders?

A

Domestic producers: Better off as they sell at higher quantity and higher price
Consumers: Worse off as they pay higher price for lower quantity
Foreign producers: Worse off as they sell at lower quantity at same price
Government: Earns tax revenue
Total welfare: Decreases, more units being produced from inefficient producers and consumers pay higher price for lower quantity

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10
Q

How to calculate consumer expenditure tariff?

A

Consumer expenditure: Price X Quantity
Before Tariff: Pw X Q2
After tariff: (Pw+T) x Q4

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11
Q

How to calculate consumer surplus tariff?

A

Before tariff: (Max price - Pw) x Q2 / 2
After tariff: (Max price - (Pw-T)) x Q4 / 2

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12
Q

How to calculate producer revenue tariff?

A

Revenue = Price X Quantity
Before Tariff: Pw X Q1
After Tariff: (Pw+T) x Q3

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13
Q

How to calculate producer surplus tariff?

A

Before Tariff: (Pw - min price) x Q1 / 2
After Tariff: ((Pw+T) - min price) x Q3 / 2

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14
Q

How to calculate foreign producer revenue tariff

A

Revenue = Price X Quantity of imports
Before tariff = Pw X (Q2-Q1)
After tariff = Pw X (Q4-Q3)

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15
Q

How to calculate government revenue tariff

A

Revenue = ((Pw-T) - Pw) X (Q4-Q3)

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16
Q

How to calculate welfare loss tariff

A

(T x (Q3-Q1)) / 2 + (T x (Q2-Q4)) / 2

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17
Q

Pros / Cons of Tariffs

A

Pros:
- Government receives revenue
- Supports domestic producers and jobs

Cons:
- Trade off between domestic employment and inefficient allocation of resources
- Consumers pay higher price and have less options
- Foreign producer revenue decreases
- May result to retaliation and long term breakdown of political relationships
- Encourages productive inefficiencies as domestic firms reliant on this form of protection rather than performing competitively

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18
Q

Quota

A

Quota is a legal limit to the quantity or value of imports allowed into a country over a time period

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19
Q

Quota effect on stakeholders

A

Domestic producers: Better off as they sell at higher quantity and higher price
Consumers: Worse off as they pay higher price for lower quantity
Foreign producers: May generate higher or lower sales revenue depending on PED, PES and size of quota
Government: No tax revenue
Total welfare: Decreases, more units being produced from inefficient producers and consumers pay higher price for lower quantity

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20
Q

Production subsidies

A

Refers to sum of money which government provides to domestic producers for producing each unit of the subsidized good

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21
Q

How to calculate consumer surplus quota

A

Before : (Max price - Pw) x Q2 / 2
After : (Max price - (Pq)) x Q4 / 2

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22
Q

How to calculate domestic producer revenue quota

A

Revenue = Price X Quantity
Before: Pw X Q1
After: (Pq) x Q3

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23
Q

How to calculate producer surplus quota?

A

Before : (Pw - min price) x Q1 / 2
After : ((Pq) - min price) x Q3 / 2

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24
Q

How to calculate foreign producer revenue quota

A

Revenue = Price X Quantity of imports
Before = Pw X (Q2-Q1)
After = Pq X (Q4-Q3)

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25
Q

How to calculate welfare loss quota

A

(Pq - Pw) x (Q3-Q1) / 2 + (Pq-Pq) X (Q4-Q3) / 2 + (Pq-Pw) X (Q4-Q3)

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26
Q
A
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27
Q

Production subsidy effect on stakeholders

A

Domestic producers: Better off as they sell at higher quantity and higher price
Consumers: Unaffected by subsidy, they will still pay same price and consume same quantity
Foreign producers: Generates lower sales revenue due to falling exports
Government: Must pay for subsidy
Total welfare: Decreases, more units being produced from inefficient producers and consumers pay higher price for lower quantity

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28
Q

How to calculate consumer expenditure quota?

A

Consumer expenditure: Price X Quantity
Before : Pw X Q2
After : (Pq) x Q4

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29
Q

How to calculate consumer surplus quota?

A

before: (Max price - Pw) x Q2 / 2
after: (Max price - (Pq)) x Q4 / 2

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30
Q

How to calculate producer revenue quota?

A

Revenue = Price X Quantity
Before: Pw X Q1
After: (Pq) x Q3

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31
Q

How to calculate producer surplus quota?

A

Before : (Pw - min price) x Q1 / 2
After : ((Pq) - min price) x Q3 / 2

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32
Q

How to calculate foreign producer revenue quota?

A

Revenue = Price X Quantity of imports
Before = Pw X (Q2-Q1)
After = Pq X (Q4-Q3)

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33
Q

How to calculate welfare loss quota?

A

(Pq-Pw) x (Q3-Q1) /2 + (Pq-Pw) x (Q4-Q3) / 2 + (Pq-Pw) x (Q4-Q3)

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34
Q

How to calculate consumer expenditure production subsidy?

A

Consumer expenditure: Price X Quantity
Before / After : Pw X Q2

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35
Q

How to calculate consumer surplus production subsidy?

A

before/after: (Max price - Pw) x Q2 / 2

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36
Q

How to calculate producer revenue production subsidy?

A

Revenue = Price X Quantity
Before: Pw X Q1
After: (Pw+sub) x Q3

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37
Q

How to calculate producer surplus production subsidy?

A

Before : (Pw - min price) x Q1 / 2
After : ((Pw+sub) - min price) x Q3 / 2

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38
Q

How to calculate foreign producer revenue production subsidy?

A

Revenue = Pw X Quantity of imports
Before = Pw X (Q2-Q1)
After = Pw X (Q2-Q3)

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39
Q

How to calculate government expenditure production subsidy?

A

(Pw+Sub - Pw) x Q3

40
Q

How to calculate welfare loss production subsidy?

A

(Pw+sub - Pw) x (Q3-Q1) / 2

41
Q

What is export subsidy?

A

Sum of money which government provides to domestic producers for each unit of subsidised good exported

42
Q

Export subsidy effect on stakeholders?

A

Domestic producers: Better off as they sell at higher quantity and higher price
Consumers: Worse off as they pay higher price and lower quantity
Foreign producers: Other exporting countries lose portion of the market and worse off
Government: Must pay for subsidy
Total welfare: Decreases, more units being produced from inefficient producers and consumers pay higher price for lower quantity

43
Q

How to calculate consumer expenditure export subsidy?

A

Consumer expenditure: Price X Quantity
Before : Pw X Q1
After: Pw+sub X Q3

44
Q

How to calculate consumer surplus export subsidy?

A

before: (Max price - Pw) x Q1 / 2
after: (Max price - Pw+sub) x Q3 / 2

45
Q

How to calculate producer revenue export subsidy?

A

Revenue = Price X Quantity
Before: Pw X Q2
After: (Pw+sub) x Q4

46
Q

How to calculate producer surplus export subsidy?

A

Before : (Pw - min price) x Q2 / 2
After : ((Pw+sub) - min price) x Q4 / 2

47
Q

How to calculate government expenditure export subsidy?

A

sub x (Q4-Q3)

48
Q

How to calculate welfare loss export subsidy?

A

sub x (Q3-Q1) /2 + sub x (Q4-Q2) /2

49
Q

What are administrative barriers?

A

Regulations which increase costs, difficulty and time required to import foreign goods and services. EG: embargoes, licensing requirements, product quality standards

50
Q

Protection of infant industries

A

Early stage of development and requires government protection to compete with foreign competitors as they don’t benefit from economies of scales and might shut down unless they recieve government protection

51
Q

Dumping

A

Practice of selling products in foreign markets at below cost of making or prices set below their own domestic market

52
Q

why Anti dumping needed?

A

As dumping occurs when firms experience excess supply or excess subsidies resulting in selling of good at low prices, anti dumping used to prevent domestic firms from closing down or workers losing job

53
Q

Balance of payments

A

record of all transcations made between domestic countries and rest of the world over period of time

54
Q

What are debits and credits?

A

Debits: Inflow of money from country
Credits: Outflow of money from country

55
Q

Why governments impose tariff

A
  • To raise revenue
  • Lower unemployment by safeguarding domestic jobs through shifting of consumer expenditure to increase production/consumption
56
Q

What are economically least developed countries?

A

Low income countries facing severe structural barriers to sustainable development

57
Q

Why ineffecient allocation of resources from tariffs

A

Market unable to achieve allocative effecinecy as more goods / services produced by less effecient producers. Domestic producers with trade protection against foreign producers may lack incentives to become more effecient

58
Q

Retaliation

A

Some countries may retaliate by imposing trade barriers in response

59
Q

Why does trade protection increase costs?

A

Raises cost of production for domestic producers who import raw materiasl as inputs to manufacture other good / services

60
Q

Arguments for free trade?

A

Better alllocation of resources
economies of scales
lower prices
more choice
domestive firms have incentive to become more effecient
increased export competitiveness

61
Q

arguments for trade protection

A

protection of infant industries
national security
health / safety and enviornmental standards
anti dumping and unfair competition
balance of payments correction
government revenue
protection of jobs
ELDC diversification

62
Q

what is a preferential trade agreement (PTA)

A

agreement between 2 or more countries to lower trade barriers between each other. Members of governments sign trade to special or favorable terms and conditions or trade
- bilateral (2 countries)
- multilateral (3 or more countries)

63
Q

what are trading blocs?

A

group of countries that agree to reduce trade barriers for purpose of encouraging free or freer trade and cooperation.
- free trade areas
- custom unions
- common markets

64
Q

free trade areas

A

group of countries agree to remove trade barriers between them, members can decide level of trade barriers towards non members independently

65
Q

custom unions

A

group of countries agree to remove trade barriers between them, member must adopt common external trade policy towards non members

66
Q

trade creation

A

when demand shifts from high cost producer to lower cost producers within trading bloc as a result of formation

67
Q

trade diversion

A

when demand shifts from low cost producer outside trading bloc to high cost producer within bloc as a result of formation

68
Q

adv of trading blocs

A
  • improved resource allocation, effeciency in production thus greater economic growth
  • increased competition for lower prices and greater consumer choice
  • producers can expand to larger markets to achieve economies of scale
  • greater employment opportunities
  • improved political relations / cooperation
69
Q

dis of trading wars

A
  • ineffecient producers suffer
  • importing essential goods can reduce national sovreignty
  • increases discrimination to non members
  • unequal distribution of gains and losses
  • reduce government tariff revenue
70
Q

monetary union

A

formed when member countries of common market adopt common currency and central bank responsible for monetary policy. Members do not have flexibility in excercising own monetary policy and forming requires members to limit inflation, government deficits, and debt

71
Q

adv of monetary union

A
  • eliminate exchange rate risk / uncertainty
  • eliminates transaction costs
  • encourages price transparency
  • promotes higher level of inward investment / trade
72
Q

dis of monetary union

A
  • loss of monetary policy as instrument of economic policy -> loss of sovereignty
  • changes in policy impacts differently on each member -> asymmetric impact
  • loss of exchange rate flexibility
  • changeover cost
73
Q

what is the world trade organization?

A

established to
- promote trade liberalization
- oversee multilateral trade agreements
- resolve trade disputes between members
- enviornmental protection
- national security
- protect consumers from health hazards

74
Q

objectives of WTO

A
  • non discrimination of member nations
  • more open international trade
  • predictable / transparent trade policies
  • promote competition and prevent protectionism
  • support LEDC’s
  • protect enviornment
75
Q

function of WTO

A
  • platform for trade negotiation
  • implementation and monitoring of trade agreements
  • forum for systematic trade disputes resolutions
  • building trade capacity for developing countries
  • outreach to promote economic co-operation and growth
76
Q

limitations of WTO

A
  • high income countries subsidize domestic production of primary production of primary goods while imposing tariffs on primary good imports to protect domestic jobs
  • in favor of MNC’s and high income countries
77
Q

floating exchange rates

A

value of currency determined by market forces of demand and supply without government intervention

78
Q

what happens when appreciation occurs on exchange rate

A
  • Demand shifts out
  • supply shifts in
79
Q

what happens when depreciation occurs on exchange rate

A
  • Demand shifts in
  • Supply shifts out
80
Q

why might the demand curve increase in appreciation of currency

A
  • Increased demand for exports hence foreign consumers demanding exports must purchase exports which increases demand
  • increased investments as foreign firms fund FDI or through portfolio investement
  • speculators may purchase expecting the value to increase
  • fall in inflation rates thus exports cheaper
  • rise in interest rates as it increases incentive to save and earn interest payments thus investors will exchange currency
81
Q

why might the supply curve decrease in appreciation of currency

A
  • fall in domestic demand for imports as residents import less goods and services
  • fall in outward investment as domestic firms will fund FDI or domestic portfolio investment by selling domestic currency
  • central bank may restrict supply through administrative barriers and currency only traded through approved outlets preventing governments / large group of investors to manipulate currency
82
Q

why might the demand curve decrease in deppreciation of currency

A
  • fall in demand for exports from domestic consumers
  • fall in inward direct / portfolio investemnt
  • fall remmitances
  • speculation that exchange rate will fall
  • rise in inflation rates
  • fall in interest rates and growth rates
83
Q

why might the supply curve increase in deppreciation of currency

A
  • increase in domestic demand for imports
  • increase in outward investment from domestic consumers
  • fall in central bank intervention
84
Q

effects of changes in floating exchange rates

A

E - Economic growth
L- Living standards
I - inflation
T - Trade balance
E- Employment

85
Q

what are consequences of deppreciation?

A
  • imported FOP’s more expensive reducing producer willingness to produce leading to cost push inflation as SRAS shifts inward
86
Q

consquences of appreciation?

A
  • country’s exports more expensive to foreign consumers
  • imports cheaper to domestic consumers
  • worsens trade balance decreasing economic growth and standard of living
  • producers producer at lower output
  • unemployment ast economy below full capacity
87
Q

fixed exchange rate system

A
  • central bank or government fixes value of national currency value to another currency at particular level. Must actively intervene to influence demand and supply of currency to maintain exchange rate at predetermined level. intervention may be through:
  • buying / selling of official reserves
  • changing interest rates
  • import controls
88
Q

devaluation

A

when central bank or government reduces the predetermined level of currency in fixed exchange rate systemrev

89
Q

revaluation

A

when central bank / government increases the predetermined level of currency in fixed exchange rate system

90
Q

arguments for and against fixed / floating exchange rate

A
  • certainty:
  • opportunity costs:
  • currency liquidity
  • speculation
  • monetary policy
91
Q

certainty

A

fixed offers stability reducing fluctuations thus encourages FDI as it reduces risks for firms

92
Q

opportunity costs

A

fixed encourages improvement of long term competitiveness as it reduces market volatility. Although more incentive to improve country’s intrinsic international competitiveness, central bank needs to carry more foreign reserves and incurring opportunity costs. Signifcant time needed to monitor market

In floating, long term improvements would appreciate currency, negating effects of reform

93
Q

currency liquidity

A

availability of currency in market. Holding of foreign reserves reduces availabiltiy of currencies on global market for private investors which crowds out private investors

94
Q

speculation

A

floating subject to speculation where investors may buy or sell currency depending on beliefs of future value of currency. Leads to fluctuations and increases volatility / uncertainty

95
Q

monetary policy

A

in fixed central banks adjust interest rates to influence exchange rate thus less freedom to use monetary policy to achieve macroeconomic objectives

96
Q

managed exchange rate

A

incorporates elements of both fixed and floating exchange rates where currency subjected to free market forces but with occasional central bank interventions to prevent large market fluctuations

97
Q

overvalued / undervalued currency

A

overvalued: managed at value higher than its true floating exchange rate
undervalued: managed at value lower than its true floating exchange rate

Economy HL (6 decks)

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