The Global Economy Flashcards
What is a developed country?
Countries that are richer and more industrialised. They have higher GDP per capita figures
What is a developing country?
Countries that largely rely on manufacturing, agriculture and other labour intensive industries. They will have low GDP per capita and lower standards of living.
What is globalisation?
Increasing integration of economies internationally
What are the main characteristics of globalisation?
- Free movement of capital and labour across international boundaries
- Free trade in goods and services between different countries
- The availability of technological and intellectual capital to be used and patented on an international scale
What is a multinational corporation(MNC)?
Firms that operate in at least one other country aside from their country of origin
What are the factors that attract MNC’s to invest in a country?
- The availability of cheap labour and raw materials
- Good transport links
- Access to different markets
- Pro-foreign investment government policies
What are the causes of globalisation?
Trade Liberalisation- Reduction or removal of tariffs
- Increase in global product standards
- Improvements in communication technology
- Firms expanding overseas to exploit economies of scale
What are the benefits of globalisation?
- Encourages specialisation for countries to produce goods they are the best at producing, which increases output
- Producers can benefit from economies of scale and lower production costs
- Greater choice of goods for consumers
- Increase in world GDP
- Increased growth and employment
- Increased competition
What are the drawbacks of globalisation?
- Increase in price of some goods and services
- Economic dependency
- Global imbalances in balance of payment accounts
What are the positives of MNC’s?
- New jobs and wealth to an economy
- Inflows of foreign currency
- They can be more efficient by benefitting from economies of scale
- Raise living standards by providing employment
What are the negative effects of MNC’s?
- Exploitation of workers by paying lower wages
- Force local firms out of business
- Can relocate rapidly and cause mass unemployment
- Use economic power to reduce choice and increase prices
What are the consequences of globalisation on developing/emerging countries?
- Profits made by MNC’s return to their county of origin and don’t stay in the host country, which may increase inequality
- Skilled worker leave developing countries for more developed countries, reducing the potential for growth in the developing country
- Local companies may not be able to compete with MNC’s
What are the advantages of international trade?
- Larger variety of goods
- Lower prices
- Increased product innovation
- Increased standard of living
What are the disadvantages of international trade?
- Higher transport costs
- Increased globalisation
- Currency exchanges carry costs
What are the advantages of specialisation?
- Costs reduced, meaning lower prices
- World resources are used more efficiently
- Global output and living standards are increased
What are the disadvantages of specialisation?
- Domestic firms may have to shut down as foreign firms are better at producing certain goods
- Overreliance on one industry
- If one industry gets specialised in then the quality of other industries may decrease
What is absolute advantage?
When a country’s output of a good is greater per unit of resource used than any other country
What is comparative advantage?
When the opportunity cost of producing a good is lower in one country than another
How does trade benefit developed countries?
- Imports help to maintain high standards of living
- Products will normally be cheaper abroad, due to increased competition and cheap labour in developing countries
How does trade benefit developing countries?
- They can import goods that they don’t have the technology to produce —-> higher standard of living
- Access to new materials from imports, more industries formed with those new materials
What is free trade?
International trade the is not restricted by tariffs or quotas
What are the benefits of free trade?
- Specialisation
- Increased competition
- Increased ability to transfer resources
What is the World Trade Organisation(WTO)?
An international trade organisation where governments can discuss trade agreements and settle trade disputes
What are some principles of the WTO?
- Countries must treat all their trading partners, and foreign and domestic goods, equally
- They want to encourage competitiveness and discourage trade barriers, such as subsidies
What are some disadvantages of free trade?
- Increased unemployment domestically
- May drive start-up industries out of the market
- May start to get harmful goods coming into the country
- Specialisation from free trade could lead to overdependence on one industry
- May result in imbalances in the balance of payments
What policies can governments use to protect domestic industries?
- Tariffs
- Quotas
- Embargos (bans)
- Value of currency can reduced
- Tight product standard regulation
- Subsidise domestic producer
What are some disadvantages of protectionist policies?
- Reducing imports means less specialisation, diverting resources away from their most efficient use, decreasing allocative and productive efficiency
- Higher domestic prices
- Reduced choice for domestic consumers
- Trade barriers being imposed may cause retaliatory trade barriers, causing a trade war
What are trade blocs?
Associations between different governments that promote and manage trade
What is a bilateral agreement?
Agreements between two countries or trading blocs
What is a multilateral agreement?
Agreements between more than two countries or trading blocs
What are the different types of trade blocs?
- FTA(Free Trade Agreement)
- Customs union
- Common/Single Market
- Economic Unions
- Monetary Unions
What is dumping?
When companies sell goods abroad at a price lower than the production cost in order to drive local businesses out of the market
What can trade blocs lead to?
Trade creation and trade diversion
What is trade creation?
When patterns of trade change after barriers are removed as a result of products being bought from the cheapest source
What is trade diversion?
When trade barriers are imposed on non-members of a bloc, trade will be diverted from any cheaper non-members
What is economic integration?
The process by which the economies of different countries become more closely linked
What type of trade bloc is the EU?
Customs Union
What type of trade bloc is the Eurozone?
Monetary Union
Advantages to economic integration?
- Possibility of trade creation within a trade bloc
- More trade in the bloc, greater efficiency from increased competition, specialisation and economies of scale
- Export prices for non-members will fall
- Removal of tariffs will increase consumer surplus, decrease producer surplus and gov revenue
Disadvantages of economic integration?
- Trade diversion can occur when trade barriers divert trade away from cheaper, more efficient non - members
- Reductions in efficiency, non - members cannot exploit comparative advantage
Benefits of monetary unions?
- Countries don’t need to think about costs relating to other countries as they all have the same currency
- No exchange rate risks when trading in a monetary union
- Policies that are adopted in a monetary union may be beneficial to members
Costs of monetary unions?
- It is hard to adapt policies so that everyone benefits
- Countries lose the ability to make decisions on their own
What is the European commission?
A group of one commissioner from each member country
What does the European commission do?
- Allocates EU funding
- Manages budgets
- Proposes laws and helps to enforce them
What is the European Central Bank?
The central bank of the Eurozone
What does the European Central Bank do?
- Manages the Euro and tries to keep prices stable
- Sets interest interest rates to control inflation
- Issues euro banknotes and manages foreign currency reserves to maintain euro’s exchange rate
What is the European and Monetary Union(EMU)?
A group of policies aimed at converging the economies of member states
What does the European and Monetary Union(EMU) involve?
- Implementing a common monetary policy
- Coordinating fiscal and economic policies between member states
- Using a common currency: The euro in this case
What are the two types of exchange rates?
Fixed and Floating
What is a fixed exchange rate?
When the exchange rate is set by the government or the central bank
What is a floating exchange rate?
An exchange rate that is free to move with changing supply and demand of a currency
Advantages of a floating exchange rate?
- Reduces the need for foreign currency reserves
- Can reduce a BOP deficit
- No need to use monetary policy to maintain the exchange rate
Disadvantages of a floating exchange rate?
- Can fluctuate widely, making business planning hard
- Speculation can artificially strengthen an exchange rate, causing a loss of competitiveness
- Falls in exchange rates can lead to inflationary pressure
Advantages of a fixed exchange rate?
- Reduced speculation
- Firms need to keep costs down, invest and increase productivity to stay competitive
- Certainty in the exchanges rate, more investment
Disadvantages of a fixed exchange rate?
- If the currency isn’t sustainable, speculators will sell the currency
- Country may lose control of the interest rates
- Difficult to maintain
What will happen if the value of the currency falls?
- Exports will become cheaper, increasing domestic competition
- Imports become more expensive
- CA deficit should reduce, but a surplus will increase
- AD increases
- Unemployment is reduced
- Inflation may rise if goods are inelastic
- Increased import prices can cause cost - push inflation
What is the Marshall - Lerner condition?
If the currency depreciates, the CA will only improve if: PED of Imports + PED of exports > 1
What will happen when there is a rise in the value of the currency?
- Increased CA deficit/ decreased CA surplus
- Fall in aggregate demand
- Rise in unemployment
- Inflation may fall, depending in the price elasticity of demand for imports
