The Global Economy

Question 1

What are the two reasons country trade?

Answer 1

• Scarce resources

- Specialisation

Question 2

What is the nature of trade in relation to TNC’s?

Answer 2

Growth of TNC’s leading to an increase of “intra trade” - movements of factors of production and growth of global production

Question 3

What is promotes trade?

Answer 3

• New technology - reducing costs
• Governments removing trade barriers
• Trade organisations

Question 4

What is the composition of trade?

Answer 4

Trade is changing due to growth in commodities and services with advanced economies contributing to 65% of world trade

Question 5

Why has international financial flows increased since the 1980’s?

Answer 5

• Growth in trade
• Deregulation of financial systems
• Floating of exchange rates
• Technology advances
• FOREX

Question 6

What is an advantage and disadvantage of FOREX market?

Answer 6

• Able to obtain funds for investment

- Causes speculation and ‘herd mentality’ leading to volatility

Question 7

How does technology, transport and communication lead to globalisation?

Answer 7

• Technology drives investment leading to spread of technological innovation around the globe
• Technology allows for businesses to compete in overseas markets with easier global communication
• Technology leads to an improvement of transport infrastructure which increases output

Question 8

How does the international division of labour and migration lead to globalisation?

Answer 8

The division of labour refers to workers specialising in small tasks rather than an entire job - leading to increased productivity, reduced costs and lower prices. 3% of the world has migrated leading to movement of businesses and people.

Question 9

Factors that strengthen the international business cycle

Answer 9

• Trade flows
• Investment flows
• TNC’s
• Technology
• Global interest rates
• Commodity prices
• International organisations

Question 10

Factors that weaken the international business cycle

Answer 10

• Domestic interest rates
• Government fiscal policy
• Other domestic policies
• Exchange rate
• Structural factors
• Regional factors

Question 11

Advantages of free trade

Answer 11

• Comparative advantage
• Specialisation - economies of scale
• International competitiveness
• Technological innovation and capital investment
• Higher living standards

Question 12

Disadvantages of free trade

Answer 12

• Less international competitiveness
• Discouraging new industries with no protection from importers
• Can lead to dumping, unemployment and lower environmental standards

Question 13

What is the role of international organisations?

Answer 13

• Manage stability
• Assist economies experiencing difficulties
• Develop global standards
• Establish rules
• Resolve disputes

Question 14

What is the role of the WTO?

Answer 14

Implement and advance global free trade agreements and resolve trade disputes

Question 15

What is the role of the IMF?

Answer 15

Maintain international financial stability supporting free trade and the movement of finance and capital globally

Question 16

What is the role of the World Bank?

Answer 16

To reduce poverty and support developing nations

Question 17

What is the role of the UN?

Answer 17

Broad agenda that maintains international peace and security

Question 18

What is the role of the OECD?

Answer 18

To achieve sustainable economic growth and development of member countries

Question 19

What is the influence of government economic forums?

Answer 19

Coordinating policies with major economies during times of crises’s. Their aim is to enable nations to discuss global economic issues with attention to stability and growth.

• The G7 coordinate global macroeconomic policy
• The G20 coordinate key issues relating to global economic stability

Question 20

Why do countries form trading blocs, monetary unions and trade agreements?

Answer 20

Countries form these agreements and alliances to ensure they are in the best position in order to positively benefit from growing trade opportunities.

Question 21

What are the main reasons for protection?

Answer 21

• Protect infant industries
• Prevent dumping
• Protect domestic employment
• Defence and self sufficiency

Question 22

What are the economic effects of a tariff?

Answer 22

• Stimulates domestics production and employment
• Higher prices for consumers
• Raises revenue for the government

Question 23

What are the economic effects of a quota?

Answer 23

• Domestic producers can compete with importers
• More resources shifted to the inefficient industry
• Higher prices for consumers

Question 24

What are the economic effects of a subsidy?

Answer 24

• Stimulates domestic production and employment
• Diverts other resources from other sectors
• Lower prices for consumers

Question 25

What are the economic effects of local content rules?

Answer 25

• Restricts foreign firms and their competition

- Preserves domestic industries

Question 26

What are the economic effects of export incentives?

Answer 26

Encourages local businesses to compete in international markets and improve their market share

Question 27

What are the economic effects of protectionism?

Answer 27

• Reduces trade, living standards, economic growth (due to the inefficient allocation of resources)
• Harder for specialisation

Question 28

What are the global factors for differences between nations and why?

Answer 28

• Trade - trading blocs favour wealthy countries
• Financial architecture - international financial rules aren’t keeping up to date with globalisation e.g. tax havens
• Aid and assistance - reflects strategic and military considerations rather than the needs of poor
• Technology - internet availability favours wealthy nations

Question 29

What are the domestic factors for differences between nations and why?

Answer 29

Economic resources

• Countries with an abundance of natural resources have high potential
• Access to capital and technology - poor nations can’t access

Institutional factors

• Political and economic institutions
• Economic policies - focus on either development or growth conflicts with each other

Question 30

What are the effects of globalisation?

Answer 30

• Increased growth

- Trade and financial flows