The Global Economy Flashcards
How is the global economy measured?
Through GDP - it is a popular way of determining the size of a country’s economy
What is GDP?
The market value of total output of good and services produced within a nation (usually over a year)
How is world GDP derived?
Through combining all the GDPs of each country
How is GDP compared?
- 195 countries measure their own GDP in local currency
- $US dollar is world’s business currency so GDP is converted to USD
What is the purchasing power parity?
How much it costs to buy a basket of goods commonly purchased in most households
What you can buy with the local currency
How does the purchasing power parity work?
It measures the amount of country A’s currency required to purchase a basket of goods and services in country A as compared to the amount of country B’s currency used to purchase a similar basket of goods in country B
What is a criticism of the purchasing power parity?
Reduces economic size of advanced countries, opposite effect on developing countries
How does GDP fail to capture elements which affect standard of living?
- Distribution of income
- Composition of spending
- Environmental degradation
- Resource depletion
- Shadow or informal economy
What implications does GDP have on business?
- Still a popular measure of growth and prosperity
- Attraction of high growth emerging economies lies with their demand for infrastructure investment and demand for consumer goods from growing middle class
What is infrastructure investment?
- Capital equipment
- Construction materials
- Power mission equipment
- Transport
What consumer goods are the growing middle class demanding?
- Cars
- Electronic goods
- Household appliances
- Entertainment
- International travel
Why do countries trade?
Mercantilism - increase exports, reduce imports: trade surplus
Comparative advantage - producing at a relatively lower cost than other countries (Ricardo, 1817)
Export products that utilise resources in abundance; the opposite holds for imports (Heckscher, 1919)
International product lifecycle model (Vernon, 1966)
What is the difference between absolute and comparative advantage?
Absolute advantage - producing more in total
Comparative - when you can produce goods at a lower cost than another country
What is the international product life cycle (Vernon, 1966)?
Innovating country: exports during new product stage and imports in standardised product stage
Other advanced countries: import during new product stage and export in standardised product stage
Less developed countries: import during new product stage and export in standardised product stage
What is an example of a trade pattern?
Samsonite was founded in Denver, Colorado in 1910 and manufacturing was done in the US (innovation country), now the production is standardised it takes place in Asia
