The International Economy

Question 1

What is globalisation

Answer 1

Globalisation is the ever increasing integration of the world’s local, regional and
national economies into a single, international market

Question 2

what does globalisation involve

Answer 2

the free trade of goods/services

the free movement of capital and labour

the free interchange of technology and intellectual capital

Question 3

what does the spread of globalisation cause

Answer 3

-more trade between nations and more transfers of capital including FDI (foreign direct investment)

brands developed globally and labour has been divided between several countries

there is more migration and more countries participate in global trade e.g. china and India

countries have also become more interdependent -> so the performance of their own country depends on the performance of others

Question 4

factors that contribute to globalisation

Answer 4

trade in goods:

developing countries acquire capital and knowledge to manufacture goods -> the efficient forms of transport make it easier and cheaper to transfer goods across international borders -> some developing countries have cost advantage of cheap labour -> so MNC’s (multi-national companies) move their production abroad
-> causes developed countries to trade with developing countries so they can access the same manufactured goods

trade in services:

e.g. the trade in tourism, call centre services and software production has increased from developing countries to developed countries

trade liberalisation:

the growing strength and influence of organisations such as the world trade organisation (WTO), which advocates free trade, has contributed to the decline in trade barriers.

Multinational corporations (MNCS):

own or control the production of goods or services in multiple countries -> they have used marketing to become global and by growing, they have been able to take advantage of economies of scale e.g. risk bearing -> lower cost of production

International financial flows:

For example, the flow of capital and FDI across international borders has
increased.

China and Malaysia have financed their growth with capital flows.

Also, the foreign ownership of firms has increased.

There has been more
investment in factories abroad.
The removal of capital controls has facilitated this increase.

Communications and IT

The spread of IT has resulted in it becoming easier and cheaper to communicate, which has led to the world being more interconnected.

There
are better transport links and the transfer of information has been made easier.

This is sometimes referred to as the ‘death of distance’.

Containerisation:

This has resulted in it becoming cheaper to ship goods across the world.

This
causes prices to fall, which helps make the market more competitive.

Containerisation means that goods are distributed in standard sized
containers,

so it is easier to load and cheaper to distribute using rail and sea
transport.

This helps to meet world demand.

Cargo can be moved twenty
times as fast as before, economies of scale can be exploited and less labour is
required.

However, it is mainly MNCs which have been able to exploit this, and it could
result in some structural unemployment.

Question 5

what are the consequences of globalisation on individual countries

Answer 5

trade imbalances between countries -> e.g. US runs a large current account deficit with China, who has a large current account surplus

imbalances and inequalities in consumers and countries accesses to health, education and markets

within individual countries, there could be income and wealth inequalities if the benefits and costs of globalisation are not evenly spread e.g. china where the rural and urban areas have vastly different levels of income and living standards

arguments about cultural diversity being lost. However, some argue that spread of culture has been positive and has help improved the quality of life

Question 6

what are the consequences of globalisation on governments

Answer 6

some governments might lose their sovereignty due to the increase in international treaties

having to abide by the rules of being a member of an organisation if joined to one e.g. EU

Question 7

what are the consequences of globalisation on producers and consumers

Answer 7

Consumers and producers can earn the benefits of specialisation and economies of
scale as firms become larger

Firms operate in a more competitive environment, which encourages them to lower their average costs and become more efficient.

Producers can also make their average costs lower by switching production to places with cheaper labour. -> the spread of technology has resulted in firms being able to employ the most advanced machines and production methods

Question 8

what are the consequences of globalisation on workers

Answer 8

Workers can take advantage of job opportunities across the globe, rather than just in
their home country.

However, there could be structural unemployment. For example, in the UK after the
collapse of the ship building and mining industries, there was a lot of structural
unemployment. This is because it was more efficient for manufacturing to occur
abroad, so production shifted to lower labour cost nations.

When production shifts to lower labour cost countries, the creation of jobs could be
seen as either beneficial or harmful.

On one hand, MNCs could be exploiting their
labour and providing poor working conditions in, for example, sweatshops.

On the
other hand, working in a sweatshop might provide a higher, more stable income
than any alternatives, such as agriculture.

Question 9

what are the consequences of globalisation on the environment

Answer 9

Although industrialisation and increased consumer living standards might lead to
more pollution through increased production and increased car use, consumers
might show more concern towards the environment as their average incomes
increase.

Some of the negative impacts on the environment could include deforestation,
water scarcity and land degradation

Question 10

what is an absolute advantage

Answer 10

A country has absolute advantage in the production of a good or service if it can produce it
using fewer resources and at a lower cost than another country

Question 11

what is an comparative advantage

Answer 11

Comparative advantage occurs when a country can produce a good or service at a lower
opportunity cost than another country.

This means they have to give up producing less of
another good than another country, using the same resources.

Question 12

what are the benefits of free trade

Answer 12

Countries can exploit their comparative advantage, which leads to a higher output
using fewer resources and increases world GDP. This improves living standards.

Free trade increases economic efficiency by establishing a competitive market. This
lowers the cost of production and increases output.

By freely trading goods, there is trade creation because there are fewer barriers. This
means there is more consumption and large increases in economic welfare.

More exports could lead to higher rates of economic growth.

Specialising means countries can exploit economies of scale, which will lower their
average costs.

Question 13

costs of free trade

Answer 13

Free trade has resulted in some job losses, since countries with lower labour costs
have entered the market.

Free trade might have contributed to some environmental damage. This is especially
from the increase in manufacturing.

Question 14

Growth of trading blocs and bilateral trading agreements

Question 15

Impact of emerging economies

Question 16

Changes in relative exchange rates

Question 17

what is Protectionism

Answer 17

Protectionism is the act of guarding a country’s industries from foreign competition.

Question 18

what are the Methods of protectionism and their impact

Answer 18

Tariffs are taxes on imports to a country.

It could lead to retaliation, so exports might
decrease.

The impact of tariffs is that the quantity demanded of domestic goods increases,
whilst the quantity demanded of imports decreases.

Question 19

draw the diagram for imposing a tariff

Answer 19

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Question 20

what is a quota

Answer 20

A quota limits the quantity of a foreign produced good that is sold on the domestic market.

It sets a physical limit on a specific good imported in a set amount of time.

It leads to a rise
in the price of the good for domestic consumers, so they become worse off.

Question 21

Export subsidies

Answer 21

This is a form of government intervention to encourage goods to be exported rather than
sold on the domestic market.

The government might use direct payments, tax relief, or
provide cheap access to credit.

Question 22

what are Embargoes

Answer 22

This is the complete ban on trade with a particular country. It is usually politically motivated.

Question 23

Excessive administrative burdens (‘red tape’)

Answer 23

Excessive administration increases the cost of trading, and hence discourages imports.

It makes it difficult to trade with countries imposing red tape, and is particularly harmful for
developing countries which are unable to access these markets.

Question 24

the causes of countries adopting protectionist policies

Answer 24

If a country employed several protectionist measures, then a trade deficit would
reduce. This is because they will be importing less due to tariffs and quotas on
imports.

Infant industries might need protecting. These are industries which are relatively
new and receive support. Protectionism is usually short term until the industry
develops, at which point the industry can trade freely.

Protectionism could be used to correct market failure. It can deal with demerit goods
and protect society from them.

Governments might employ protectionist measures to improve the current account
deficit.

Governments might want to protect domestic jobs.

It imposes an extra cost on exporters, which could lower output and damage the
economy

Tariffs are regressive and are most damaging to those on low and fixed incomes.

There is a risk of retaliation from other countries, so countries might become hostile.

Protectionism could lead to government failure.

Question 25

what is a customs union

Answer 25

Countries in a customs union have established a common trade policy with the rest of the
world. For example, they might use a common external tariff.

It also has free trade between members. The European Union is an example of a
Customs Union.

Question 26

what are the other features of a customs union

Answer 26

-Safety measures for imported goods, such as for food, are common across all
members.

There are common customs rules and procedures.

• There is a structure for the combined administration of the nations within the
  Customs Union.
• There is a common trade policy. This helps to create and guide trading relationships
  with countries and blocs outside the Customs Union.

Question 27

consequences for the UK of its membership to the EU

Answer 27

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Question 28

what are the components of the balance of payments

Answer 28

The current account: This includes all economic transactions between countries.

The main transactions are the trade in goods and services, income and current
transfers.

• The capital account and financial account: Capital transfers involve transfers of
  the ownership of fixed assets. The financial account involves investment. For
  example, direct investment, portfolio investment and reserve assets are part of
  the financial account.
• Balancing item: The components of the Balance of Payments should balance.
  That is, the sum of the accounts should be zero. Where there are imbalances, a
  balancing item is used to cover the discrepancies.

Question 29

what is a current account surplus

Answer 29

A current account surplus means there is a net inflow of money into the circular flow
of income.

The UK has a surplus with services, but a deficit with goods.

The UK has a net current account deficit. This means the UK spends more on imports
from foreign countries, than they earn from exports to foreign countries. If the
deficit is large and runs for a long time, there could be financial difficulties with
financing the deficit.

Question 30

what are the causes of disequilibrium in the balance of payments

Answer 30

Appreciation of the currency

economic growth -> when consumer incomes increase, demand increases -> increases demand for imports + especially in UK where there is a high propensity to import

more competitive -> if a country becomes more internationally competitive -> e.g. with lower inflation or if there is economic growth in export markets -> exports should increase

deindustrialisation -> in the UK, the manufacturing sector has been declining since the 1970s -> goods previously made domestically are now being imported -> worsening deficit

membership of trade union - negative current transfers since membership fees are paid to the EU

attractiveness to foreign investors -> capital account surplus could be cause from income finance from investors buying UK bonds, securities

Question 31

fiscal policies that might be used to correct a balance of payments deficit or surplus

Answer 31

If there is a deficit on the current account, income tax could be increased. This will
reduce the amount of disposable income consumers have, which will reduce the
quantity of imports. However, it might also impact domestic growth, since
consumers will also spend less on domestic goods.

Governments could also reduce their spending. This would reduce AD and lead to
less imports. It forces domestic firms into increasing exports, which helps improve
the disequilibrium.

Fiscal policy is effective in the short term, but not so much in the long term. As soon
as the policy measures end, household are likely to revert their expenditure back on
imports

If taxes are imposed on trading partners, there is the risk of retaliation, which could
reduce demand for exports, too.

Governments might have imperfect information about the economy, so it could lead
to government failure.

If ‘green taxes’ are implemented, such as carbon taxes, or if there are minimum
prices on pollution permits, the competitiveness of domestic firms could be
compromised. This could reduce exports from domestic firms.

Question 32

Supply side policies

Answer 32

Supply-side policies could help increase productivity with increased spending on
education and training, which could result in the country becoming more
internationally competitive. This could lead to a rise in exports. However, this incurs
a significant time lag, so it is not effective as an immediate measure. In the long
term, this can be an effective policy

Supply-side policies could also help make the domestic economy attractive to
investors.

The domestic economy could be made more competitive through deregulation and
privatisation, which will force firms to lower their average costs. However,
privatisation could result in monopolies being formed, which will not increase
efficiency.

If governments provide subsidies to some industries to encourage production, there
could be retaliation from foreign countries that see this as an unfair protectionist
policy.

Question 33

The significance of deficits and surpluses for an individual economy

Answer 33

If imported raw materials are expensive, there could be cost-push inflation in the
domestic economy, since firms face higher production costs.

International trade has meant countries have become interdependent. Therefore,
the economic conditions in one country affect another country, since the quantity
they export or import will change.

A surplus or deficit on the current account could indicate an unbalanced economy,
and it could mean the country is too reliant on other economies for their own
growth.

It could be difficult to attract sufficient financial flows in order to finance a current
account deficit. This could make it unsustainable in the long run.

Question 34

The implications for the global economy of a major economy or
economies with imbalances deciding to take corrective action

Answer 34

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Question 35

what is the exchange rate

Answer 35

The exchange rate of a currency is the weight of one currency relative to another.

Question 36

what is a floating exchange rate, draw a diagram for it

Answer 36

The value of the exchange rate in a floating system is determined by the forces of supply
and demand.

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Question 37

what is a fixed exchange rate, draw a diagram for it

Answer 37

A fixed exchange rate has a value determined by the government compared to other
currencies.

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Question 38

what are the advantages of fixe d exchange rates

Answer 38

Allows for firms to plan
investment, because they know that they will not be affected by
harsh fluctuations in the
exchange rate.

It gives the monetary policy a
focused target to work
towards.

Question 39

what are the disadvantages of fixe d exchange rates

Answer 39

The government and the
central bank do not necessarily know better than the market
where the currency should be.

The balance of payments does
not automatically adjust to
economic shocks.

It can be costly and difficult for
the government to hold large
reserves of foreign currencies

Question 40

what are the advantages of afloating exchange rates

Answer 40

The fluctuations in the price of
the exchange rate can be
unpredictable, which can make
investment planning difficult.

It can also affect the exports
and imports of a country, which
could cause a lot of
unemployment if an industry is
affected in particular.

It could make the exchange
rate vulnerable to speculative
shocks.

Question 41

what are the advantages of a country joining a currency

Answer 41

The participating countries have more currency stability, and the currency is less
prone to speculative shocks. This gives future markets more certainty, so there is
more investment and growth potential.

There are fewer admin fees and less red tape when travelling abroad or exchanging
money.

This also benefits firms which trade with the different member states. It is especially
beneficial to small firms, who benefit from the time and money saving of a common
currency.

The German monetary credibility might result in all member states having a lower
interest rate. This might encourage more investment and spending, which might
create more jobs.

Question 42

what are the disadvantages of a country joining a currency

Answer 42

Labour mobility is limited across Europe due to language barriers. Moreover, the
differences in economic performance between member countries means a common
monetary policy might not be effective.

The exchange rate is not flexible to meet each country’s need, such as if they need a
boost in exports.

Member nations lose sovereignty when there is a common monetary union. This
means that countries with a strong economy have to cooperate with countries that
have weaker economies. They cannot adapt their policies to meet each individual
requirement.

The one-off cost of joining a currency union of changing labels and prices can be
significant.

Question 43

what are the requirements to join a currency union

Answer 43

Gross National Debt has to be below 6% of GDP

• Inflation has to be below 1.5% of the three lowest inflation countries

-The average government bond yield has to be below 2% of the yield of the
countries with the lowest interest rates. This ensures there can be exchange rate
stability.

Question 44

what is economic growth

Answer 44

Economic growth is the increase in a country’s real national output. This is caused by
increases in the quality or quantity of factors of production, which cause an outward
shift in the PPF.

Question 45

what is economic development

Answer 45

Economic development refers to living standards, freedom (from oppression) and
life expectancy. Essentially, it covers a more moral side to economic growth and it is
normative. Development is also concerned with how sustainable the economy is and
whether the needs of future generations can be met.

Question 46

characteristics of LEDCs (less economically developed countries)

Answer 46

Low life expectancies

• High mortality rates
• High dependency ratio
• Low GDP
• Fast population growth
• Low levels of education
• Poor standard of living
• Poor nutrition, lack of access
  to clean, safe drinking water
  and a lack of sanitation
• Poor or absent health care provision

Question 47

what is the HDI

Answer 47

human development index

A value close to 1 is indicative of a high level of economic development. A value
close to 0 suggests a low level of development.

Question 48

The advantages and limitations of using the HDI to compare levels of development
between countries and over time

Answer 48

HDI does not consider how free people are politically, their human rights, gender
equality or people’s cultural identity.

HDI does not take the environment into account. It could be argued that this should
be included to focus on human development more.

HDI does not consider the distribution of income. A country could have a high HDI
but be very unequal. This can mean many people might still be in poverty.

HDI does allow for comparisons between countries to be made, based upon which
countries are generally more developed than other countries.

It provides a much broader comparison between countries than GDP does.
Education and health are important development factors to consider, and it can
provide information about the country’s infrastructure and opportunities. It also
shows how successful government policies have been.

Question 49

what are other indicators of development apart from HDI

Answer 49

HPI (human poverty index) measures life expectancy, education and ability of the citizens to meet basic needs

Gender-related Development Index (GDI) measures the relative inequality between
men and women. It combines HDI with a consideration of gender.

Question 50

what are other indicators of development apart from HDI

Answer 50

HPI (human poverty index) measures life expectancy, education and ability of the citizens to meet basic needs

Gender-related Development Index (GDI) measures the relative inequality between
men and women. It combines HDI with a consideration of gender.

Question 51

Factors that affect growth and development

Answer 51

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market oriented strategies and interventionist strategies