The international economy Flashcards
Globalisation
the increasing intergration of economies internationally
characteristics of globalisation
free movement of capital and labour
free trade between goods and services between countries
availability of technology and intellectual capital
MNC
multi national company which function in a country other than the one of origin
causes of globalisation
trade liberalisation which is the removal of tariffs or restrictions
firms expanding oversees to exploit there economies of scale
growth in international trading blocs
How MNCs cause Globalisation
increase in MNCs in their growth and influence leading to more trade and investment
MNCs wishing to increase profits by an increase in FDI
Consequences of globalisation for developing countries
MNCs could exploit workers through low wages
Skilled workers leave to join for developed countries
increase investment
Consequences of Globalisation for developed countries
increased imports has a negative effect on the balance of payments
MNCs get access to cheap labour lowering production costs and prices
Cheap overseas production has led a reduction in certian industries for example due to cheap clothes in bangladesh it leads to a collapse in the text stiles industry
international trade
the exchange of goods and services between countries
advantages of international trade
increased competition
additional markets allow firms to exploit economies of scale
it can expose firms to new ideas and skills
disadvantages of international trade
higher transport costs
currency exchange has costs
regulatory and legal costs in oversees markets
Absolute advantage
when output of a product is greater per unit of resource of any country
comparative advantage
when the opportunity cost of producing a good is lower than the opportunity cost for other countries
terms of trade
is a countries relative price of exports compared to its imports
terms of trade index
index of average price of exports divided by index of average price of imports
free trade
international trade without restrictions such as tariffs and quotas
WTO
The world trade organisation helps trade be as free as possible it helps settles agreements and settle disputes
tariffs
is a form of tax on selected imports
quotas
they limit the quantity of a certain good which can be imported
embargoes
bans that are imposed on certain products
trade disputes
when one country or trading bloc is seen to be acting unfairly when trading internationally
Ad valorem
tax taking a percentage value of a good
costs of protectionism
restricts and reduces specialisation reducing efficiency
higher prices leading to higher inequality
reduces choice for consumers
trading blocs
are associations between different governments which promote and manage trade
Free trade areas
all barriers are removed between members can still impose barriers on outside countries like NAFTA
Customs unions
these are free trade areas where standard tariffs are imposed on non members
Common markets
these are customs unions with the addition of free movement of factors of production between members
Monetary unions
members implement a single, common currency, therefore have a common monetary policy for example euro zone
tarriffs imposed on imports graph
if a fixed tariffs are imposed it increases prices from pe to p1
domestic demand reduces
domestic supply increases
consumer surplus reduces
net welfare loss
domestic producer surplus increases
reasons for changes in world patterns of trade
changes in comparative advantage with developed countries having high value products and developing countries having lower value products
growth of trading blocs meaning increased trade between monetary unions
increasing emerging economies have a big impact on trade
patterns of trade in UK
exports fall and imports rise
decline in exports is due competition from emerging and new industrialised economies
imports rise as goods are cheaper to buy from less developed countries
Balance of payments
records all flows of money into and out of a country
sections of a current account-trade in goods
trade in goods measure imports and exports of visible goods
trade in services-sections of a current account
measures imports and exports of services such as insurance
primary income-sections in a current account
the flows of money in and out of a country resulting from employment or earlier investment
secondary income
transfers are movements between countries who arent paying for goods and services and that arent investment
causes of a current account deficit
High levels of consumer spending on imports
countries who cant compete internationally see a reduction in exports
external shocks-rises in the prices of raw materials decrease in exports
causes of a current account surplus
low value domestic currency-exports cheaper and imports more expensive
high interest rates-more saving,less spending
in recession there will be a fall in imports and overall spending
consequences of BOP deficit
show that a economy is uncompetitive
a deficit could bring a higher standard of living through imports
fall in the value of currency leading to higher import prices
consequences of a BOP surplus
surplus shows a economy is competitive
it could lead to a overeliance on exports
could create inflationary pressure if the price of materials rise
Policies to correct a current account deficit
increase the price of domestic goods to increase exports and reduce imports
restrictions on imports like tarriffs
devalue or depreciate the currency making exports cheaper
Policies to correct a BOP deficit
raise the value of currency
reduce the demand for exports and increase imports
global impact of correcting imbalances
supply side policies lead increase in world trade and growth
restrictions on imports could lead to trade wars, reduction in international trade
economic growth could be limited in developing countries reducing growth and efficiency
fixed exchange rates
where the government or bank sets the exchange rate
floating exchange rate
is free to move with changing supply or demand
How can government influence the exchange rate
devaluation of fixed exchange rate when exchange rate is lowered
revaluation of exchange rates
competitive depreciation or devaluation when the government deliberately lowers the exchange rate to be more competitive
floating exchange rate advantages
reduces the need for currency reserves
help reduce a BOP current account deficit decreasing the exchange rate and increase exports
floating exchange rate disadvantages
make business planning difficult due to fluctuations
fall in the exchange rate can lead to inflationary pressure
fixed exchange rate advantages
encourages FDI
competitive pressures is on firms
fixed exchange rate disadvantages
difficult to maintain
they lose control of the interest rates
How are floating exchange rates determined
they are determined by supply and demand
increase in supply of pounds from s to s1 causes a decrease in value from p to p1
a decrease in demand from D to D1 causes a decrease in value from p to p1
Economic growth-economic development and growth
Increase in the size of a countries GDP
Economic development
making value judgements about what would make up a developed country
Measures of economic development
Real GDP per capita or real GNI(gross national income) per person
its a measure of living standards with per capita being per person
GPI
genuine progress indicator is an economic indicator that gives a fuller picture of growth apart from GDP like quality of life
HDI
human development index is a attempt to describe peoples welfare and a countries economic development apart from national income figures like standard of living, health and education
factors that affect growth and development-poor infrastructure
poor infrastructure doesnt attract FDI, makes it difficult to be competitive like for example poor transport limits goods being transported
infrastructure
basic facilities and services
factors that affect growth and development-education
low education means a less productive workforce
factors that affect growth and development-investment
lack of investment means lower incomes
lack of domestic investment means lower economic growth
it can create a foreign exchange gap where outflows are greater than inflows
savings gap
the gap between domestic level savings and the investment needed to grow
limits to economic growth and development-absence of property rights
if people arent sure if they will keep their land then they may not invest in improvements to their homes harming development
limits to economic growth and development-corruption
corruption is when power is used for personal gain
decrease in effiency as countries resources are diverted away
unreliable bureaucracy which means the tax office is unable to collect taxes
policies to promote economic growth and development-Aid
aid is used as emergency relief during war or to promote development which is called development aid
Aid
the transfer of resources from one country to the other
promoting growth and development-free market strategies
inward strategies like import subsitution, subsidies, high exchange rates, nationalisation
promoting growth and development- free market strategies
less government intervention and more free trade, outward looking strategy to increase efficiency by freeing the market and removing subsidies, floating exchange rates
