The International Economy Flashcards
how does international trade benefit consumers ?
decreases prices
&
increases the variety of goods/services
what does it mean if a country has absolute advantage in production of a good/service ?
it can produce it using fewer resources at a lower cost than another country.
what is comparative advantage ?
when a country can produce a good/service using fewer resources at a lower opportunity cost than another country.
i.e. they have to give up less of another good than another country, using the same resources.
allows a country to specialise in production of that good/service.
what is free-trade ?
the act of trading between nations without protectionist barriers, such as tariffs, quotas or regulations.
what are the benefits of Free trade ?
+ countries exploit their comparative advantage, which leads to higher output using fewer and increases the worlds GDP, improving living standards.
+ free trade increases economic efficiency by establishing a competitive market, lowering costs of production and increases output.
+ greater consumption due to less trade barriers, leading to large increases in economic welfare.
what are the drawbacks of free trade ?
- free trade may lead to loss of jobs for some, since countries with lower labour costs have entered the market creating structural unemployment in the economy.
- environmental damage, from increased manufacturing in particular.
what are some reasons in the changes in the pattern of trade in the UK and the rest of the world ?
. comparative advantage
(recent growth in the exports of manufactured goods from developing countries, due to these developing countries gaining a comparative advantage in the production of manufactured goods)
. emerging economies
. growth of trading blocks
(created trade elsewhere, where manufacturing costs of producing is cheaper)
. changes in relative exchanges rates
what is protectionism ?
the act of guarding a country’s industries from a foreign competition.
how does a tariff impact a country ?
price of foreign goods and imports increases.
therefore, quantity demanded of domestic goods increases, whilst quantity demanded for imports decreases.
what is quota ?
limits the quantity of a foreign produced good that is sold on the domestic market.
sets a physical limit on a specific good imported in a set amount of time.
leads to a rise in the price of that good for domestic customers, reducing consumer surplus.
what are export subsidies ?
a form of government intervention to encourage goods to be exported rather than sold on a domestic market.
(could be through direct payments, tax relief, or provide cheap and easy access to credit)
what are embargoes ?
the complete ban on trade with a particular country.
(usually politically motivated)
what is excessive administrative burdens (red tape) ?
excessive attempts to increase the cost of trading, and discourage imports.
what if the effect of “red tape” on developing countries ?
makes it difficult or these developing countries to access the market.
what are the main forms of protectionism ?
. tariff
. quota
. embargoes
. export subsidies
. “red tape”
what are the causes and consequences (adv & dadv) of countries adopting protectionist policies ?
+ reduced trade deficit
+ support and develop domestic industry, to a point where the country can return to free trade
+ correct market failure (demerit goods, and protect society from them
+ protect domestic jobs
- could distort market and lead to allocative inefficiency, loss in consumer welfare
. imposes extra cost on exporters, which could lower output and damage the economy
. could mostly damage those on low and fixed incomes due to the regressive nature of tariffs
. some countries may become hostile
. government failure
what is a customs union ?
occurs when a group of countries agree to have free trade amongst themselves and agree on a common external tariff to countries outside the zone.
(e.g. EU)
what are some other features of Customs unions other than agreeing on a tariff ?
. safety measure for imported goods (such as food)
. common customs rules and procedures
what are the main characteristics of the Single European Market (SEM) ?
- Free movement of goods, services, capital and labour between nations.
- Administrative provisions, laws and regulators are approximated between member nations. This could mean some laws are better suited to some countries, and not so much for others.
- Competition policy is common across the whole of the EU.
- There are common external tariffs.
what are the consequences for the UL of its membership in the European union (EU) ?
. trade creation and diversion
(With more trading blocs, trade has been created between members, but diverted from
elsewhere.)
. reduced transactional costs
(cheaper and easier to trade between members of union)
. economies of scale
. enhanced competition
(firms may become more efficient)
. migration
what is the role of the World Trade Organisation (WTO) ?
promotes world trade through reducing trade barriers and policing existing
agreements.
Every member of the WTO must follow the rules. Those who break the rules face trade sanctions. In addition to trade in goods, the
WTO covers the trade in services and intellectual property rights.
what are the common conflicts between regional trade agreements and the WTO ?
. trading blocks might distort world trade or adversely affect those who do not belong to them
. conflicts between blocs could lead to an increase in protectionism
what is the Balance Of Payments ?
a record of all the financial transactions made between consumers, firms, and the government from one country with other countries
states how much is spent on imports, and the value of imports.
what is the Balance Of Payments made up of ?
Current account
Capital account
Financial account
what is the current account ?
includes all the economic transactions made between countries.
the main transactions are:
. trade in goods/services
. income
. current transfers
what is the capital account ?
involves transfers of the ownership of assets.
what is financial account ?
involves investment
(FDI, direct investment, portfolio investment)
what does a current account surplus mean ?
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)
what does a current account deficit mean ?
the UK spends more on imports from foreign countries, than they earn from exports to foreign countries.
what are the causes of a Balance Of Payments disequilibrium ?
DEFICIT
- appreciation of the currency (SPICED)
- economic growth
(incomes increase, more imports) - deindustralisation
(declining industries means more goods are imported)
SURPLUS
- becoming a more internationally competitive country
(exports increase, due to lower inflation)
- attractiveness to foreign investors (low interest rates, increased investment, greater exports)
if there is a current account surplus, what will be the state of the financial and capital account ?
capital and financial account deficit.
what are the consequences of investment flows between countries ?
FDI can create employment, encourage innovation, and promote long term sustainable growth.
how can Fiscal Policy be used to correct a Balance Of Payments Deficit ?
> increase indirect tax and income
tax:
+ (reduce disposable income and
spending on imports)
- (retaliation from trading
partners if taxes imposed on
trading partners
> governments could reduce
spending to reduce AD:
+ (less spending on imports)
- (governments may have
imperfect information, leading to
market failure).
vice-versa for suplus
how can Monetary Policy be used to correct a Balance Of Payments Deficit ?
reducing the supply of money
increase interest rates
how can Supply-side Policies be used to correct a Balance Of Payments Deficit ?
. increased spending on education and training, greater productivity, country becomes more internationally competitive, exports increase.
(- time lag)
. deregulation and privitisation to make the economy more competitive, lower AC, reduced prices, increased exports
. subsidies
. improving infrastructure to make the economy more attractive to investors
what is the significance of surplus and deficit for an economy ?
. if imported goods are expensive, there could be cost-push inflation in the domestic economy
. could indicate an imbalance in the economy
. An imbalance suggests that the UK is reliant on the performance of other countries.
If export markets, such as the EU, become weak, UK economic performance will be
affected. This was seen during the 2008 financial crisis.
. It could become difficult to finance the deficit in the long run. In the US, the current
account deficit is financed by Chinese investors buying US securities at low interest
rates. If they lose confidence in the US economy, they would stop buying US debt.
The interest rates would then have to be increased to encourage investors to buy
the debt. This would be damaging to US consumers who have a lot of debt, since
repayments would increase, and they would have less disposable income as a result.
what is the exchange rate of a currency ?
weight of one currency relative to another.
what determines exchange rates ?
the demand for that countries currency.
what is a fixed exchange rate ?
where the value of a country’s exchange rate is determined by the government compared to other currencies.
can be manipulated by the central bank, where they buy or sell the currency to change the price to where they want.
what is a managed exchange rate ?
combines characteristics of fixed and floating exchange rate systems.
what is a floating exchange rate ?
where the value of the exchange rate is determined by the forces of supply and demand.
The currency fluctuates, but it doesn’t float on a fully free market. This is when the exchange rate floats on the market, but the central bank of the country buys and sells currencies to try and influence their exchange rate.
how can exchange rates be influenced by the government other than buying the currency (floating exchange rate system) ?
changing interest rates
(higher interest rates, makes economy more attractive for investors, leading to investment and an appreciation in exchange rate)
quantitative easing
(reduce value of the currency)
foreign currency transactions
(buying and selling foreign currency to manipulate the domestic currency. China kept large reserves of the US Dollar by purchasing government bonds, in order to undervalue the Yuan.)
what are the ADV and DADV of fixed exchange rates ?
A: allows for firms to plan investment, because they know that they will not be affected by harsh fluctuations in the exchange rate.
D: the government and the central bank do not necessarily know better than the market where the currency should be.
what are the ADV and DADV of floating exchange rates ?
ADV: It gives the monetary policy
more freedom to focus on
other macroeconomic
objectives.
DADV: the fluctuations in exchange rate can be unpredictable making planning for investment difficult.
what is a currency union (Eurozone, Euro) ?
Members of a monetary union share the same currency. This is more economically integrated than a customs union and free trade area. The Eurozone is an example of this.
A common central monetary policy is established when a monetary union is formed.
The single European currency, the Euro, was implemented in 1999 to form the Eurozone.
Monetary unions use the same interest rate. The Euro, for example, floats against the US Dollar and the Pound Sterling.
what are the advantages for a country joining a currency union (Eurozone) ?
+ 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.
what are the disadvantages of joining a currency union ?
+ 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.
What is Economic Growth ?
Is an increase in the country’s real national output.
This is caused by an increase in the country’s quality or quantity of factors of production, which causes an outward shift in the PPF.
What is Economic Development ?
Refers to living standards, freedom and life expectancy.
Covers a more moral side to economic growth rather than normative.
Economic development is also concerned with how sustainable the economy is and whether the future generations needs and wants can be met.
What are the characteristics of LEDC’s ?
- low life expectancy
- high mortality rates
- high dependency ratio
- Low GDP
- fastest 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
What are the 3 indicators of economic development ?
HDI (education, life expectancy, standard of living)
GNI
PPP
What are the advantages of using HDI to compare levels of development between countries over time ?
+ It allows for comparisons between countries to be made
+ it provides a much broader comparison between countries to be made
What are the disadvantages of using HDI to compare levels of development between countries over time ?
- HDI does not consider how politically free people are
- does not take the environment into account
- does not consider the distribution of income into account
What is Human Poverty Index (HPI) ?
Indicator of economic development.
Human poverty index measures life expectancy, education, and the ability of citizens to meet basic needs.
What is Gender related index (GRI) ?
Indicator of economic development.
Measures the relative inequality between men and women.
It combines HDI with the comparison of gender.
What are the factors that affect economic growth and development ?
. Free Trade
(The act of trading between nations without barriers)
. Promotion of FDI
(FDI is the flow of capital from one country to another, in order to gain a benefit from a higher interest rate)
. Removing government subsidies (could lead to market failure as I distort price signals.)
. Floating exchange rate systems
What are the interventionist strategies to influence economic growth and development ?
. Development of Human Capital
(Spending on education and training to improve productivity)
. Protectionism
(Protects domestic industries)
. Managed exchange rate system
(Floats on the market, but the central banks can influence the exchange rate through buying and selling currency reserves)
. Infrastructure Development
What is Debt Relief ?
Partial or total forgiveness of debt.
In developing countries, debt is deemed to be a significant cause of poverty.
What are the barriers to Economic Growth and Development ?
. Primary Product dependency
(Commodity prices are highly volatile, making it hard to plan for the future, fall in price leads to a fall in exports incomes)
. Savings Gap
(In poorer countries, people have to focus on their immediate needs (food, water, shelter), which they only have enough for, which means there is insufficient savings, leading to inefficient capital accumulation. This impedes capital investment)
. Foreign currency gap
. Capital flight
. Debt
. Infrastructure
What is the foreign currency gap ?
When a country is not attracting sufficient capital flows to make up for a deficit in the capital account.
What is capital flight ?
When capital and money leaves the economy through investment in foreign economies.
