Theme 4 Flashcards
Globalisation
The process of deeper economic integration and interdependence between countries
Causes:
-Containerisation (Transport)
-Technology and communications
-Reduced protectionism
-Increased international financial flows
-MNCS
Impact:
Prices- Fall in prices of many goods and services, but prices may rise as theirs greater pressure on scarce resources
Incomes-Led to increased incomes, but income isn’t spread equally
Employment-Move to tertiary and quaternary sectors will lead to higher paying jobs, but workers may not have the skills
Migration-Migration workers compete in job markets with domestic workers, but many migrant workers will take jobs domestic workers wont take
Wages- Higher skilled workers have seen an increase in wages from increase demand, but increased pay gap
Specilisation and trade
Absolute advantage- A country has absolute advantage in the production of a good when it can be produced cheaply than another country
Comparative advantage- A country has comparative advantage when it can produce a good at a lower opportunity cost compared to another country
Assumptions of the theory of comparative advantage:
-Goods are homogeneous
-Factors of production are perfectly mobile
-No tariffs or trade barriers
-Perfect information
Patterns of trade
Level of trade- The total amount of trade in the world
Pattern of trade- The types of goods and services traded, the regions that trade takes place between, and the significance of different parts of the world to a country’s trade
Factors affecting the pattern of trade:
-Emerging economies
-Comparative advantage
-Trade blocs
-Trade agreements
-Exchange rates
Terms of trade
The terms of trade is the ratio between average export prices and average import prices
Index of terms of trade= Index of export prices/Import of import prices x 100
Factors affecting SR:
-Demand and supply of export and imports (Increase in one country’s demand will increase price)
-Inflation (Increase in inflation will improve terms of trade)
-Exchange rates (Spiced will improve terms of trade)
Factors affecting LR:
-Incomes (Increase in global incomes leads to increasing demand for goods)
-Productivity (Worsening terms of trade as costs drop)
-Technology (Worsening terms of trade as costs drop)
Trading blocs
Blocs- EU, ASEAN, SAFTA, NAFTA
Free trade areas- Eliminates tariffs, import quotas, and preferences on most goods and services traded between them
Custom union- A free trade area with a common external tariff
Common markets- A free trade area with common policies on product regulation
Monetary union- Similar economic cycle, Similar levels of inflation and interest rates, Exchange rate stability, Same government finances
Benefits of trade blocs:
-Trade creation- Lowering of trade barriers can lead to the total amount of trade increasing. Ev- Increase in trade may mean larger increase in imports than exports for some countries
-Lower costs for firms- Increased size of markets could lower costs from economies of scale. EV- Adjustment of specilisation may lead to unemployment in some industries
-Lower prices for consumers- Lower business costs and greater competition leads to lower price of goods and more choice. EV- Trade diversion
WTO- Free trade in its purest form
Disadvantages- Favours already developed countries, Free trade may prevent developing economies develop their infant industries
Restrictions on free trade
What type of protectionism exists?
Tariffs- A tax imposed on imported goods
Import quotas- A limit on the quantity of a good that can be imported
Export subsidies- Grants to specific export-orientated goods (makes goods more competitive)
Non-tariff barriers- Safety standards, technical barriers
Reasons for protectionism:
Infant industry- protests industries which haven’t exploited economies of scale
Protection against dumping- (Selling goods under production costs)
Job protection
Arguments against protectionism:
Infant industry- Government may struggle to pick suitable industries (Infant industries may never mature as theirs no incentive)
Higher prices- Import restrictions leads to higher prices for consumers and businesses
Current account imbalances-Causes
Balance of payments is made up of the current account, the capital account, and the financial account
Causes of a current account imbalance:
Value of currency- If currency is overvalued it creates unfavourable trading conditions for exporters. EV- Depends on the type of exchange rate system
Level of productivity- Lower prices allow exporters to be more competitive abroad. EV- Even if productivity is seemingly strong, competitiveness may be undermined by a strong currency
Level of inflation- A high rate of inflation relative to trading partners means the average price of goods and services in the economy will be rising faster than foreign firms. EV- Depends on the cause of inflation
Current account imbalance- Remedies
Demand management- Contractionary fiscal or monetary policy to reduce AD. EV- Uncertain impact on imports (Consumers may cut back on domestic goods causing harm to domestic producers)
Economic cycle- As an economy moves into a boom, greater demand should increase imports and a current account deficit. EV- Cyclical changes will not deal with a structural deficit that is based on a lack of competitiveness
Depreciation/Devaluation- Weakened currency- Imports dearer, exports cheaper. EV- J-curve effect may undermine this policy in the short run
Exchange rate system
Floating exchange rate system- Exchange rates are determined solely by free market forces, no government intervention in the currency market
A:
Robustness- Floating systems are more robust as they require no government intervention. EV- No compulsion for the government to intervene short term
Fixed exchange rate system- One currency has a fixed value against another currency, most commonly countries fix their currency against the dollar or euro
A:
Financial discipline- A fixed system imposes discipline on governments to overspend. EV- The flexibility of a floating rate means that current account imbalances can be resolved through its self-correcting mechanism
How rates change:
Devaluation-An official reduction of the value of a currency under a fixed or managed exchange rate system
Depreciation-A fall in currency value due to free market forces
Revaluation-An official increase of the value of a currency under a fixed or managed exchange rate system
Appreciation-A rise in currency value due to free market forces
Poverty
Absolute poverty- A measure of the number of people below an absolute threshold ($1.90 per day (PPP))
Causes:
Homelessness, Wars, Famines, Natural disasters, Lack of economic development
Relative poverty- A measure of income inequality within a country (60% median earnings)
Causes:
Unemployment, Discrimination, Lack of wealth, Regressive taxation, Poverty trap
Inequality
Causes:
Disparities in education- A poorer quality education leads to worsened career opportunities. EV- Depends on the structure of the education system
Differences in assets/wealth- Those with existing wealth have opportunities to raise their incomes. EV- Depends on tax system (High levels of inheritance tax can redistribute wealth)
Level of benefits- Low state pensions means elderly may be trapped on a low income with little prospect of raising it. EV- Low unemployment benefits may provide an incentive to take work, reducing inequality in the long run
Policies to reduce inequality:
Progressive tax system- Rich pay a greater proportion of their income in tax. EV- May have disincentive effects
Increase in national minimum wage- Raise the threshold of pay for millions in the lowest paying jobs. EV- Could cause greater unemployment if employers can no longer afford to pay staff
Improved training and education- Improved skills make individuals more employable, raising earning potential. EV- Cost of training/ Time lag
Factors influencing growth and development
HDI- Health, Education, and living standards
Demographic factors- Falling population (Brain drain (Skilled workers leave))
Infrastructure- Poor infrastructure creates high costs and delays for businesses (Negative impact on mobility of labour)
Education and skills- Low levels of education and skills leads to low levels of productivity
Strategies influencing economic growth- Interventionist
Protectionism- Protects domestic industries from foreign competition. EV- Less incentive for domestic firms to become efficient
Infrastructure development- Essential for development. EV- Government may not have the funds to develop all the infrastructure necessary
Joint ventures- Foreign companies investing in a country (FDI) may result in repatriation of profits and little gains for host country. EV- The imposition of restrictions and ownership rules may act as a disincentive to foreign companies
Strategies influencing economic growth- Alternative approaches
Development in tourism- Labour intensive industry, multiplier effect from related sales to tourists. EV- Environmental impact and poor are unable to access tourist lifestyle
Fairtrade schemes- Buyers agree to pay a group of farmers a guaranteed amount. EV- Wage workers dont benefit
Aid- Grants, Loans, Tied aid
The role of financial markets
Retail banks- Provide a range of financial products for consumers and small businesses
Commercial banks- Provide a range of financial products for larger businesses
Investment banks- Buy and sell shares on behalf of customers, Help facilitate mergers
