theme 4- 4.1 international economics Flashcards
globalisation
the increased economic integration between countries
the pace of globalisation increased up to the GFC 2008
the pace slowed after Trump’s election in 2016 due to rise in protectionism, the covid-19 pandemic will increase pace of deglobalisation
key characteristics of globalisation
- increased trade as a proportion of GDP, trade growth > GDP growth
- increased FDI- indication of integration between economies
- increased capital flows between countries- due to mergers and acquisitions across borders
- increased movement of people between countries
causes of globalisation
- decrease in transport costs- e.g. containerisation -> economies of scale
- decrease in the cost of communication
- reduction in world trade barriers- engineered by WTO
- the opening up of China and the collapse of the USSR
- growth of trading blocs
- increased importance of global and transnational companies (TNCs)- partake in FDI and offshoring labour and production to cheaper countries
impact of globalisation on living standards
countries can specialise in producing goods that they have a comparative advantage for
-> results in higher world output and therefore increased living standards
impact of globalisation on a country’s trade balance
a country that lacks comparative advantage may rely on imports
-> cause a deterioration in the trade balance
impact of globalisation on inequality
evidence it has led to increased inequality in some countries
due to:
- decreased demand for unskilled labour in developing countries = increased gap in earnings
BUT inequality between countries has fallen over the last 40 yrs
impact of globalisation on public finances and governments
tax revenues will increase which can be used for public services
BUT some global countries avoid tax through transfer pricing
transfer pricing
the price one part of a company charges for the products and services it provides to another part of the same company
enables TNCs to declare profits in the country where corporation tax is lowest
impact of globalisation on producers
benefit from economies of scale and higher profits
tech transfer is likely to occur
TNCs can bring in modern management techniques designed to increase productivity
BUT local producers who are less competitive are likely to go out of business
impact of globalisation on consumers
can expect:
- lower prices
- increased consumer surplus
- greater choice
impact of globalisation on workers
can expect:
- increased employment opportunities
BUT
- TNCs may exploit workers in developing countries by paying low wages for long hours
- if migration of low skilled workers to developed countries, existing workers may face little increase in real wages
impact of globalisation on the environment
increased external costs
e.g. air and noise pollution
FDI by countries in search of raw materials may lead to exploitation and depletion of resources
impact of globalisation on supply chains
made supply chains lengthier and more complex
-> covid-19 exposed weaknesses of this so some are trying to shorten them by increasing domestic production
absolute advantage
implies that a country can produce more of one product than another country can with the same amount of resources
comparative advantage
when a country can produce a good with a lower opportunity cost than another country
ricardo and comparative advantage
demonstrated that trade is advantageous to both countries if each specialises in the production of a good in which it had the comparative advantage- must be a difference in the opportunity cost of producing the products
law of comparative advantage assumptions
- constant returns to scale (implies PPF = straight line)
- no transport costs
- no trade barriers
- perfect mobility of factors of production
- externalities are ignored
comparative advantage on a graph
a country has comparative/absolute advantage when 1/both its points are at a higher quantity of production
limitations of the law of comparative advantage
- free trade is not = to fair trade (may exert monopsony power to coerce developing countries to accept very low prices)
- based on unrealistic assumptions
- if opportunity costs are =, there would be no benefit from specialising
advantages of specialisation and trade
- higher living standards and increased employment from increased world output
- lower prices = consumer surplus and choice
- transfer of management expertise and tech
- economies of scale
- reduction in the power of domestic monopolies
disadvantages of specialisation and trade
- deficit in the trade balance if uncompetitive
- danger of dumping
- increased unemployment in some countries
- increased risk of contagion and disruption from problems in the global economy
- TNCs may become global monopolies and exploit consumers
- unbalanced development
disadvantages of specialisation and trade for developing countries
- infant industries may be unable to compete and go out of business
- may exert monopsony power to coerce developing countries to accept very low prices
- declining in terms of trade occur for countries dependent on primary products
key factors influencing the patterns of trade between countries
- changes in comparative advantage
- growth in exports, especially from low wage countries to developed
- growth of global supply chains
- increased importance of emerging economies as trading partners
- growth of trading blocs and bilateral trade agreements
- changes in relative exchange rates
changes in the share of world exports
asia’s share grew from 28% in 2008 to 34% in 2018
terms of trade
measure the price of a country’s exports relative to the price of its imports
= index of export prices /
index of import prices x 100
factors influencing terms of trade
- rate of inflation relative to other countries
- productivity relative to other countries
- exchange rate
effect of an increase in the terms of trade
- higher living standards- can import more for a given quantity of exports
- deterioration in the current account of the balance of payments- causes a decline in the competitiveness of its goods and services
decrease = vice versa
trading blocs
groups of countries that agree to reduce or eliminate trade barriers between themselves- most in specific geographical locations
e.g. the Common Market for Eastern and Southern Africa (COMESA)
free trade areas
type of trading bloc where trade barriers and removed between members but each can impose trade restrictions on non-members
customs unions
type of trading bloc where there is free trade between members combined with a common external tariff on goods outside of the union
common markets
type of trading bloc that is like a customs union but includes free movement of factors of production between members
monetary unions
type of trading bloc that is like a customs union that adopts a common currency e.g. the Eurozone
costs of regional trade agreements (trading blocs)
- trade diversion (may be diverted from low cost producers to high cost ones in the member states)
- distortion of comparative advantage- trade barriers with non-members is likely to decrease specialisation and world output