Theme 4: A global perspective Flashcards
What is globalisation (4.1) (3)
-Globalisation is an increase in worldwide economic interdependence
-Globalisation is a variety of ways in which countries are becoming more and more closely integrated, in an economic, cultural and political sense
-Although the pace of globalisation has risen rapidly over the past 50 years, it is not a recent phenomenom, dating back to colonialism
What characterises globalisation (4.1) (5)
-Increase in trade as a % of world GDP
-More movement of money and people between countries
-Increased international specialisation
-Growing importance of TNC’s
-More FDI
What are some factors contributing to globalisation (4.1) (6,1)
-Huge real fall in transport costs makes it cheaper to import/export
-A decline in communication costs with the internet
-A lowering of trade boundaries, due to the World Trade Organisation
-The collapse of communism and opening up of China to trade
-TNC’s taking advantage of lower costs and boundaries
-Growth in the number/size of trading blocs/regional agreements
-Lowering of trade boundaries most significant, since they allow 4,5,6 to occur, and make 1,2 easier
What are the impacts of globalisation on countries/governments (4.1) (5,3)
-Free trade enables comparative advantages to prosper
-Countries specialising leads to higher world output, incomes, living standards
-2008 financial crisis led to deglobalisation, as countries enacted protectionism to protect their domestic economies
-Globalisation leads to higher inequality in developed countries, low wage jobs outsourced to developing countries
-Migration into developed countries pulls down the wage rate, further increasing income inequality
-Globalisation leads to higher exports, leading to economic growth
-Higher growth leads to higher incomes, leading to higher consumption, government revenue etc
-However, TNC’s might shift their earnings to other countries (transfer pricing)
What are the impacts of globalisation on producers, consumers, workers and the environment (1,1,3,2)
-Producers have lower costs of production due to offshoring and economies of scale
-Consumers have higher choice and lower prices, increasing consumer surplus
-Globalisation in developed countries drives down the wages of the unskilled
-Developing countries’ less demanding health and safety laws/regulations lead to lower costs of production
-The exploitation of workers in developing countries by TNC’s, but they get higher paying jobs
-Specialisation will lead to the over abstraction of specific resources
-External costs such as pollution (increased transport) lead to global warming, and its impacts
What are the pros & cons of globalisation (4.1) (5,5)
+Gains through free trade through comparative advantages
+Increased competition leads to increased efficiency, quality and lower prices
+Increased FDI and access to global capital markets will increase investment
+Increased output leads to increased incomes, increased employment leads to lower poverty
+Increased pace of technological diffusion
-Transmission of shocks (crashes, recessions)
-Increased inequality between countries and workers’ wages
-External costs of production and trade
-Unemployment, as jobs are outsourced
-Migration will lead to decreased populations in poorer countries, as there is a brain drain
How can we use graphs to model international trade (4.1) (2)
(Assuming the world price is fully elastic)
-If the UK’s equilibrium is below world price, the difference between QS at world price and QD at world price will be exported
-If the UK’s equilibrium is above world price, the difference between QD at world price and QS at world price will be imported
What are absolute and comparative advantages (4.1) (3)
-An absolute advantage is when a country can produce more of a good/service than another country
-A comparative advantage is when a country can produce a good/service at a lower opportunity cost than another country
-The law of comparative advantages states that even if a country has absolute advantages in the production of all goods/services, it can still benefit through specialisation and trade in the products in which it has a comparative advantage
What is a numerical example of the theory of comparative advantage (4.1) (4)
-Country A can produce 20,000 mangos and 10,000 TV’s, Country B can produce 8,000 mangos and 8,000 TV’s
-Country A has an opportunity cost of 0.5 TV’s when producing mangos, and an OC of 2 when producing TV’s, and Country B has an OC of 1 either way
-If the countries specialise in their respective comparative advantages, Country A produces 30,000 mangos and 5,000 TV’s, and Country B produces 16,000 TV’s
-Through trade, Country A now has 21,000 mangos (>20,000), 11,000 TV’s (>10,000), and Country B has 9,000 mangos (>8,000) and 10,000 TV’s (>8,000)
How can you illustrate comparative advantages using PPF’s (4.1) (2)
-The country with the steeper gradient should specialise in the good on the y axis
-The country with the less steep gradient should specialise in the good on the x axis
What assumptions are made in the theory of comparative advantage, and what is wrong with these assumptions (4.1) (5,3)
It is assumed there are:
-Perfect mobility of resources between different countries
-Perfect knowledge
-Constant costs, no EOS
-No trade boundaries
-No transport costs
However, there are:
-Not constant costs, as specialisation over time leads to lower costs and economies of scale
-Transport costs, as trading across the world requires people to be paid to move the goods
-Trade barriers, as trade barriers such as tariffs distort comparative advantages
What are the pros & cons of specialisation and trade (4.1) (5,5)
+Specialisation and free trade based on comparative advantages leads to efficient resource allocation
+Higher world output and living standards
+Lower price/Higher choice for consumers
+Higher incentives for firms to become more efficient
+More markets for firms, leading to growth and EOS
-Specialisation forces countries to be reliant on one another
-Law of comparative advantage based on unrealistic assumptions
-Risk of dependence on imports
-What you specialise could be uncompetitive in the future
-Negative externalities
How have patterns of trade changed from 1995-2013 (4.1) (4)
-The US’ share has fallen from 12.5% to 8%
-The EU’s share has fallen from 44% to 37%
-Chinas share has risen from 4% to 18%
-East Asia and China’s share has risen from 20% to 34%
(Everything in terms of regional share in global manufacturing exports from 1995-2013)
What are some reasons for the changing patterns in trade (4.1) (2,3,2,2)
-Comparative advantages changing over time
-Deindustrialisation within the UK leads to a less competitive UK manufacturing sector, and boosts other competitors, such as China
-Growth of emerging economies, such as China
-China/other emerging economies take up more of a countries exports/imports than previously
-International trade is more important for developing countries (developing countries = 20% of output, USA = 8% of output)
-Growth in the number/size of regional trade agreements
-Increases trade between member countries (EU, BRICS)
-Changes in relative exchange rates
-China manipulates its currency to increase trade (weakens it to boost export competitiveness)
What are some factors influencing a countries terms of trade (4.1) (5)
-Relative inflation: higher UK inflation = higher export prices = higher TOT
-Raw material prices: higher raw material prices = higher import prices = lower TOT
-Relative exchange rates: higher exchange rate = higher export prices, lower import prices = higher TOT
-Tariffs: higher tariffs = higher import prices = lower TOT
-Productivity: higher productivity = lower export prices = lower TOT
What are terms of trade, and the impact of changes in a countries terms of trade (4.1) (2,2,3,1)
-Terms of trade are the rate at which exports exchange for imports
-ToT = (indexed export prices / indexed import prices) x 100 (The ratio of export prices to import prices)
-An improvement (ToT>100) means more imports can be purchased for X amount of exports
-A worsening (ToT<100) means less imports can be purchased for X amount of exports
A higher ToT=
-More imports per exports = higher living standards
-Higher export prices = decreased export competitiveness = worsening current account/output
-Decreased imported inflation or higher domestic inflation
-The “resource curse” = resource rich developing countries exchange rates are high, due to high demand for their resources, so the ToT rise, leading to higher export prices and a worser current account
How do tariffs work (4.1) (1,4)
-Tariff is a tax imposed on imports, intending to make foreign goods more expensive, and thus less price competitive, than domestic goods
-Before the tariff, domestic supply was at S1, demand at D1, and D1-S1 was imported (Pw<Pe, comparative advantages abroad)
-After the tariff( price rises from Pw to Pw+t, leading to demand falling from D1 -> D2, supply rising from S1->S2, and imports fall from (D1-S1) to (D2-S2)
-The positive impacts of the tariff are the increased producer surplus (left of S curve from Pw -> Pw+t), and the tariff revenue ((D2-S2)x(Pw+t - Pw))
-The negative impacts of the tariff are the lost consumer surplus (left of D curve from Pw -> Pw+t) and the deadweight loss (areas of lost consumer surplus which aren’t gained through tariff revenue and producer surplus), the resource cost to society as a result of domestic suppliers producing more expensively
How may tariffs be evaluated (4.1) (8)
-How large is the tariff
-In some trading blocs, tariffs are common, not unilateral
-How much of a comparative advantage does the world have (how much greater is Pw than Pe)
-Inelastic curves = lower impact on imports, increased government revenue, decreased DWL
-The greater the increase in the import price = lower the real living standards
-Tit for tat responses
-Many exports require imported raw materials
-How does the government use the tariff revenue
How do quotas work (4.1) (2,3)
-A quota is a limit on the volume of imports allowed into a country per year
-Intention is to restrict the flow of imports without directly changing price (indirectly, via constraining supply)
-Before the quota, domestic supply was at S1, domestic demand was at D1, world price was at Pw (Pw<Pe), and (D1-S1) was imported
-The quota led to Domestic supply shifting outwards, leading to price increasing from Pw to Pw+q, reducing demand, increasing supply, and thus reducing imports
-The impacts are an increased domestic producer surplus (area left of Sdom), increased foreign producer surplus (D1-S1 x Pw+q - Pw), deadweight loss of the triangle gaps between S1 and S2 and D1 and D2, with the whole lot being lost consumer surplus
How to evaluate quotas (4.1) (6)
-A more inelastic supply and demand leads to a higher price rise, thus causing greater producer surplus and DWL
-Are the quotas common or unilateral
-Depends on the size of the quota
-How much of a comparative advantage does the world have
-Higher import prices lead to lower real living standards
-Tit for tat responses
What are export subsidies (4.1) (4)
-Export subsidies are a grant of money given by the government, to an industry, in order to lower prices and increase output for exports
-The intention is to make domestic goods cheaper in foreign markets, hence more price competitive (Pw<Pq)
-After the subsidy, the domestic S curve shifts vertically downwards by the subsidy
-Domestic supply increases from S1 to S2, squeezing imports from D1-S1 to D1-S2
What are non-tariff barriers (4.1) (3)
-Usually, these are rules and regulations that control the standard of products to be sold in a country
-These include technical or health and safety standards
-These are often a grey area, either being entirely sensible and applying equally to domestic and foreign firms, or a disguised restriction on international trade
What is the impact on an economy of a rise in protectionism (4.1) (6)
-Lower output and living standards, since protectionism distorts comparative advantage, so production will occur at higher opportunity cost, reducing output
-Rise in price, due to the protectionist measures, will lead to a fall in consumer surplus, rise in producer surplus and DWL
-Tariffs will raise the prices of imported goods bought by producers, increasing their costs of production and creating cost push inflation
-Rise in import price causes import substitution, shifting AD to the right and causing unemployment to fall
-Tariffs cause less imports, and thus an improvement in the balance of payments
-Tariffs being indirect taxes makes them regressive, leading to increased income inequality
How can you evaluate the impacts on an economy of protectionism (4.1) (6)
-Lower output: How far reaching are the measures, are they to one/two industries or an entire countries output
-Higher price impacts: Depends on PED, PES and size of tariff
-Inflation: Depends what imported goods are subject to tariffs, are they materials or finished goods
-Lower unemployment: Depends on the elasticity of the AS curve, and existing unemployment
-Greater balance of payments: If other countries impose retalitory measures, this may cause lower exports, offsetting the impacts of lower imports
-Greater inequality: Can be mitigated if the government redistributes its tariff revenues to poorer households