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
What are some justifications of protectionism (4.1) (5)
-Infant industies: Tariff protection is required until the domestic industry learns the ropes, and grows large enough to become internationally competitive
-Job protection: Any rise in imports and fall in domestic production will result in less domestic demand for labour
-Prevent dumping: Tariffs levied on imports to offset international subsidies, which aim to drive competitors out via predatory pricing
-Strategic industry: Governments may not want to be dependant on foreign suppliers for vital goods, such as food and defence
-Geriatric industry: Protecting old industries on the verge of bankruptcy (similar to infant)
How can you evaluate the protectionist justifications (4.1) (2,2,1,1,1)
Infant industry
-Firms may grow accustom to the protectionist measuresd, thus insulating them
-May be better to boost their productivity, through supply side policies
Job protection
-Jobs saved at the expense of consumers, who lose welfare, spend less and reduce AD
-Countries retaliating may offset the jobs saved
Prevent dumping
-Is the dumping due to government subsidies, distorting comparative advantages, or simply foreign firms’ clear surpluses
Strategic industry
-Each country considers different industries to be ‘strategic’
Geriatric industry
-Same as infant industries
What are some examples of protectionism (4.1) (3,3,4)
-The EU had banned US beef imports on health and safety reasons, due to the hormones used
-However. there was no scientific basis found for these claims, and US beef was found safe for consumption
-In 1997, the WTO ruled against the EU, viewing their non-tariff barriers as disguised protectionism
-The US claimed airbus recieved $40billion in subsidies since 1967, the EU claiming Boeing claimed $18billion in subsidies since 1992
-This dispute broke out since Airbus caught up with Boeing and both geared up for their supersized jet release
-The WTO ruled Boeing recieved $5.3billion in unfair aid, and Airbus had recieved illegal aid
-In 2002, Bush imposed 30% tariffs on imported steel
-The idea was to rebuild the US industry and make it more competitive with imports
-Under WTO rules, the EU were planning $2.2 billion worth of extra tariff duties
-However, the US tariffs were dropped in 2003, partially to avoid a trade war a year before the US 2004 elections
What is the WTO, its main roles and principles (4.1) ((1),(2,2)(2,2,2))
-The World trade organisation is an international organisation dedicated to encourage global trade
Roles:
-They negotiate trade agreements (law making)
-The WTO aims to remove trade barriers through agreements, to promote free trade and comparative advantages
-They have a role in dispute settlement (law enforcement)
-They resolve trade disputes and enforce trade agreements
Principles:
-Non-discrimination
-Tariff reductions must apply to all, as imports must be treated as domestic goods
-Reciprocity
-If one country offers tariff reductions, the other should follow suit
-Safety values
-Protectionism is allowed when justified (offset illegal subsidies or to protect infant industries)
What are WTO enforcement mechanisms, and problems with these (4.1) ((2,2),3)
Mechanisms
-Retaliation: when a country hit with illegal protectionism is allowed to impose its own measures, to an equivalent value, against the offender
-This will threaten exports in the offender, pressuring them to drop protectionism
-Cross-retaliation: where a small country, hit by illegal protectionism by a large country, is allowed to suspend its obligations under more than one of its WTO agreements
-This will inflict economic damage on the larger country, despite their advantage
Problems
-Fighting protectionism with more protectionism
-May spark a trade war, a vicious cycle of tariffs and retaliation
-Comparative advantage is no longer the basis for trade, leading to inefficient resource allocations, and a fall in total world output/living standards
What are some case studies of WTO actions (4.1) (3,2,1,1)
-Airbus is a european airline company which recieves significant subsidies
-In 2019, the US announced that it had recieved WTO permission to take retalitory measures (tariffs) against EU airlines, wisky, wine and cheese
-However, the EU also has a case against Boeing regarding US tax concessions
-In 2013, Japan asked the WTO to investigate the South Korean ban on fish caught in the waters around the Fukushima nuclear plant
-In 1018, the WTO ruled the ban was unfair as fish hadn’t been affected by the nuclear waste, however in 2019 many of the key points were overturned
-In 2014, the US and Indonesia sorted out their clove cigarrete dispute outside of the WTO (the US had banned flavoured cigarretes, including clove ones made in indonesia), with the USA removing the ban and indonesia removing its complaint
-The 1947 General Agreement on Tariffs and Trade prevented any further tariffs on goods being placed
What are the different types of trading bloc (4.1) (2,2,2,2)
Free trade Area
-The removal of tariffs and quotas between member states, but members are allowed to retain their commercial policy towards non-members
-ASEAN, NAFTA (now USMCA)
Customs Union
-Removal of tariffs and quotas between member states, and members agree to a common external tariff on non-members
-EU, MERCOSUR (south american)
Commons Market
-Customs union but with the free flow of factors of production (labour)
-The EU became a single european market in 1993
Monetary Union
-Customs union with a common currency
-Eurozone area of EU
What are the effects of a trading bloc (4.1) (2,2,2,)
-Trade creation: Where the dismantling of trade barriers causes a country to switch from purchasing goods from a high cost producer (domestic) to a low cost producer in the bloc, likely to have a comparative advantage
-Trade diversion: Where the common external tariff causes a country to shift from a low-cost producer outside the bloc to a higher cost producer in the bloc
Firms:
-Higher economies of scale, as firms have access to larger markets, and lower costs through imports
-For example, the EU has 450 million people, and a total GDP of $17 trillion
Consumers:
-Increased choice from greater markets
-Greater competition = higher quality, lower price
How can trade creation be illustrated (4.1) (3d)
-price/world supply falls from p+t to P
-Qs falls from Qs to QS1, QD rises from Qd to Qd1, imports rise from QD-QS to QD1-QS1
-There is loss of consumer surplus from the area left of the supply curve, loss of tariff revenue from the rectangle between old price Q and D and new price, the whole area is increased consumer surplus with the remaining triangles being net welfare gain
How can trade diversion be illustrated (4.1) (3d + 2)
-price/world supply has fallen from S+T to SEU
-Qs falls from Qs to QS1, QD rises from Qd to Qd1, imports rise from QD-QS to QD1-QS1
-There is loss of consumer surplus from the area left of the supply curve, loss of tariff revenue from the rectangle between old price Q and D and the price without surplus, the whole area is increased consumer surplus with the remaining triangles being net welfare gain
-There is a net gain from trade diversion if +welfare > -TR (typically large distance from S+T to SEU, and smaller fromS)
-There is a net loss from trade diverion if +welfare < -TR (typically smalldistance from S+T to SEU, and larger fromS)
What are the pros and cons of regional trade agreements (4.1) (2,3,1)
+Trade creation: members can specialise in line with comparative advantages
+Increased FDI: TNC’s will invest within the bloc to avoid trade barriers
-Trade diversion: shifting from a low cost producer to a high one inside the bloc will distort comparative advantages
-Distorting comparative advantages: Unitary protectionist measures on others distorts CA’s, and creates loer growth
-Loss of an independent monetary policy (if in a monetary union)
-The WTO will allow trading blocs to form if trade creation > trade diversion, if there is net trade creation
Why can there be conflicts between the WTO and trading blocs (4.1) (2,4)
-Trading blocs are often highly protectionist to countries outside their bloc, hence distorting comparative advantage
-For example, the WTO ruled against the EU banning US beef in 1997, the EU justifying this as the hormones put in the cows
Trading blocs are highly protectionist outside their bloc to:
-Promote regional security and resolve political concerns
-To promote economic and technical cooperation among developing countries
-To promote south-to-south trade (Africa, Asia, Latin America)
-This is highly relevant in light of the Doha round, WTO trade negotiations started in 2001, which failed in 2008 as the EU and US refused to reduce agricultural subsidies
What is the EU’s economic and monetary union (4.1) (1,3,3)
-The aim of the Economic and Monetary Union is to remove the final barrier to free trade, the existance of multiple currencies, transaction costs and exchange rates
-In 1997, the Euro was introduced in electronic form in 11 countries
-In 2002, the Euro was introduced in physical form
-330 million EU citizens now use the EU, as do many neighbouring countries
-The Eurozone has a single monetary policy, set by the European Central Bank with an inflation target of 2%
-Fiscal policy stays in the hands of individual member states, but they must follow the rules of the Stability and Growth pact (Budget deficit < 3% of GDP, National debt < 60%)
-However, several countries have broken the SGP targets without consequences, and thus in 2005 the enforcement procedures have been reduced to ‘deficit reduction targets’
What is Optimal currency area theory (4.1) (1,(2,2,2),1)
-Mundell’s OCA theory lists 3 characteristics needed for a successful single currency
Wage flexibility:
-A sudden recession in a country will need wages to fall to reduce firms’ costs of production, to help the country recover without interest rates
-In europe we have great wage rigidity, with strong unions, unlike in the US
Labour mobility:
-Unemployed workers should easily migrate from recession hit areas to growth hotspots, to ensure the supply of labour = demand
-Strong cultural/language barriers in Europe limit the flexibility
Fiscal transfer system:
-Individual states should allow a federal authority to tax all member states and redistribute incomes from the hotter area to colder ones
-This allows the US’ federal bank to focus interest rates on booms, with fiscal transfers helping the poor
-If a region in a currency union is hit with a shock, then the three above factors need to adjust
What are the pros and cons of the single european currency (4.1) (3,4)
+Elimination of transaction costs (However, this only accounts for a small amount of GDP)
+Reduced exchange rate uncertainty, encouraging exports and reducing uncertainty in how much money firms recieve when a payment is done (However, uncertainty still exists outside the EU)
+Price transparency makes it easier to see price differences (However, price differences persist as factors of production differ)
-Rounding up inflation to maximise profit (However, consumers will learn eventually)
-Menu costs (However, a minimal one time cost)
-Loss of sovereignty of a single interest rate to benefit a country, not a union
-Loss of sovereignty through the SGP pact (However, been broken and changed)F
What is the balance of payments, and components of the balance of payments (4.1) (1,3)
-The balance of payments is the record of transfers between one country and the rest of the world
-The current account primarily records the trade in goods, trade in services, investment income (dividends, interest, profit) and current transfers (aid, remitances)
-The capital account primarily records international flows of capital, such movements in assets associated with migration, inter-country loans or government investment overseas
-The financial account primarily records net foreign direct investment, as well as portfolio investments, whether long run (government owned bonds, gold) or short run (speculative hot money)
What are the consequences of investment flows between countries on the financial account (4.1) (1,2,2)
-The impact of investment flows between countries depend on the type of investment flows, and whether it is in the short run or long run
-FDI is classed as long term direct capital flow, and involves the enhancement of a countries capital stock
-Even though profits will return to another country, the increased output will create economic growth and employment, boosting the UK’s productive potential
-Portfolio capital flows make it easier for individuals to purchase overseas shares, or UK firms to access global financial markets
-However, a large number of Portfolio capital flows are short term speculative hot money flows, destabilising the international monetary system
What are the causes of a deficit on the current account (4.1) (4)
The UK’s current account deficit could be caused by:
-High economic growth/foreign recessions will increase the value of imports, and reduce the value of exports
-Weak UK price/product competitiveness will reduce the value of exports
-A strong exchange rate will lead to cheaper imports and more expensive exports
-Weak productivity will demand imports to close the gap between domestic production and domestic consumption
What are the impacts of a current account deficit (4.1) (3,2)
-Higher unemployment, if the deficit is caused by a loss of UK export competitiveness
-Cost push inflation, due to higher priced imported raw materials
-Sterling depreciation leads to more imported inflation (However, makes exports more competitive, reducing the deficit)
+UK consumers experience a high standard of living
+If the deficit is being used to sustain growth (imported raw materials), the growth to repay the debt may grow faster than the debt
How can we evaluate the significance of a current account deficit (4.1) (2,2,2)
Size of the deficit-
-Small deficit are unavoidable, given the complexities of international trade
-Large deficits (% of GDP) indicates an economic fundamental weakness, low domestic productivity or overreliance on imports
Duration of deficit-
-If the deficit is short, there is relatively little concern
-A persistant deficit creates a financial issue for the government, leading to corrective measures, which create other macroeconomic problems
Cause of deficit-
-Strong growth = high imports = relatively little concern
-If its caused by a lack of competitiveness, poor productivity, high inflation, then its an issue
What is the significance of global imbalances (4.1) (3,4,4)
Global imbalances may lead to-
-Protectionism by those in deficit
-Reliance on export-led growth by those in surplus
-Investmet into other nations, leading to inflationary pressures
-However, there are mechanisms to reduce global imbalabces
-WTO has rules in place to stop protectionism
-Trade imbalances are often offset by other elements of the BOP
-Currency depreciation = higher export competitiveness (However, hot money isn’t equal to trade, and is 90%)
When countries take corrective action, significance depends on-
-Who?
-What corrective measure (appreciation = greater exports for others)
-How widescale (whole economy or struggling industry)
-What is the reason (fundamental weakness, protectionist retaliation)
How might demand management help reduce a current account deficit (4.1) (3,2)
-This is an expenditure-reducing policy, especially when the deficit is cyclical and due to high spending
-AD will be lowered with contractionary fiscal/monetary policy, reducing domestic spending and hence lower imports
-Lower AD also leads to a lower price level, boosting export price competitiveness
However-
-Significant tradeoffs of lower economic growth and living standards exist
-This can be highly effective, as the UK has a high income elasticity for imports (1.6-2)
What are the types of current account deficit (4.1) (3,1,3)
Exceptional:
-Due to one-off incidents
-Current oil position, due to Russia Ukraine
-Not that major and unpreventable
Cyclical:
-Due to temporary boom in UK (higher imports) or temporary recession abroad (lower exports)
Structural:
-Due to underlying problem in the UK economy, which causes a persistant and substantial deficit
-Requires a persistant capital/financial account surplus
-Can lead to government intervention
How may supply-side policies help reduce a current account deficit (4.1) (3,2)
-Improves the quality of UK goods and services and increases productive capacity
-Involves boosting flexibility/quality in product and labour markets
-Import substitution (higher exports, lower imports) occurs, due to higher price competitiveness, higher non-price competitiveness and a higher productive capacity
However:
-Very long time lags
-The future government may not share same view/commmitment (HS2 vs China + 17yr 3 gorges dam)
