Theme 4 Content Flashcards

Question 1

Q

4.1 - International economics

What is globalisation?

Answer

A

Growing interdependence of countries and the rapid rate of change in the world

Question 2

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4.1 - International economics

Define interdependence:

Answer

A

Define interdependence: The integration of local, regional, national economies into a single international market.

Question 3

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4.1 - International economics

How have economies integrated?

Answer

A

Free trade of goods and services
Free movement of FoP
Free exchange of tech + intellectual capital

Question 4

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4.1 - International economics

What are the 6 restrictions to globalisation? (PATS QE)

Answer

A

Protectionism
Administrative barriers
Tariffs
Subsidies to domestic industry
Quotas
Embargoes

Question 5

Q

4.1 - International economics

What does trade liberalisation mean?

Answer

A

Reduced protectionism

Question 6

Q

4.1 - International economics

What is a synonym for globalisation?

Answer

A

Free trade

Question 7

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4.1 - International economics

What are the impacts of globalisation on consumers?

Answer

A

↑ Choice - range of global products from global producers
↓ Prices - more competition and production is being switched from high cost to low cost locations
Loss of culture

Question 8

Q

4.1 - International economics

What are the impacts of globalisation for workers?

Answer

A

Job loss in non-comp. industries
Inc. employment in comp. industries
↑ Migration - Many migrants have moved for better economic opportunities and standard of living. Migration can fill skill gaps in the economy, raise productivity, reduce wage costs and increase competitiveness. But native workers might see migrants as lowering wage rates due to competition in the job market. Might strain the welfare state.Immobility of labour can be seen as market/government failure.
↓ Wages - have to compete on global scale - so unskilled wages go down as more supply. Skilled workers likely unaffected as less of them

Question 9

Q

4.1 - International economics

What are the impacts of globalisation on firms?

Answer

A

Specialisation and economic interdependency
-> Firms are now dependent on long and complicated supply chains of other firms.
-> Firms are increasingly specialised on specific tasks.
Costs and markets
-> Lower costs being able to use lower paid workers and source materials from cheap firms.
-> New markets firms can sell to- economies of scale.
-> Forces firms to compete with each other - Greater dynamic efficiency and prevents x-inefficiency. Prevents build up of monopolies.
Footloose capitalism
-> Firms can operate in several countries to maximise profits. Might move production from the UK or USA to India or Thailand. This means that they are exploiting comparative advantage.
Tax avoidance
-> Transfer pricing - TNCs reduce taxes on profits by selling goods at a low price internally from a high tax country to another part of the company in a low-tax country.
-> Set up office in a low-tax country like Ireland, Luxembourg or the Bahamas. - Google, Apple, Intel Pfizer have all moved their European headquarters to Ireland.

Question 10

Q

4.1 - International economics

How does an increase in globalisation affect eco growth?

Answer

A

Increases injections, FDI, increases Real GDP
(However could negatively effect environmnent)

Question 11

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4.1 - International economics

What are the diagrammatical effects of globalisation?

Answer

A

A reduction in price from P to P1
Increased overall Qd
(However, reduction in domestic Qs)

Question 12

Q

4.1 - International economics

What are the impacts of globalisation on firms?

Answer

A

Diversification of supply chains.
↘︎ Risk
Exploitation (divide labour market).
↗︎ Profits
Firms who unable to compete internationally will lose out.

Question 13

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4.1 - International economics

What are the characteristics of globalisation?

Answer

A

Increased trade of goods and services across national boundaries.
Increased movement of labour between countries. (migration)
Increased movement of capital between countries
Increased interchange of technology and intellectual capital
Increasing connectivity of people, communities and business through networks
Creation of global supply chains & new trade and investment routes in the world economy

Leads to greater specialisation and interdependence.

Question 14

Q

4.1 - International economics

What are the causes of globalisation

Answer

A

Advancement in technology, communications, IT, transport - Makes it easier for firms to communicate across state lines in different parts of the world. People can work for London firms from anywhere in the in the world.
Trade liberalisation - Protectionism has fallen due to the neoliberal orthodoxy - Washington Consensus, WTO.
International financial flows and Foreign ownership of firms - Removal of capital controls/ deregulation has meant that countries can invest in other countries and grow rapidly.
TNCs - Take advantage of economies of scale and make products in countries with lower costs. - Global brand
Reduced cost/improvement of transportation - e.g. containerisation - the real prices/costs of ocean and air shipping have come down due to containerization & economies of scale in freight industries and the huge ports built to serve them
Differences in tax systems – Some countries have adjusted their corporate tax rates in a bid to attract inflows of foreign direct investment (FDI) - such as Ireland. Uk corporate tax rate is 25%
Collapose of Communisim in Eastern Europe and opening up of China
Increased international labour mobility
Increased mobility of labour

Question 15

Q

4.1 - International economics

What are the problems for Ireland cutting taxes so low to attract TNCs.

Answer

A

Other countries like France and Germany are not happy - Joseph Stiglitz accused Ireland of ‘Stealing revenues’
The United states cut corporate tax to 21% down from 35% to lure American countries back.
-> Game theory suggests that if all countries cut taxes, then everyone is left with lower tax revenues.
-> Countries are ‘footloose’ meaning that they might leave Ireland if tax incentives change
Distorts official statistics - makes growth appear higher than it actually is.

Question 16

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4.1 - International economics

What are the impacts of globalisation on governments?

Answer

A

Government now have to take a more ‘entreprenurial role’ in the economy, investing and intervening in order to improve a country’s international competitiveness.
Lowering taxes, giving subsidies, spending on education and reserach.
Some governments forced to concede to the power of multinationals - Uber withdrew operations in Tanzania after government tried to regulate fares and cut comissions.

Question 17

Q

4.1 - International economics

What is the impact of globalisation on the environment?

Answer

A

Global supply chains, industrialisation, mass consumption, transporting goods, use of raw materials and fossil fuels has greatly increased emissions.
Between 1990 and 2021, greenhouse gases rose by about 50%. Estimates from the UNEP suggest that the world is on track for a 2.5ºC increase in temperatures.
Deforestation in Brazil.
Rich countries like Sweden have been able to invest in climate-friendlier technologies.
Footloose multinationals have been able to pillage environment due to incentives to cut climate regulations.

Question 18

Q

4.1 - International economics

Discuss two macroeconomic policies, apart from protectionism, that a government could use to reduce the negative effects of globalisation. (12) (2018)

Answer

A

One way to tackle the ‘low wages’, ‘insecure employment and inequalities’ created by globalisation is by investing in education and training.
Investing will improve human capital and make workers more productive. This means that they can be more competitive against foreign competition and recieve higher wages. Less likely to be undercut.
This will help solve the ‘low wages’ and striking inequalities that have been created by globalisation.
Evaluation - Time lag. Education and training will take a long time, and might not be an option for many e.g. the elderly. Also conflicts with the government budget
Another way to tackle the ‘relative poverty’ and ‘striking inequalities’ created by globalisation is to introduce a more redistributive tax system.
Tax corporations and MNCs like Google, and give them to lower paid workers. This increases aggregate demand as lower paid workers have a migher MPC and reduces unemployment.
Higher wages and living standards therefore reduces the inequality and poverty created by globalisation.
Evaluation - Might be counterproductive because MNCs are ‘footlose’, it means that they will move to Ireland or Bermuda. This results in a net welfare los

Question 19

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4.1 - International economics

Why do improvements in technology mean globalisation?

Answer

A

Easier to transport goods/services/capital across national boundaries - countries can focus on producing and exporting goods - increased specialisation and interdependence.
Technology means that capital can move across the world
People can work remotely.
Rapid share of information.

Question 20

Q

4.1 - International economics

What has caused deglobalisation?

Answer

A

Countries are worried about external economic shocks and interdependent supply chains.
So are trying to reshore and make products closer to home - start building facilities.
Zero Covid policy and conflict with Taiwan
Invasion of Ukraine
Brexit
Inflation reduction Act.

Question 21

Q

4.1 - International economics

What are the drawbacks of globalisation

Answer

A

Brain drain in LEDCs
Negative externalities
Exploitation of cheap labour
Dumping
Increased unemployment
Increased relative poverty/inequality within developed economies
Increased vulnerability/overdependence on imports
MNCs might engage in tax avoidance
Environmental damage

Question 22

Q

4.1 - International economics

Why is tax avoidance bad?

Answer

A

Means that resources can be exploited
Bad for the government budget balance.
Welfare loss - Western conglomerates siphon off profits to tax havens, whilst developing countries are unable to fund infrastructure, education. Keeps people in poverty.
Erosion of sovereignty e.g. Uber suspended operations in Tanzania after they tried to regulate fairs

Question 23

Q

4.1 - International economics

How can the government reduce the negative impacts of globalisation?

Question 24

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4.1 - International economics

When does comparative advantage occur?

Answer

A

When one country can produce a good / service at a lower OC cost than another country.

Question 25

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4.1 - International economics

What does absolute advantage mean?

Answer

A

When an economy can produce a greater total of goods for the same quantity of inputs.

Question 26

Q

4.1 - International economics

What does the theory of reciprocal comparative advantage state?

Answer

A

This occurs when two countries have absolute advantage in different products.
Countries should specialise in their advantage and import the good they don’t have advantage in.

Question 27

Q

4.1 - International economics

When does reciprocal comparative advantage occur?

Answer

A

When two countries, with absolute advantages in different products trade with each other

Question 28

Q

4.1 - International economics

What is an evaluation to theory of reciprocal comparative advantage?

Answer

A

Theory of comparative advantage - even if a country has absolute advantage in all goods, trade can still benefit if there is a difference in the OC

Question 29

Q

4.1 - International economics

How can a resource-poor country with no absolute advantages gain from trade?

Answer

A

As long as a country has a comparative advantage in some resource (as long as it faces a lower opportunity cost than another country for that resource), then it can benefit from trade.

Question 30

Q

4.1 - International economics

Advantages of Specialization and Trade in an International Context

Answer

A

Efficiency and Productivity: Specialization allows countries to focus on producing what they are most efficient at, leading to increased productivity and economic growth.
Consumer Benefits: International trade provides consumers with a wider variety of goods and services at competitive prices, improving their standard of living.
Resource Allocation: It enables efficient resource allocation as countries can allocate resources to industries where they have a comparative advantage, reducing wastage.
Economies of Scale: Specialization often leads to larger production scales, which can result in economies of scale, further reducing production costs.
International Cooperation: Trade fosters peaceful international relations and cooperation as countries become interdependent.
Theory of comparative advantage states countries should specialise in goods with the lowest OC - (This will boost economy + lead to greater output globally).

Question 31

Q

4.1 - International economics

What are the disadvantages of specialisation to trade?

Answer

A

Countries could become over-dependent. (if one export fails, collapse. e.g. Manchester, shipbuilding). Dutch disease.
High interdependence - trade prevented e.g. wars = massive problems.
Job Displacement: Specialization can lead to job displacement in industries where a country does not have a comparative advantage, causing unemployment and social issues.
Dependency: Over-reliance on imports for critical goods can make a country vulnerable to supply disruptions or price fluctuations.
Income Inequality: While trade can benefit a nation as a whole, it may exacerbate income inequality if the gains are not equitably distributed.
Environmental Concerns: Specialization in resource-intensive industries may lead to environmental degradation if not regulated properly.
Trade Imbalances: Persistent trade deficits can lead to indebtedness and economic instability for some countries.
Loss of Domestic Control: Relying on imports for essential goods can compromise a nation’s control over its own economy and security.

Question 32

Q

4.1 - International economics

Give an example of a country that lost comparative advantage and its consequences:

Answer

A

Italy lost comparative advantage for manufacturing, forced to move from a secondary to a tertiary economy.

Question 33

Q

4.1 - International economics

Evidence how trade liberalisation can lead to eco development:

Answer

A

Efficient use of resources for comparative advantage.
Export-led growth. e.g. Singapore and South Korea.

Question 34

Q

4.1 - International economics

Give a diagram for the theory of comparative advantage:

Answer

A

Even though USA has an absolute adv. in both machines + food, OC of the two countries are different.
Theory of comparative adv. states countries should specialise where they have the lowest OC.
USA - machines, G. - food.

Question 35

Q

4.1 - International economics

Why do countries still trade even if one country has an absolute advantage?

Answer

A

Because they may still be able to produce a good at a lower relative opportunity cost.
This means that both countries can focus on what they have a lower opportunity cost in and increase total output.

Question 36

Q

4.1 - International economics

How could the negative impacts of primary product dependence be evaluated? Why might primary product dependence not be so bad?

Answer

A

LEDCs may have a comparative advantage in primary products - Therefore should continue to develop in areas which they are strongest - Argument given by the Bad Samaritans
Some rich countries have been able to use primary products to develop - Saudi Arabia and oil. - Primary product revenue should be used to reinvest into manufacturing.
Forward markets can be used to fix prices in advanced to reduce volatility and risk.
Not all primary products have a low YED - Diamonds in Botswana.
Primary products rose steeply in price between 2000-2008 while prices for manufactured goods was falling. They also rose post-pandemic.

Question 37

Q

4.1 - International economics

What are the assumptions of the theory of comparative advantage

Answer

A

Ignores transport costs - Might eliminate comparative cost advantage.
Ignores economies of scale.
Assumes there are only two economies producing two goods.
Assumes that traded goods are homogenous.
Assumes perfect factor mobility.
Assumes no trade barriers
Assumes perfect information

Question 38

Q

4.1 - International economics

What are the limitations of comparative advantage? List them.

Answer

A

Transport costs are not considered
Strategic industries - risky to be reliant on another country
Not just 2 countries in the world producing goods
Infant industries might be damaged

Question 39

Q

4.1 - International economics

What are the 4 factors influencing the pattern of trade?

Answer

A

Trading Blocs - within blocs members have reduced trade barriers so more trade between them
Exchange rate - changes in exchange rate mean changes in competitiveness of exports and amount of imports, SPICED/WIDEC
Emerging economies - they are major exporters of manufactured goods and services, altering global trade dynamics
Comparative advantage - countries exports g/s that they have comparative advantage in and import those they have a disadvantage in. This drives international trade patterns

(TEEC)
Also
* Tarrif and non tarrif barriers, FDI, changes in competitiveness and inflation rates.

Question 40

Q

4.1 - International economics

What is trade diversion?

Answer

A

When the patterns of trade are changed, due to blocs.
(Reduced benefits from specialisation).

Question 41

Q

4.1 - International economics

How has the UK pattern of trade chanaged in the past 60 years?

Answer

A

UK has increasingly hada comparative advantage in services rather than good.
-> Usually financial services.
Foreign trade has increased as a proportion of GDP. Exports are now around 30% of national income.
The UK does earn money from North Sea Oil.
EU has become main trading partner since joining the EEC

Question 42

Q

4.1 - International economics

What does terms of trade measure?

Answer

A

The rate of exchange of one product for another when two countries trade.

Question 43

Q

4.1 - International economics

What does ToT tell us in terms of the quantity of imports and exports?

Answer

A

The quantity of exports that need to be sold to buy a given quantity of imports.

Question 44

Q

4.1 - International economics

Give the equation for terms of trade:

Answer

A

Avg export prices index / Avg import prices index x 100.
(Remember X over M).

Question 45

Q

4.1 - International economics

What Terms of Trade (ToT) does the UK aim for?

Answer

A

Increasing, increased injections into economy.

Question 46

Q

4.1 - International economics

How do we know how X and M prices affect ToT?

Answer

A

Use equation ToT = avg.Xprices/ avg.M prices.
If X prices ↑, ToT ↑.
If M prices ↓, ToT ↑.

Question 47

Q

4.1 - International economics

What affects ToT in the SR / LR?

Answer

A

SR - anything that affects price
LR - anything that affects productivity

Question 48

Q

4.1 - International economics

What is the Prebisch-singer hypothesis?

Answer

A

In the LR, the price of primary products declines compared to manufactured products.

(Terms of trade for primary products tends to fall in the LR).

Question 49

Q

4.1 - International economics

Give an example of the Prebisch-Singer hypothesis:

Answer

A

Profit margins for chocolate are better than cocoa.

Question 50

Q

4.1 - International economics

What is a synonym to ‘Dutch disease’?

Answer

A

Primary product dependency.

Question 51

Q

4.1 - International economics

When does Dutch disease occur?

Answer

A

When rapid development of one sector of the economy precipitates a decline in other (non-resources) sectors.
(Other industries don’t take off, Rostow’s model doesn’t occur).

Question 52

Q

4.1 - International economics

What are the factors influencing the terms of trade?

Answer

A

A change in exchange rate. spiced/widec
Inflation
A change in demand for imports and exports
Changing incomes affect pattens of demand.
Changes in productivity
Incomes
PRIMARY PRODUCT DEPEDENCY
Protectionism - tarrifs increase prices so terms of trade worsen

Question 53

Q

4.1 - International economics

What two things would cause an improvement in the terms of trade?

Answer

A

Falling import prices
Rising export prices

Question 54

Q

4.1 - International economics

Give examples of what would cause an improvement in the terms of trade.

Answer

A

Inflation - would increase export prices.
Tarrifs - would increase import prices.
An appreciation in the exchange rate

Question 55

Q

4.1 - International economics

Give examples of what would cause a deterioration in the terms of trade?

Answer

A

Higher productivity
A weaker exchange rate

Question 56

Q

4.1 - International economics

Assume that demand for imports and exports are price inelastic. There is an improvement in the terms of trade. What would happen to:

Import expenditure
Export revenue
Affect on the overall economy?

Answer

A

Would lead to a reduction in import expenditure
A rise in export revenue
Increase in net trade and an improvement in the balance of payments.

Question 57

Q

4.1 - International economics

When is an improvement in the terms of trade a good thing?

Answer

A

If imports are price inelastic - consumers are not responsive to the fall in price so spend less on imports
And exports are price inelastic - other countries continue to buy exports despite the increase in price.

Question 58

Q

4.1 - International economics

When would an improvement in the terms of trade be a bad thing?

Answer

A

If demand for imports imports are elastic
And demand for exports are price elastic

Question 59

Q

4.1 - International economics

Assume that demand for imports and exports are price inelastic. There is an deterioration in the terms of trade. What would happen to

Import expenditure
Export revenue
Affect on the overall economy?

Answer

A

Increase in import expenditure
Decrease in export revenue
Bad for current account balance

Question 60

Q

4.1 - International economics

Assume that demand for imports and exports are price elastic. There is an deterioration in the terms of trade. What would happen to

Import expenditure
Export revenue
Affect on the overall economy?

Answer

A

Fall in import spending
Increased export revenue
There is an improvement on the current accounta balance of payments

Question 61

Q

4.1 - International economics

Textbook question - Discuss whether the changes in the terms of trade between 2012 and 2014 are likely to have led to an improvement in the current account position on the balance of payments for Australia (10)

Answer

A

Likely will be bad for the current account - commidities are very price inelastic.
This would mean as prices fall, export revenues will also fall
This means a deterioration in trade balances and cut in aggregate demand.
Evaluation- Commodities are very volatile. Likely future increase. Longrun/short run.
Or, depends on what is happening with imports.

Question 62

Q

4.1 - International economics

Why might a decline in the terms of trade a problem?

Answer

A

For every import, a country has to export more
A decline in terms of trade reduces the ability to import goods.
Less purchasing power means worse standards of living
Can make it harder to pay foreign debt.

Question 63

Q

4.1 - International economics

Why might a decline in terms of trade be not such a bad thing?

Answer

A

Might make exports more competitive - better for balance of payments.
The impact of a decline in the terms of trade will depend on the elasticity of demand. If demand is elastic, the lower price of exports will cause a bigger % increase in demand.
Some LDC’s have seen an improvement in terms of trade because of rising price of commodities and food post-2008. It is not always LDCs who see a decline in the terms of trade.
It is important to distinguish between a short-term decline in terms of trade and a long-term decline. A long-term decline is more serious for reflecting a fall in living standards.

Question 64

Q

4.1 - International economics

What is a trading bloc?

Answer

A

A group of countries with trade agreements.

Answer 64

A

Regional Trading Bloc.
Free Trade Area
Preferential Trade Area
Customs union.
Common / single markets.
Monetary unions.
Economic union.

Answer 65

A

A group of countries in a geographical region that protect themselves from imports from non-members.
(Also reduction / elimination of internal tariffs).

Answer 66

A

Trans-Pacific Partnership (TPP)

Answer 67

A

Trade creation - Makes it easier for countries to trade within the bloc and specialise - Exploit comparative advantage. Economies of scale from new markets. Greater competition
More FDI - MNCs can invest in the free trade area as they can avoid tariffs and other trade restrictions.

Answer 68

A

Trade diversion - Trade is diverted away from former partners - when the UK joined the EU it began trading less with the commonwealth. might lead to overall fall in economic output.
Country might be better off outside - they can sign lots of bi-lateral agreements
Might make developing countries worse off - Do not have enough economies of scale so their infant industries die off.
Less efficient use of world resources - Trading blocs distort comparative advantage because they entain the use of trade restrctions - Might be more effective to persue global free trade in the WTO.
Increased negative externalities of production, resource depletion & environmental damage

Answer 69

A

Reduced tariff barriers on all goods coming from other members.
(Members allowed to impose restrictions on those outside the FTA)

Answer 70

A

Reduced barriers on some goods
(Used to protect domestic industries)

Answer 71

A

The removal of tariff barriers between members and acceptance of common external tariff against non-members.
May also have preferential import tariffs rates that apply to trade agreements with the customs union has entered into with other countries or groupings of countries

Answer 72

A

No barriers to trade between members - freedom of asset / factor mobility.
Common external tariffs on imported goods from outside.

Answer 73

A

Harmonisation of macroeconomic policies e.g. common rules regarding monopoly powers, anti-competitive practices and the removal of custom posts.
(Best example is the EU).

Answer 74

A

No customs posts between countries - Just as goods and people are free to travel between Manchester and London, they should be as free to travel between London and Milan
Identical product standards - The existence of individual national safety standards on cars, for instance, is a barrier to trade just as it would be if cars sold in London had to meet different safety regulations as cars in Bristol
Harmonisation of taxes- If the tax on the same car is £2000 more in the UK than in France, then UK residents will buy their cars in France and drive them over -> distorting pattern of trade
A common currency - Having to buy foreign currency is a barrier to trade, hence there should be a common currency as there is in the UK

Answer 75

A

Import-tariffs free access to a single market of nearly 500 million people - Opportunity to exploit economies of scale – leading lower long run unit costs and higher profits
Easier access to foreign direct investment - Inward FDI can lift trend rates of economic growth and raise factor productivity
Access to EU structural funds - Investment helps improve infrastructure and potential output (long run aggregate supply
Better access to EU capital markets - Eu companies can more easily raise extra investment funds from bond and capital markets
Discipline of intense competition from being inside the EU single market - Businesses must become more cost efficient + improve their dynamic efficiency to remain competitive

Answer 76

A

‘lack of control’ over immigration
Fairness/equity of subsidies + grants
Competition -> loss of domestic jobs
Profits/wealth in capital markets

Answer 77

A

Countries with a single currency and exchange rates monitored by a central bank.

Answer 78

A

EU - Eurozone.
(Results in loss of monetary policy for members).

Answer 79

A

Trade creation - Specialise, Comparative Advantage.
Savings on transaction costs - No need to convert currencies.
Greater certainty for firms - Fluctuations are less likely. Increases business confidence. Firms do not have to worry about unfavourable currency fluctuations. For example, after the mini budget the £ fell to almost parity with the dollar.
Increased economies of scale - New markets are unlocked, firms can expand and reduce costs.
Price stability
Currency risk – Euro is more stable than smaller currencies. Reduced currency risk makes is easier for smaller countries to borrow money
Trade – Euro enhances the gains from being in the single market – e.g. it encourages more cross border trade in goods and services
Investment – Membership of Euro is likely to stimulate inward investment e.g. in industries such as tourism, financial services, car-making
Competition – Euro increases price transparency and market competition which then helps consumers to find products at better prices

Answer 80

A

Loss of control over monetary policy - countries can’t use monetary policy in order to adopt to local problems. One sized fits all.
Loss of exchange rate flexibility
Reduced control over fiscal policy - 3 % limit on budget deficit and 60% limit on national debt or face a fine
Transition costs - Adjustment costs when switching currencies
Makes countries excessively interdependent - Contagion.

Answer 81

A

Similar trade cycles - So that interest rates synergise. E.g. interest rate rises to curb inflation in a booming Germany will not help Spain if it is in recession.
Mobility of factors of production - Reduces the impact of shocks, as worker can migrate to other countries.
Mobility of finance - There should be complete mobility of finance with prices & wages free to adjust based on market conditions.
Automatic fiscal transfers - Some form of automatic fiscal transfer is needed for countries that are doing badly. E.g. Greece and Portugal. This will reudce the need of excahnge rate adjustment, which might have ben the prior policy response.
Similar economic situation – so interest rate changes have similar effects across the union

Answer 82

A

To help members use trade to raise living standards and create jobs.

Answer 83

A

Tries to negotiate trade agreements and resolve trade problems.
(By reducing protectionism + ↑ integration).

Answer 84

A

Allows rich countries to exploit developing countries, paying low wages and making them work in conditions that would be completely unacceptable in the developed world - Glencore in Zambia, DRC
Is causing environmental disaster as rich countries plunder the poor countries
Destroys native cultures and replaces it with an American way of life.
Forces poor countries to lower their barriers to trade whilst rich countries keep theirs
Gives ownership of the rules of the world trading system to a few rich countries and their multinational companies

Answer 85

A

If the WTO cannot produce multilateral agreements between all member countries then countries will resort to signing ever more regional trade agreements (RTAs)
RTAs do not produce anywhere near the economic gains that could be achieved by a world trade agreement
Still arguably better than nothing so long as trade creation > trade diversion

Answer 86

A

Conductor – come up with a set of rules that apply to international trade. They also bring countries together at conferences & encourages them to reduce or eliminate protectionist trade barriers between themselves e.g. The Doha Round conferences
Tribunal role – Settling disputes between members, countries are encouraged to work it out between themselves but sometimes they don’t. Member countries can file a complaint if they believe a trading partner has violated a trade agreement. The WTO will then run a hearing & make a judgement
Monitor roles – The WTO reviews the trade policies of its members to make sure that WTO rules are being applied fairly and consistently
Training role - The WTO provides training to government official in (mostly) developing countries, to help them engage in trade with other WTO members.

Answer 87

A

Taxes placed on imports.

Answer 88

A

X and Y represent net welfare loss.
Yellow box represents govt. rev.

Answer 89

A

Welfare loss is greater with quotas, as there is no tax revenue generated by the govt

Answer 90

A

Qs of domestic producers increases from Q1 to Q4.
Qs of world producers decreases from Q2 to Q3.

Answer 91

A

Increases prices, due to reduced world supply. Reduces QoL for consumers.
However, govt. revenue from tax may improve QoL in LR (hypothecated).
Other eval: Infant industry argument: domestic producers increase producer surplus + increased market share increased job protection in domestic economy.

Answer 92

A

Triangles X and Y = net welfare loss.
(Net welfare loss as areas of X and Y larger than revenue).
Reduction in CS larger than increase in PS.

Answer 93

A

Potential distortion of comparative adv. - as this theory assumes no tariffs.
Tariff alters the cost advantage that countries may have built up through specialisation.
(Another downside is retaliation - need a para to memorise for this one).

Answer 94

A

When importing country represents a very small proportion of the total demand for the good.
∴ Any protectionist diagram can be evaluated by elasticity of world supply i.e the optimal tariff argument.

Answer 95

A

A country with a large proportion of global trade experiences a smaller price increase when tariffs are imposed.
Reducing the MSC all while govt. benefits from tax rev.

Answer 96

A

The country with a large proportion of global demand reduces global price (as they import less).
The usual price increase of a tariff is offset by this fall in global prices.

Answer 97

A

Not much increase in domestic price (as share of global demand is sufficiently large for protectionist country).
Tax revenue for govt. equal to the value previously earned by foreign producers (before the fall in world prices).

Answer 98

A

Horizontal, perfectly elastic.

Answer 99

A

Optimal tariff theory:
Tariff can actually increase a countries welfare, if the area of tax revenue is larger than the loss in consumer surplus.
(Condition is country must represent large proportion of global demand).

Answer 100

A

Size of tariff x no. of imports.

Answer 101

A

Retaliation.
(Countries will retaliate with tariffs that cause domestic country to overcome their portion of DWL).

Answer 102

A

An additional tariff, above normal import tariffs.

Answer 103

A

A ‘tit for tat’ trade war.

Answer 104

A

However, there is net welfare loss overall, represented by blue boxes.

Answer 105

A

Infant industries - To protect new firms that would be unlikely to succeed at start-up due to the level of global competition. Once established support is removed
Sunset industries - At the end of the life cycle, these firms are on their way out & the government chooses to support them to help limit the economic damage that would occur if they closed abruptly
Strategic industries - Industries such as energy, defense & agriculture are essential to self-sufficiency & security. Being reliant on other countries for these creates vulnerabilities for a nation
Dumping - Dumping is anti-competitive & can harm a country’s industries. Excess output is sold in another country below costs (illegal) or below normal prices in the home market
Employment - helps fix structural unemployment and offshoring
Current Account deficit - When imports > exports the amount of money leaving the country to support foreign firms is greater than that entering to support domestic firms. Protectionism aims to correct this imbalance
Raise tax revenues to lower budget deficit - Important for countries that are developing as they have a limited domestic tax base

Answer 106

A

Outward shift in domestic supply to Q3. Higher prices due to relative shortage.

Answer 107

A

They create a relative shortage, total output falls:

Answer 108

A

Before the tariff domestic producers produced output equal to Q1 & their revenue was equal to Pw x Q1
After the tariff was imposed domestic producers produced Q3 & their revenue was equal to Pw X Q3
Domestic producer surplus has increased by area 2
Over-reliance on protectionist policies can lead to ineffieinces

Answer 109

A

Before the tariff domestic consumers consumed Q2 products at a price of Pw
After the tariff domestic consumers consumed fewer products (Q4) at a higher price of Pw+tariff
Domestic consumer surplus has decreased by areas 1, 2, 3 & 4
Domestic industries become more competitive and so may get better products

Answer 110

A

After the tariff is imposed the government receives tax revenue equal to ((Pw+tariff) - Pw) x (Q4-Q3) - area 3
Protectionist policies may strain diplomatic relations and lead to retaliation by trading partners.

Answer 111

A

The standards of living for consumers worsen as the value of their income is eroded as they are paying higher prices
Domestic firms who benefit from increased production may increase employees’ wages
——-> This would increase the standard of living for employees

Answer 112

A

Workers in industries that have been experiencing structural unemployment due to foreign competition will feel that the tariff results in them being treated more fairly
Protectionism can exacerbate income inequality if it benefits specific industries or groups while imposing costs on others.
It may also affect global income distribution by limiting opportunities for developing countries to export.

Answer 113

A

Absolute quota – A simple physical limit either a volume or a value
Tariff rate quota – These allow a certain number of imports to gain a discount on the usual tariff rate
Voluntary export restraints (VER) – This is when a government limits the amount of exports from one country to another for a particular type of good.

Answer 114

A

Quotas tend to cause a bigger fall in economic welfare because the government don’t gain any tax revenue, that you get with tariffs.
Quotas allow the country to be certain on the number of imports coming in. Tariffs is more unknown because it depends on the elasticity of demand and how consumers and suppliers react to the tariff. Tariffs depend on the market
Quotas may be harder to enforce if it is difficult to count the amount of the good coming into the country.
Quotas could be more unfair. Some export firms may do well if they get the quota allowance, but others may lose out. It becomes a political issue on how to distribute the quotas. Firms may also dislike the uncertainty of not knowing how many quotes to gain. Could be more corruption with quotas, so puts politicians are put under pressure.

Answer 115

A

Payments to domestic producers which lower their costs.

Answer 116

A

They gain from the subsidy as they get the world price and the subsidy
Higher revenues will lift profits and possible lead to higher share price. More output could lead to economies of scale

Evaluation:
Risk of dependency, removes the incentive to be more competitive by innovation, increasing efficiency and productivity

Answer 117

A

The subsidy may not be large enough to change the world price. So won’t affect them

Eval
Facing higher taxes if the subsidy is expensive

Answer 118

A

Can be an effective non-tariff barrier to reduce the volume of imports by encouraging domestic production

Eval:
Doesn’t generate tax revenue. More spending can increase budget deficit. Opportunity cost

Answer 119

A

Intellectual property laws – patents and copyright
Technical barriers to trade – labelling rules or sanitary standards at customs borders. The complacent expense will increase and so will add extra costs for foreign producers
Preferential state procurement policies – governments will favor local producers for state funded contracts
Financial protectionism – e.g. when a government tells banks to give priority for loans to domestic businesses
Murky or hidden protectionism – e.g. state measures that indirectly discriminate against foreign workers, investors or trades
Managed exchange rates – government/central bank intervention in currency markets to affect relative prices of imports and exports – very expensive

Answer 120

A

Risk of Retaliation and a possible trade war
Market Distortions
Higher prices for consumers
Regressive effect on income inequality
Incentives to by-pass controls in shadow markets
Higher costs for exporters

Answer 121

A

Record of all financial dealings over a period of time.
Between economic agents of one country and all other countries.

Answer 122

A

(Balance of) trade in goods
(Balance of) trade in services
(Net) income flows from abroad
(Net international) transfer payments.

Answer 123

A

Current account.
Financial account
Capital account.
Balancing items.

Answer 124

A

A record of all transactions for financial investment.

Answer 125

A

Direct investment
Portfolio investment

Answer 126

A

Net investment from abroad
E.g. UK firm building Japanese factory

Answer 127

A

Financial flows - buying bonds / saving in bank.
Buying foreign currencies.
Hot money flows.
(Makes up part of the financial account).
Short term + don’t gain management over firms etc. (unlike direct investment).

Answer 128

A

Short-term monetary flows to take advantage of exchange rate / interest rate changes worldwide.

Answer 129

A

Used to correct small errors in the data

Answer 130

A

Lack of competitiveness and productivity
High inflation
High value of currency.
Trade cycle - Boom times may mean higher imports. (Depends on MPI)
Spending habits - If people are spending too much on foreign luxuries.
Non price factors like poor quality and design
Monetary policy
Supply side policies
Fiscal policy

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