Theme 4 Definitions Flashcards
Globalisation
The ever-increasing integration of the world’s local, regional and national economies into a single international market, involving a greater level of inter-dependence.
Absolute advantage
Exists when a country’s output of a product is greater per unit of resource inputted than any other country
Comparative advantage
Exists when a country is able to produce a good at a lower opportunity cost than other counties.
Theory of comparative advantage
Countries will find it mutually advantageous to trade if the opportunity cost of production differs.
Trading bloc
A group of countries that have signed an agreement to reduce or eliminate protectionist barriers between themselves, as governed by a regional trade agreement like NAFTA, or the establishment of a trading organisation like the EU.
Free-trade area
A bloc in which groups of countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries.
Example of free-trade area
North American Free Trade Agreement (NAFTA); an agreement signed by Canada, Mexico and the United States and is one of the largest trade blocs in the world by GDP and covers a population of 490,000,000.
Customs union
A bloc where there are no protectionist barriers between members, and a common external tariff on goods coming from outside of the bloc.
Example of customs union
Gulf Cooperation Council (GCC) is a customs union consisting of the 6 Gulf Arab monarchies.
Common market
A customs union (free trade + common external tariff) as well as free movement of labour and capital, and where common product standards (e.g. health and safety) are adopted by all members.
Example of common market
Mercosur; a South American trade bloc consisting of Argentina, Brazil, Paraguay and Uruguay.
Monetary union
A bloc where countries share a common currency, with one central bank and a common monetary policy for the bloc.
Example of a monetary union
Eurozone; a monetary union of 19 of the 27 EU member states which have adopted the euro as their common currency and sole legal tender. It’s monetary policy is controlled by the European Central Bank (ECB).
Example of WTO (1)
The WTO was established to promote free trade between all member countries (164 as of 2016) by persuading member states to abolish import tariffs and other protectionist barriers.
Example of WTO (2)
The GCC’s (Gulf Cooperation Council) customs union took 12 years to achieve between its proposal in 2003 and implementation in 2015.
Example of growth of trading bloc
The accession of 10 countries into the EU in 2004 (e.g. Poland, Hungary, Slovakia…) increased the population of the EU by nearly 75 million people, increasing the number of inhabitants by nearly 20%.
Hence, inward flows of FDI into the EU shot up by $370 million from 2005 to 2007 as external TNCs sought to exploit this enlarged customer market.
Economies of scale examples
At the time of it signing, the 11 signatories of the CPTPP combined represented 13.4% of global GDP, making it the largest free trade area in the world by GDP.
Also, the EU for example has 503 million inhabitants compared to 67 million for the France.
Functions of the WTO
The WTO was established in 1995 by the signatories to the Uruguay Round to replace GATT. It’s 2 main functions are:
To bring about trade liberalisation; the move towards greater free trade by encouraging countries to remove or reduce their protectionist barriers to trade. It does this mainly through various rounds, with the Doha Round being the latest.
To ensure that countries act according to the various trade agreements they have signed. Any country can file a complaint to the WTO against the competitive practices of another country.
Tariff
A tax on imported goods which has the effect of raising the domestic price of imports and thus restricting demand for them.
Quota
An import quota is a legal limit on the quantity (either in terms of number of units, or the total value of imports of that product) that can be imported in a given year.
Subsidies
Subsidies are payments by the government to firms for each unit of output produced. In a protectionist context, they can be used to either reduce imports or further promote exports
Administrative barriers
The use of rules, regulations and other administrative requirement to make it more difficult for foreign countries to meet the necessary requirements to export to a certain country.
Tariff example
In 2019, Trump more than doubled tariffs on $200bn worth of Chinese products after accusing China of unfair trading practices and intellectual property theft.
Subsidy example
The US government spends over $20bn per year on fossil fuel subsidies
The Common Agricultural Policy has a total budget of just under €60 billion
Quota example
The Common Fisheries Policy (CFP) is the fisheries policy of the EU, setting quotas for which member states are allowed to catch each type of fish.
Administrative barriers example
When UK cows were infected with BSE, many countries banned the import of UK beef.
Chlorine-washed chicken and hormone-treated beef is currently banned from being imported into the UK.
Balance of payments
A record of all the money flowing into and out of a country. Money flowing into the country (inflows) are known as debit items. Money flowing out of the country (outflows) are known as credit items.
Example of WTO ruling
In October 2019, the US announced that it had WTO approval to take retaliatory measures and placed tariffs on European aircraft (and wine, whiskey and cheese) in response to the significant EU subsidies of Airbus which US claims threatens their producers (i.e. Boeing).
Example of WTO trade disputes failure
In 2014, Indonesia brought a case against the US saying that its Smoking Prevention and Tobacco Control Act of 2009 unfairly discriminated against it because it banned flavoured cigarettes which it produces, but makes an exception for menthol cigarettes which are produced in the US.
The case was ‘settled’ in a secret agreement between the 2 countries outside of the WTO, and Indonesia withdrew its complaint.
Current account
The part of the BoP account where payments for the purchase and sale of goods and services are recorded.
Marshall-Lerner condition
Devaluation will lead to an improvement in the current account so long as the combined price elasticities of exports and imports are greater than 1. The greater the elasticities, the greater the scope for improvement of the trade balance and the smaller the devaluation/depreciation required.
FDI
Investment into the productive activities of another country, either through purchases of physical capital or significant (>10%) and long-term investment in shares.
Expenditure switching policies
Policies aimed to encourage consumers to reduce imports and switch instead to purchasing domestically produced goods and services.
Expenditure reducing policies
Policies aimed to make domestic consumers consume less overall and, by extension, to spend less on imports. This can also reduce the amount of borrowing needed, which can be the reason for CA deficits.
Supply-side policies
Aim to address the long-run underlying issue behind a deficit, a lack of international competitiveness, due to perhaps expensive and/or poor-quality domestic goods and services.
Exchange rates
The price of one currency in terms of another. They are normally expressed as a value of one currency in terms of another currency. They can also be expressed as the value of a currency against a range of other currencies (expressed in terms of a basket of currencies).
Floating exchange rate system
An ER system where the government does not intervene in the forex market and so the value is determined entirely by the forces of supply and demand.
Fixed exchange rate system
An ER system which governments actively intervene in the forex markets to maintain a fixed ER with another currency.
Managed exchange rate system
An ER system where free market forces are one determinant of the ER. However, the government also plays some part in determining the ER of the currency through direct intervention (buying and selling currency using the gold and foreign currency reserves held by its central bank), or it could intervene indirectly by changing the IR.
Adjustable peg system
An adjustable peg system of exchange rates where there is an inbuilt mechanism for regular changes in the central value of the currency.
Appreciation of a currency
When the value of a currency rises because of free market forces or with a dirty float, because of government intervention.
Currency or exchange rate controls
Limits on the purchase and sales of foreign currency, usually through its central bank.
Hot-money
Money that flows freely and quickly around the world looking to earn the best rate of return.
Depreciation of a currency
When the value of a currency decreases because of free market forces or with a dirty float, because of government intervention.
Exchange rate systems
Trading arrangements where currencies are purchased and sold for each other.
Revaluation of a currency:
When a government or central bank officially fixes a new higher exchange rate for the currency in a fixed or pegged system of exchange rates.
Devaluation of a currency
When a government or central bank officially fixes a new lower exchange rate for the currency in a fixed or pegged system of exchange rates.
Competitiveness
Refers to the ability of a country to sell its goods/services abroad. Competitiveness is usually determined by the price and/or quality of the good or service.
Capital expenditure
Long-term investment expenditure on projects such as Crossrail or new hospitals by the government.
Current expenditure
The government’s day-to-day expenditure on goods and services. Examples include wages and salaries of civil servants, and drugs used by the NHS.
Transfer payments
Payments made by the state to individuals without there being any exchange of goods or services- there is no production in return for these payments. It is typically used as a means of redistributing income.
UK examples include Employment and Support Allowance for ill and disabled people and child benefit. These are not included in the measurement of GDP.
Progressive taxation
As income rises, a larger percentage of income is paid in tax (e.g. UK income tax).
Proportional taxation
The percentage of income paid in tax is constant, no matter the level of income.
Regressive taxation
As income rises, a smaller percentage of income is paid in tax (e.g. excise duties on tobacco, alcohol and petrol in the UK).
Fiscal deficit
The amount that a government must borrow in a given time period because government spending amounts to more than the total receipts from tax revenue and other sources of government income.
National debt
The total of all unpaid government borrowing from previous years, including unpaid interest which has accrued on that borrowing.
