Theme 4 Definitions

Question 1

Globalisation

Answer 1

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.

Question 2

Absolute advantage

Answer 2

Exists when a country’s output of a product is greater per unit of resource inputted than any other country

Question 3

Comparative advantage

Answer 3

Exists when a country is able to produce a good at a lower opportunity cost than other counties.

Question 4

Theory of comparative advantage

Answer 4

Countries will find it mutually advantageous to trade if the opportunity cost of production differs.

Question 5

Trading bloc

Answer 5

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.

Question 6

Free-trade area

Answer 6

A bloc in which groups of countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries.

Question 7

Example of free-trade area

Answer 7

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.

Question 8

Customs union

Answer 8

A bloc where there are no protectionist barriers between members, and a common external tariff on goods coming from outside of the bloc.

Question 9

Example of customs union

Answer 9

Gulf Cooperation Council (GCC) is a customs union consisting of the 6 Gulf Arab monarchies.

Question 10

Common market

Answer 10

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.

Question 11

Example of common market

Answer 11

Mercosur; a South American trade bloc consisting of Argentina, Brazil, Paraguay and Uruguay.

Question 12

Monetary union

Answer 12

A bloc where countries share a common currency, with one central bank and a common monetary policy for the bloc.

Question 13

Example of a monetary union

Answer 13

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).

Question 14

Example of WTO (1)

Answer 14

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.

Question 15

Example of WTO (2)

Answer 15

The GCC’s (Gulf Cooperation Council) customs union took 12 years to achieve between its proposal in 2003 and implementation in 2015.

Question 16

Example of growth of trading bloc

Answer 16

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.

Question 17

Economies of scale examples

Answer 17

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.

Question 18

Functions of the WTO

Answer 18

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.

Question 19

Tariff

Answer 19

A tax on imported goods which has the effect of raising the domestic price of imports and thus restricting demand for them.

Question 20

Quota

Answer 20

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.

Question 21

Subsidies

Answer 21

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

Question 22

Administrative barriers

Answer 22

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.

Question 23

Tariff example

Answer 23

In 2019, Trump more than doubled tariffs on $200bn worth of Chinese products after accusing China of unfair trading practices and intellectual property theft.

Question 24

Subsidy example

Answer 24

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

Question 25

Quota example

Answer 25

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.

Question 26

Administrative barriers example

Answer 26

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.

Question 27

Balance of payments

Answer 27

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.

Question 28

Example of WTO ruling

Answer 28

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).

Question 29

Example of WTO trade disputes failure

Answer 29

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.

Question 30

Current account

Answer 30

The part of the BoP account where payments for the purchase and sale of goods and services are recorded.

Question 31

Marshall-Lerner condition

Answer 31

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.

Question 32

FDI

Answer 32

Investment into the productive activities of another country, either through purchases of physical capital or significant (>10%) and long-term investment in shares.

Question 33

Expenditure switching policies

Answer 33

Policies aimed to encourage consumers to reduce imports and switch instead to purchasing domestically produced goods and services.

Question 34

Expenditure reducing policies

Answer 34

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.

Question 35

Supply-side policies

Answer 35

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.

Question 36

Exchange rates

Answer 36

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).

Question 37

Floating exchange rate system

Answer 37

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.

Question 38

Fixed exchange rate system

Answer 38

An ER system which governments actively intervene in the forex markets to maintain a fixed ER with another currency.

Question 39

Managed exchange rate system

Answer 39

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.

Question 40

Adjustable peg system

Answer 40

An adjustable peg system of exchange rates where there is an inbuilt mechanism for regular changes in the central value of the currency.

Question 41

Appreciation of a currency

Answer 41

When the value of a currency rises because of free market forces or with a dirty float, because of government intervention.

Question 42

Currency or exchange rate controls

Answer 42

Limits on the purchase and sales of foreign currency, usually through its central bank.

Question 43

Hot-money

Answer 43

Money that flows freely and quickly around the world looking to earn the best rate of return.

Question 44

Depreciation of a currency

Answer 44

When the value of a currency decreases because of free market forces or with a dirty float, because of government intervention.

Question 45

Exchange rate systems

Answer 45

Trading arrangements where currencies are purchased and sold for each other.

Question 46

Revaluation of a currency:

Answer 46

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.

Question 47

Devaluation of a currency

Answer 47

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.

Question 48

Competitiveness

Answer 48

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.

Question 49

Capital expenditure

Answer 49

Long-term investment expenditure on projects such as Crossrail or new hospitals by the government.

Question 50

Current expenditure

Answer 50

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.

Question 51

Transfer payments

Answer 51

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.

Question 52

Progressive taxation

Answer 52

As income rises, a larger percentage of income is paid in tax (e.g. UK income tax).

Question 53

Proportional taxation

Answer 53

The percentage of income paid in tax is constant, no matter the level of income.

Question 54

Regressive taxation

Answer 54

As income rises, a smaller percentage of income is paid in tax (e.g. excise duties on tobacco, alcohol and petrol in the UK).

Question 55

Fiscal deficit

Answer 55

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.

Question 56

National debt

Answer 56

The total of all unpaid government borrowing from previous years, including unpaid interest which has accrued on that borrowing.