Theme 4 - Globalisation and Trade

Question 1

what is globalisation

Answer 1

• the process in which national economies have become increasingly integrated and interdependent

Question 2

causes of globalisation

Answer 2

1. Trade liberalisation: Trade liberalisation lowers tariffs, making it easier for countries to exchange goods and services. With fewer barriers, businesses expand internationally, leading to more global trade. Economies become more connected
2. Trading blocs - they remove tariffs and restrictions between member countries, easier to trade within the group. businesses within the block gain access to larger unified market, encouraging trade
3. growth of MNCs - they establish operations in multiple operations in multiple countries, boosting cross border investment
4. mobility of labour- allows workers to move between countries, filling skill gaps, supporting international economic activities. migrant workers contribute to global business and enhance productivity. they also send remittances back home, creating economic connections

Question 3

benefits of globalisation

Answer 3

• increased productivity, lower prices, increased international competition
• consumer welfare increases as they have more variety of choice, more innovative products
• greater growth, higher tax revenue
• greater employment, lower prices, higher demand, have to keep up w this demand
• benefits from large economies of scale, increased output and lower costs, high profit
• technological advancements

Question 4

disadvantages of globalisation

Answer 4

income inequality -
- Globalization can lead to wealth being concentrated among a small group of individuals and corporations.
- results in a widening income gap between the rich and the poor

2. Higher Structural Unemployment:

• As companies outsource production to lower-cost countries, domestic jobs may be lost.
• Workers may not have the skills needed for new job opportunities created in the global economy.
• This can lead to persistent unemployment for affected individuals

3. Environmental Costs and Lower Sustainability:
   - Global production often leads to higher emissions and pollution as companies prioritize profit over environmental regulations.
   - Intensive resource extraction and exploitation can harm ecosystems and deplete natural resources.
   - Short-term profits may overshadow the need for sustainable practices, threatening future generations.
4. Trade Imbalances:
   - Dependence on Foreign Markets: This reliance can make economies vulnerable to changes in foreign markets or policies.
   - Countries may experience trade deficits when imports exceed exports,
   - Local industries may struggle to compete with cheaper imported goods, potentially leading to business closures.
5. Greater Risks of External Shocks:
   - Increased interconnectedness can expose countries to global economic fluctuations and crises
   - : Economic downturns in one country can quickly spread to others, leading to widespread financial instability.
   - Countries may face challenges in managing their economies independently due to external influences.
6. Less Cultural Diversity:
   - Globalization can lead to the dominance of certain cultures, often marginalizing local traditions and practices.
   - As global brands and lifestyles spread, unique cultural identities may diminish, reducing societal richness.
   - Consumers may increasingly adopt similar tastes and behaviors, leading to a more uniform global culture

Question 5

terms of trade equation

Answer 5

weighted index of exports / weighted index of imports x 100

Question 6

how are exports/imports weighted

Answer 6

• a basket of exports for a given nation is formulated
• the most popular exports sold are featured in the basket
• they are weighted according to the revenues brought in
• an overall price of the exports is generated

Question 7

what does terms of trade tell us

Answer 7

the quantity level of exports that need to be sold in order to purchase a given level of imports

Question 8

why is terms of trade important for developing countries

Answer 8

• Many developing countries rely heavily on exporting raw materials. Favorable terms of trade mean they can earn more for their exports, boosting national income.
• Improved terms of trade allow developing countries to buy essential goods, like machinery and technology, at lower costs, supporting economic development

Question 9

what does an increase/ decrease in the terms of trade mean

Answer 9

• increase : a country can now obtain more imports for each unit of its exports
• decrease : a country can now obtain less imports for each unit of its exports

Question 10

basic reasons why terms of trade may improve

Answer 10

• price of exports increasing
• import prices decreasing

Question 11

short run factors that can affect terms of trade

Answer 11

demand -
- If global demand for a country’s exports rises, export prices increase.
This leads to an improvement in the terms of trade as the country earns more for its exports relative to its imports.The country can now afford more imports with the same amount of exports.

supply -
- If the supply of imports increases, prices for those goods fall.
This improves the terms of trade, as the country can buy imports more cheaply while maintaining its export revenue.
The country benefits from cheaper goods, boosting purchasing power.

• relative inflation rates
• If a country’s inflation rate rises faster than its trading partners, its export prices become more expensive.
  This can improve the terms of trade as the country earns more for each unit of export.
• If inflation is lower abroad, import prices from those countries may decrease.
  This improves the terms of trade, as the country can buy imports more cheaply while still selling its exports at relatively higher prices.
  The country benefits from cheaper imports, increasing its purchasing power.
• exchange rate
• When a country’s currency appreciates, its exports become more expensive for foreign buyers, and imports become cheaper.
  This can improve the terms of trade as the country can buy more imports for each unit of export.
• If trading partners’ currencies appreciate, their goods become more expensive to import, deteriorating the terms of trade.
  Conversely, if trading partners’ currencies depreciate, the country’s imports become cheaper, improving the terms of trade.

Question 12

how do long term factors affect tot

Answer 12

• Income Growth:

As domestic income rises, demand for imports may increase, potentially worsening the terms of trade if import prices rise faster than export prices.
Higher incomes could also lead to greater consumption of luxury goods, which might shift trade patterns, affecting ToT.

• If a country improves productivity in export sectors, it can produce goods more efficiently and cheaply, allowing for competitive pricing without reducing export revenues.
  This could improve terms of trade as the country can export more at stable or better prices while importing less costly goods.
  Enhanced productivity in import-competing sectors may reduce reliance on imports, strengthening ToT.

Technological improvements can lower production costs, enabling the country to export more high-tech goods or advanced products at competitive prices.
This increases the value of exports relative to imports, potentially improving the terms of trade.

Question 13

what is economic integration

Answer 13

the process whereby countries coordinate to reduce trade barriers
- and to harmonise fiscal and monetary policy

Question 14

what isa trading bloc

Answer 14

a group of countries that join together and agree to increase trade between themselves by reducing/eliminating protectionist barriers

Question 15

what is a bilateral/multilateral agreement

Answer 15

an agreement to remove tariffs/quotas between 2/multiple countries

Question 16

what are preferential trading areas

Answer 16

where tariffs and other trade barriers are reduced on some, but not all goods traded.

Question 17

what is a free trade area

Answer 17

where all tariffs and quotas are removed on trade in goods between member countries
- however, each member country can impose tariffs and quotas on imports outside of the bloc

Question 18

what are customs unions

Answer 18

where there is free trade within the trading bloc and a common external tariff on goods coming from outside the bloc

Question 19

what are common markets

Answer 19

are customs unions where labour and capital have freedom of movement within the area
- and where produce standard and laws concerning free movement of goods and services are commonly held

Question 20

what are economic unions

Answer 20

are where the economies of member countries are as fully integrated as different regions within a country. It implies both fiscal and monetary union

Question 21

examples of trading blocs

Answer 21

NAFTA - Canada, USA, Mexico

Question 22

what is full economic integration

Answer 22

No barriers exist for trade or movement between member countries, Countries share fiscal, monetary, and regulatory policies, often adopting a unified currency and central bank
- Member countries align their laws and regulations to create a single market with uniform rules,

Question 23

features of the EU

Answer 23

• free trade between member nations
• common external trade barriers on imports from non member countries
• common policies in things like : agriculture, fishing, competition, regional, environmental
• free movement of labour and capital
• 17/28 members adopting the EURO - monetary union
• coordination of economic policy

Question 24

pros of being part of the EU

Answer 24

Free trade :
- Free trade within the EU eliminates tariffs and barriers, boosting exports and imports.
This stimulates economic growth and creates jobs, as businesses access a larger market and expand production.

Higher Foreign Direct Investment (FDI):

EU membership attracts FDI, as investors prefer a stable and integrated market.
Increased FDI leads to new businesses, job creation, and technology transfer, strengthening the economy.

Huge Market Size:

Being part of the EU gives businesses access to a vast market of over 450 million consumers.
This larger demand allows firms to achieve economies of scale, increasing efficiency and competitiveness.

Higher Consumer Choice:

Consumers benefit from a greater variety of goods and services from across the EU.
This competition lowers prices and improves product quality, enhancing consumer welfare.

Freedom of Labor and Capital:

Workers can move freely between EU countries, filling skill gaps and reducing unemployment.
Capital flows easily across borders, boosting investment opportunities and business expansion.

Question 25

cons of being in the EU

Answer 25

Forced to Follow EU Laws and Regulations:

Member states must adopt EU-wide laws and regulations, which may not always align with national interests.
This can limit a country’s policy-making flexibility, particularly in areas like labor and environmental regulations.

Costs of Contributions to the EU Budget:

Countries are required to make financial contributions to the EU budget.
These costs can be significant, reducing the funds available for national spending on public services and infrastructure.

Potential Trade Benefits from FTAs Outside the EU:

Being part of the EU may restrict a country’s ability to negotiate its own free trade agreements (FTAs) with non-EU nations.
Countries might miss out on better trade deals or benefits with emerging markets outside the EU.

High Levels of Immigration:

The free movement of labor within the EU can lead to increased immigration, which some countries find challenging to manage.
This may put pressure on public services and infrastructure and could lead to social or political tensions.

Question 26

what is trade creation

Answer 26

• a theory that derives from a countrys membership of a customs union
• movement from high cost domestic producer to a low cost producer inside the customs union

Question 27

advantages of trade creation

Answer 27

Benefits of Trade Creation:

Increased Efficiency:
- Trade creation allows countries to specialize in the production of goods and services they are most efficient at, leading to better resource allocation and higher productivity.

Lower Prices for Consumers:
- As countries import goods at lower prices due to reduced trade barriers, consumers benefit from cheaper products, which increases their purchasing power.

Economic Growth:
- Trade creation boosts economic activity by expanding markets for domestic producers, increasing output, and fostering job creation, contributing to overall economic growth.

Greater Variety of Goods and Services:
- Consumers gain access to a wider range of products from different countries, enhancing choice and quality.

Increased Competition:
- Domestic firms face competition from foreign producers, which can drive innovation, improve efficiency, and lower production costs, benefiting both consumers and the economy as a whole.

Question 28

Evaluation points for trade creation advantages

Answer 28

The benefits of trade creation depend on several factors:

Degree of Market Integration:
- The extent to which barriers like tariffs and quotas are reduced. More integration leads to greater trade creation and efficiency gains.

Comparative Advantage:
- Whether countries can truly specialize based on their comparative advantage. The larger the difference in efficiencies, the greater the gains from trade.

Market Competitiveness:
- The level of competition in domestic and foreign markets. More competitive markets are likely to pass cost savings to consumers through lower prices.

Elasticity of Demand and Supply:
- If demand for imports and supply of exports are highly elastic, the benefits from trade creation will be more significant, as trade volumes respond strongly to price changes.

Initial Trade Barriers:
- The higher the initial trade barriers (tariffs, quotas), the larger the potential gains when those barriers are removed.

Question 29

what is trade diversion

Answer 29

movement from a low cost foreign producer to a high cost producer within the customs union

Question 30

what does the box represent on a trade diversion graph

Answer 30

loss of EU or the unions efficieny

Question 31

impacts of trade diversion

Answer 31

Loss of Efficiency:
- Trade diversion shifts imports from a more efficient (lower-cost) producer outside a trade bloc to a less efficient (higher-cost) producer within the bloc. This results in a less optimal allocation of resources, reducing overall economic efficiency.

Higher Prices for Consumers:
- Consumers face higher prices as they must purchase goods from less efficient producers within the trade bloc. This leads to reduced consumer welfare and purchasing power.

Reduced Variety of Goods:
- Since imports from outside the trade bloc are discouraged by tariffs or barriers, consumers may have fewer choices in goods and services, limiting product variety and innovation.

Potential Trade Conflicts:
- Trade diversion can strain relationships with non-member countries, especially those that were previously major trading partners. This could lead to retaliatory tariffs or restrictions, disrupting global trade.

Reduced Global Competitiveness:
- By focusing on trading within a bloc, firms might have less incentive to innovate or improve efficiency, which could weaken their competitiveness on the global stage in the long run.

Question 32

advantages of being part of a monetary union

Answer 32

Non-Fluctuating Exchange Rate:
- With a shared currency, there are no exchange rate fluctuations between member countries. This stability reduces uncertainty for businesses and consumers, promoting trade and investment.

Lower Costs of Currency Conversion:
- Businesses and travelers save on currency conversion costs, which can lead to more efficient cross-border transactions and encourage more economic activity within the union.

Increased Business Confidence:
- The stability of a shared currency boosts business confidence, encouraging investment and expansion across member countries, as firms face lower currency risks.

Easier Price Comparisons:
- A common currency makes it easier to compare prices across member countries, increasing market transparency and fostering competition, which can lead to lower prices and better consumer choices.

Currency More Stable Against Speculation:
- A larger, unified currency, such as the euro, is less prone to speculative attacks than smaller, individual currencies. This enhanced stability protects economies in the union from volatile currency movements and external economic shocks.

Question 33

disadvantages of being in a monetary union

Answer 33

Loss of Monetary Independence:
- Member countries no longer control their own monetary policy, meaning they can’t adjust interest rates or money supply to respond to their specific economic conditions. Not good in recession

No Potential for Countries to Alter Their Exchange Rates:
- Countries lose the ability to devalue or revalue their currency to boost competitiveness. This limits a nation’s ability to respond to trade imbalances or economic crises by adjusting their exchange rate to influence exports or imports.

High Costs of Currency Conversion:
- Transitioning to a new currency involves significant costs, including printing new money, updating financial systems, and retraining staff. These initial costs can be burdensome for governments, businesses, and financial institutions during the changeover.

Lack of Fiscal Union:
- Although countries share a currency, they retain control over their own fiscal policies (taxing and spending). Without fiscal coordination, imbalances can arise, where some countries accumulate large deficits while others follow stricter fiscal rules, leading to tension and instability within the union.

Question 34

increased terms of trade EV points

Answer 34

• we assume that an improvement in the terms of trade means a country can buy more imports. this only holds if the improvement in the TOT translates into higher export revenue. only then, the countries purchasing power increases
• if a country has high inflation rates, u less the PED of their exports is inelastic, they will not generate a lot of revenue
• higher domestic prices make exports more expensive, which could reduce international demand, especially if the exports are not demand inelastic. foreign buyers may switch to alternative suppliers with lower costs
• this could offset the gains from better terms of trade, as falling export demand would decrease foreign revenue and might even worsen the trade balance, particularly in competitive global markets

Question 35

why might a deterioration in the terms of trade not be a bad thing

Answer 35

1. Improved international competitiveness
   - A lower terms of trade often means a country’s export prices have fallen relative to import prices
   - this can make exports more competitively priced, boosting demand for these goods
   - increased export volumes could raise overall export revenue
2. Depends on the quantity of exports and imports
   - the impact of TOT is depends on the relative volume of exports and imports
   - if the country is exporting a high volume even at lower prices, total export revenue may remain stable or increase
   - this would allow the country to maintain or improve its trade balance despite a worsening in terms of trade
3. PED
   - if exports are price elastic, a drop in price could lead to a proportionally larger increase in demand, boosting export revenue
   - even with a lower terms of trade, overall trade revenue could rise, benefiting economic stability and supporting employment in export sectors