Theme 4: International Economics Flashcards
Characteristics of Globalisation
- Increased foreign ownership of companies
- Increased trade in goods and services
- Increasing global media presence
- Deindustrialisation in developed countries and the service sector becomes more prominent.
What factors have contributed to globalisation since 1970?
- Improvements in transport infrastructure
- Improvements in communication technology
- Trade liberalisation
- Growing influence of global companies
- The end of the cold war
- The role of international financial markets
What are 2 strengths of globalisation for countries and governments?
- Rising incomes and therefore lead to rising tax revenue.
- Better quality jobs as MNCs invest in new factories and facilities.
What are 2 weaknesses of globalisation for countries and governments?
- Decline of traditional industries, which leads to structural unemployment and lower wages.
- Many countries also experience increased migration out of the country for poorer countries.
What is the impact on consumers of globalisation?
- Reduces the price of goods as they can be produced more cheaply and competition forces prices to decrease.
- Far greater choice and increased availability of goods and services.
Impact on producers of globalisation?
- Lower costs as firms are able to obtain products and materials from a wide range of countries.
- Increased competition means firms need to aim for productive efficiency.
- Tax avoidance where firms can choose where their central operation is and therefore where they pay tax.
What are the possible impacts on workers of globalisation?
+ Higher economic growth has lead to rising employment and higher wages.
- Traditional industries have suffered and workers in those industries have become unemployed.
- Due to migration into countries wages might decrease due to increased supply of workers.
What impact might globalisation have on the environment?
- Resource depletion- greater production of goods leads to the use of finite resources.
- Climate impacts- Transportation of goods and individuals could lead to higher carbon emissions.
- Rising world population is linked to globalisation and this places stressors on natural resources.
Absolute advantage
When a country can produce a good at a lower cost per unit than another country.
Comparative Advantage
If the opportunity cost of a country producing a good is lower than the opportunity cost for another country.
Comparative advantage 5 assumptions
- Constant cost of production- no economies or diseconomies of scale
- Transport costs are zero
- Perfect knowledge exists
- FOP are perfectly mobile so can easily switch
- No tariffs or trade barriers
Comparative advantage 3 limitations
- Transport costs exist and these might outweigh any comparative advantage.
- Increased specialisation may lead to larger firms which could lead to diseconomies of scale.
- Governments may introduce tariffs or other barriers to trade.
Advantages of specialisation and trade
- Lower price and more choice for consumers
- Countries have access to goods and services they would otherwise not be able to access
- Innovation as free trade encourages competition which leads to firms being innovative.
Disadvantages of specialisation and trade
- Risk of dumping by foreign firms
- Increased unemployment due to competition and dumping
- Increased integration might lead to countries growing more exposed to external shocks.
- Growing influence of global monopolies, which might lead to higher prices
- Environmental degradation
- Developing economies may face particular problems as monopsony power in developed countries may take advantage.
What is the pattern of trade?
It changes over time and can highlight how a country may shift from a goods based economy to a service based economy.
What 4 factors influence the pattern of trade?
- Comparative advantage
- Impact of emerging economies
- Changes in relative exchange rates
- Growth in trading blocs
What does the terms of trade measure?
Measures the ratio of export prices to import prices.
How do you calculate the terms of trade?
Index terms of trade = ( index or export prices / index of import prices ) x100
What do changes in the index of trade mean?
If a country’s terms of trade rises its better off. If it falls its worse off.
This is because the reduced cost push pressures in the economy, as import prices are lower compared to export prices.
3 factors that influence the terms of trade?
- Relative inflation rates- If prices in the country rise then the index of exports rise.
- Relative productivity rates- rising productivity leads to lower unit costs which will lead to a worsening of the terms of trade if export prices are able to be reduced.
- Changes in exchange rates- rise in exchange rate will lead to a fall in the price of imports.
What impact might a change in the terms of trade have on standard of living?
An improvement in the ToT caused by a rise in the index of export prices may lead to fewer exports and less demand leading to job losses and lower incomes.
However an improved ToT means that a country is able to import more for the same level of exports, which improves living standards.
What effect does an improvement in the ToT have on the balance of payments account?
Improved terms of trade should lead to an improvement in the balance of payments, although the impact will depend on the PED for imports and exports.
What are trade blocs and what are their purpose?
Promotes and manages trade between member states. Members agree to remove protectionist measures, such as tariffs or quotas. In the aim of trade creation.
Bilateral agreements and an example
Exists between two countries or trading blocs e.g. in 2018 an agreement between the EU and Japan was signed.
Multilateral agreements and an example
Exists between more than 2 countries or trading blocs. e.g. the Pacific alliance free trade agreement area was formed between Chile, Columbia, Mexico and Peru.
What are the 4 types of trading blocs?
- Free trade area
- Customs union
- Common market
- Monetary union
What is a free trade area?
- All barriers to trade between members are removed
- Members can impose barriers on non member countries
What is a customs union?
- All barriers to trade between members are removed
- Common external tariffs imposed on non-member countries.
What is a common market?
- Same features as a customs union
- Labour and capital have freedom of movement within the area
What is a monetary union?
- All barriers to trade between members are removed
- Members have a single, common currency and a central bank.
Costs of a regional trade agreement?
- Don’t cover a wide range of goods and services to the impact can be weak and limit economic benefits.
- Reduce national sovereignty- UK decision to leave EU due to belief than sovereignty would be lost by membership.
Benefits of a regional trade agreement?
- Static benefits of increased specialisation and reduced average costs for firms
- Dynamic benefits from the creation of increased competition within the area bloc and include increased innovation and knowledge transfer.
- Increased trade within member states.
Why did the WTO organisation originally form?
Due to the belief that countries needed to work together to rebuild following the second world war.
Draw a tariff diagram
Tariffs are a tax on imported goods also known as customs duty or import duty. Tariffs have the effect of making imports more expensive.
Draw a diagram illustrating a floating exchange rates
What does the J-curve effect show us? and draw it.
In the short run devaluation is likely to lead to a worsening in the current account position.
As in SR demand for exports and imports is likely price inelastic. Reason is because it takes time for firms to change to different suppliers and contracts may need to be renegotiated.
