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Economics Edexcel A A level > Theme 4: International Economics > Flashcards

Theme 4: International Economics Flashcards

1
Q

Characteristics of Globalisation

A
  • 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.
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2
Q

What factors have contributed to globalisation since 1970?

A
  1. Improvements in transport infrastructure
  2. Improvements in communication technology
  3. Trade liberalisation
  4. Growing influence of global companies
  5. The end of the cold war
  6. The role of international financial markets
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3
Q

What are 2 strengths of globalisation for countries and governments?

A
  1. Rising incomes and therefore lead to rising tax revenue.
  2. Better quality jobs as MNCs invest in new factories and facilities.
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4
Q

What are 2 weaknesses of globalisation for countries and governments?

A
  1. Decline of traditional industries, which leads to structural unemployment and lower wages.
  2. Many countries also experience increased migration out of the country for poorer countries.
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5
Q

What is the impact on consumers of globalisation?

A
  • 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.
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6
Q

Impact on producers of globalisation?

A
  1. Lower costs as firms are able to obtain products and materials from a wide range of countries.
  2. Increased competition means firms need to aim for productive efficiency.
  3. Tax avoidance where firms can choose where their central operation is and therefore where they pay tax.
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7
Q

What are the possible impacts on workers of globalisation?

A

+ 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.
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8
Q

What impact might globalisation have on the environment?

A
  1. Resource depletion- greater production of goods leads to the use of finite resources.
  2. Climate impacts- Transportation of goods and individuals could lead to higher carbon emissions.
  3. Rising world population is linked to globalisation and this places stressors on natural resources.
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9
Q

Absolute advantage

A

When a country can produce a good at a lower cost per unit than another country.

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10
Q

Comparative Advantage

A

If the opportunity cost of a country producing a good is lower than the opportunity cost for another country.

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11
Q

Comparative advantage 5 assumptions

A
  1. Constant cost of production- no economies or diseconomies of scale
  2. Transport costs are zero
  3. Perfect knowledge exists
  4. FOP are perfectly mobile so can easily switch
  5. No tariffs or trade barriers
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12
Q

Comparative advantage 3 limitations

A
  1. Transport costs exist and these might outweigh any comparative advantage.
  2. Increased specialisation may lead to larger firms which could lead to diseconomies of scale.
  3. Governments may introduce tariffs or other barriers to trade.
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13
Q

Advantages of specialisation and trade

A
  • 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.
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14
Q

Disadvantages of specialisation and trade

A
  1. Risk of dumping by foreign firms
  2. Increased unemployment due to competition and dumping
  3. Increased integration might lead to countries growing more exposed to external shocks.
  4. Growing influence of global monopolies, which might lead to higher prices
  5. Environmental degradation
  6. Developing economies may face particular problems as monopsony power in developed countries may take advantage.
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15
Q

What is the pattern of trade?

A

It changes over time and can highlight how a country may shift from a goods based economy to a service based economy.

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16
Q

What 4 factors influence the pattern of trade?

A
  1. Comparative advantage
  2. Impact of emerging economies
  3. Changes in relative exchange rates
  4. Growth in trading blocs
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17
Q

What does the terms of trade measure?

A

Measures the ratio of export prices to import prices.

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18
Q

How do you calculate the terms of trade?

A

Index terms of trade = ( index or export prices / index of import prices ) x100

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19
Q

What do changes in the index of trade mean?

A

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.

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20
Q

3 factors that influence the terms of trade?

A
  1. Relative inflation rates- If prices in the country rise then the index of exports rise.
  2. 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.
  3. Changes in exchange rates- rise in exchange rate will lead to a fall in the price of imports.
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21
Q

What impact might a change in the terms of trade have on standard of living?

A

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.

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22
Q

What effect does an improvement in the ToT have on the balance of payments account?

A

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.

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23
Q

What are trade blocs and what are their purpose?

A

Promotes and manages trade between member states. Members agree to remove protectionist measures, such as tariffs or quotas. In the aim of trade creation.

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24
Q

Bilateral agreements and an example

A

Exists between two countries or trading blocs e.g. in 2018 an agreement between the EU and Japan was signed.

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25
Q

Multilateral agreements and an example

A

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.

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26
Q

What are the 4 types of trading blocs?

A
  1. Free trade area
  2. Customs union
  3. Common market
  4. Monetary union
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27
Q

What is a free trade area?

A
  • All barriers to trade between members are removed
  • Members can impose barriers on non member countries
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28
Q

What is a customs union?

A
  • All barriers to trade between members are removed
  • Common external tariffs imposed on non-member countries.
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29
Q

What is a common market?

A
  • Same features as a customs union
  • Labour and capital have freedom of movement within the area
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30
Q

What is a monetary union?

A
  • All barriers to trade between members are removed
  • Members have a single, common currency and a central bank.
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31
Q

Costs of a regional trade agreement?

A
  • 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.
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32
Q

Benefits of a regional trade agreement?

A
  • 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.
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33
Q

Why did the WTO organisation originally form?

A

Due to the belief that countries needed to work together to rebuild following the second world war.

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34
Q

What are the 2 key functions of the world trade organisation?

A
  1. Facilitate the reduction or removal of protectionist barriers between countries and aim for trade liberalisation.
  2. Make sure that countries adhere to the agreements that they have signed up to. WTO acts as a negotiator between countries to help resolve conflicts.
35
Q

What is a real life example of when the world trade organisation had to intervene?

A

In 2018 when Airbus agreed to follow the WTOs ruling that it was in breach of the rules regarding subsidies. That was putting other aircrafts at a disadvantage.

36
Q

What are possible conflicts between the WTO and regional trade agreements?

A
  1. Common external tariffs contradicts the principles of the WTO.
  2. Some argue the WTO is too powerful and favours developed countries.
  3. Custom unions or a free trade area violates the WTOs principle of having all trading partners treated equally.
37
Q

Why might a government restrict free trade?

A
  • Protect infant industries
  • Retain self sufficiency
  • Correct imbalances on the current account of the balance of payments
  • To retaliate against restrictions imposed by another country
  • To prevent dumping
  • Reduce competition from countries with cheap/poor labour and environmental law.
  • Protect strategic industries eg defence, energy etc
38
Q

Draw a tariff diagram

A

Tariffs are a tax on imported goods also known as customs duty or import duty. Tariffs have the effect of making imports more expensive.

39
Q

What are quotas?

A

Quotas are physical limits on the quantity of a certain good that can be imported.

40
Q

What are 2 other kinds of restrictions on trade other than tariffs and quotas?

A
  • Subsidies to domestic producers
  • Non-tariff barriers eg health and safety regulations, environmental regulations and labelling of products.
41
Q

Impact on consumers of restrictions to free trade

A

Consumers may face higher prices for imports through tariffs or limited supply of goods through quotas.

42
Q

What impact can protectionist measures have on domestic producers?

A

Could benefit them as it makes goods that are imports more expensive reducing competition however, if they are a producer that uses imports subject to tariffs, they may suffer.

43
Q

Impact on the government from restrictions of trade?

A

The government may benefit in the short run from restrictions on trade because they will receive tax revenue on tariffs.

However in the long run, if the protectionism results in a less efficient industrial sector, future economic growth may be lower.

44
Q

What is the impact on living standards of trade restrictions?

A

May protect living standards due to protecting jobs.

However, in the long run the industry might loose competitiveness and then face contraction. As a result, unemployment in the industry may rise and then the living standards of the workforce might deteriorate.

45
Q

Impacts of restrictions on free trade on equality?

A

Trade unions aim for equality and are often in favour of greater restrictions to protect their members. Free trade may result in competition leading to some people losing their jobs.

46
Q

Capital accounts

A

Shows transfer of non-monetary and fixed assets

47
Q

What are the 2 main components of the balance of payments?

A

Current account and capital and financial accounts

48
Q

What does the current account do?

A

Records the sale of goods and services.

49
Q

What does the financial account involve?

A
  • Foreign direct investment- Flows of money between countries where one firm buys or sets up business in another country
  • Portfolio investment- investment in financial assets such as shares in foreign companies.
  • Financial derivatives- contracts whose value is based on the value of an asset, for example, a foreign currency.
  • Reserve assets- foreign financial assets that are available to and controlled by monetary authorities such as the bank of England for financing or regulating payment imbalances.
50
Q

Causes of deficits on the current account?

A
  • Economic growth- as consumers’ incomes grow, demand for imported goods increases, explained by the income elasticity of demand.
  • Inflation- high domestic inflation makes foreign goods more attractive for consumers.
  • International competitiveness- If domestic firms struggle to compete, the level of exports will fall relative to the volume of exports.
51
Q

Causes of surpluses on the current account?

A
  • Natural resources- Where countries have large reserves of natural resources, they can run large current account surpluses.
  • Exchange rate manipulation- Where exchange rate is kept low, imports are more expensive and exports are cheaper.
  • High interest rates- cause more saving and less spending on foreign goods and services.
52
Q

Measures used to reduce an imbalance in the current account?

A
  1. Exchange rate changes- devaluation makes exports cheaper vice versa
  2. Deflationary policies- higher interest rates will reduce consumer spending
  3. Supply-side policies- long term approach that will increase labour productivity and reduce labour costs.
  4. Protectionism-
53
Q

Why do countries aim for a balanced current account?

A
  • Large deficits can be a problem as they need to finance the increasing expenditure on imports, usually through loans abroad.
  • Large surpluses can be a problem as resources are focussed on producing to meet export demand rather than domestic demand. So, consumers choice and living standards could actually be low.
  • Imbalances may also lead to currency fluctuations, which can destabilise world trade.
54
Q

What are exchange rates?

A

The value of one currency in terms of another.

55
Q

What are the 2 main types of exchange rates? what is the 3rd?

A
  • Floating
  • Fixed
  • Managed
56
Q

What is a floating exchange rate?

A

This allows the exchange rate to be set by the market forces of demand and supply for a currency.

57
Q

What is a fixed exchange rate?

A

This occurs when a government or central banks set the exchange rate they would like by tying the exchange rate to another currency, gold or to a basket of currencies.

58
Q

What is a managed exchange rate system?

A

A combination of fixed and floating and is the most common.

The currency freely floats but the government might intervene from time to time to change the value of the currency.

59
Q

What 4 factors influence a county’s exchange rate system?

A
  1. Rise in exports
  2. Rise in imports
  3. Rise in UK interest rates
  4. Increase in investment
60
Q

Draw a diagram illustrating a floating exchange rates

A
61
Q

Appreciation and depreciation

A

The terms used under a system of floating exchange rates to describe increases and decreases in the value of a country’s currency in relation to other currencies.

62
Q

Revaluation and devaluation

A

The terms used under a system of fixed exchange rates to describe increases and decreases in the value of a country’s currency in relation to other currencies determined by the country’s central bank.

63
Q

Advantages of a floating exchange rate

A
  1. Correction of balance of payment deficits under an automatic adjustment mechanism.
  2. Protection from external shocks- the exchange rate will change in response to shocks such as a rise in the oil price.
  3. Less need for central banks to hold reserves of foreign currency.
64
Q

Disadvantages of a floating exchange rate

A
  1. Instability- exchange rates can be volatile. This can make it difficult for firms, and governments, to plan ahead as uncertainty exists.
  2. Speculation- leads to changes in exchange rates unrelated to the underlying pattern of trade.
65
Q

Advantages of a fixed exchange rate

A
  1. Certainty over the exchange rate can encourage domestic investment and FDI
  2. Reduce speculation- dealers know that the central bank will aim for the exchange rate target and there will be little chance of devaluation or revaluation.
66
Q

Disadvantages of fixed exchange rates

A
  1. Policy conflicts- a fixed exchange rate may be incompatible with an objective of low inflation or low unemployment.
  2. Difficulty in responding to external shocks. In a floating system the exchange rate will adjust automatically in response to domestic and international shocks.
67
Q

Advantages of a managed exchange rate

A
  1. Market forces determine the value of currency from day to day.
  2. Government intervention is only required to make adjustments when necessary.
  3. Predictability- consumers and firms have a clear expectation of the value of the currency and can plan on this basis.
68
Q

Disadvantages of managed exchange rates

A
  1. Loss of control of interest rates- a central bank/government would still have control of the bank/ government would still have control of the base interest rate but this would have to be set to ensure the currency was maintained at the desired level. Therefore it could not be used to control inflation.
69
Q

Why might a country competitively devaluate/depreciate their currency?

A

Exports will be cheaper and therefore give it a competitive edge. Exports will increase and imports will decrease. So will increase AD.

70
Q

How can governments attempt to manage exchange rates?

A
  1. Changing interest rates- making it more attractive for foreigners to place money in the country’s bank.
  2. Intervention on the foreign exchange market- buying its own currency. Demand would increase for the currency which would lead to a rise in price.
71
Q

What is the impact when the value of a currency increases?

A

Price of imports fall

Price of exports rise

Current account worsens

72
Q

What is the impact when the value of a currency decreases?

A

Price of imports rises

Price of exports falls

Current account is improved

73
Q

What is the Marshall-Lerner condition?

A

Devaluation in a currency will lead to an improvement in the current account position.

PROVIDED the combined elasticities of imports and exports are greater than 1.

74
Q

What does the J-curve effect show us? and draw it.

A

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.

75
Q

What effect can changes in the exchange rate have on economic growth and unemployment?

A

If a currency was valued then economic growth will result due to an increase in AD. Unemployment would decrease through the creation of new jobs.

76
Q

What effect can changes in the exchange rate have on rate of inflation?

A

A fall in the value of a currency will lead to higher inflationary pressures as the cost of imports will rise.

77
Q

What effect can changes in the exchange rate have on FDI flows?

A

A fall is likely to lead to a rise in foreign direct investment flows as the foreign firm will be able to spend less to purchase the same UK assets. However this might be less likely if the value of a currency is continuously falling as this suggests the economy is volatile and risky.

78
Q

What 4 factors influence international competitiveness?

A
  1. Productivity
  2. Relative unit labour costs
  3. Rate of inflation relative to competitors
  4. Regulation relative to competitors
79
Q

How does higher productivity impact international competitiveness?

A

Higher productivity improves competitiveness as it decreases unit costs.

80
Q

What impact can regulation have on international competitiveness?

A

Increased regulation will lead to higher costs to firms and then those will lead to increased prices for consumers and therefore lead to reduced competitiveness.

81
Q

What impact can inflation have on international competitiveness?

A

In inflation increases then goods become more expensive which can lead to these products being less competitive on international markets.

82
Q

What impact can relative unit labour costs have on international competitiveness?

A

A rise in labour costs in a country maybe due to an increase in minimum wage or a fall in unemployment will create higher export prices and therefore reduced competitiveness.

83
Q

Benefits of international competitiveness

A

An internationally competitive country can enjoy export led economic growth. Higher demand for AD and a rise in SR economic growth and a positive multiplier effect.

84
Q

Problems of international competitiveness

A
  1. Exchange rates- a current account surplus can lead to a rise in exchange rates
  2. Higher costs as country becomes more developed

Economics Edexcel A A level (24 decks)

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