Theme 4 (Macro) Flashcards
What is meant by globalisation?
4.1.1
Globalisation
The ability to produce any goods (or service) anywhere in the world, using raw materials, components, capital and technology from anywhere, sell the resulting output anywhere, and place the profits anywhere.
What are the characteristics of globalisation?
4.1.1
Globalisation
- Global Branding
- Global Sourcing
- TNC’s
- Increasing foreign ownership of companies
- Increase in trade in G/S
- De-industrialisation in developed countries
- Increasing global media presence
- Increasing international interdependence of eco. agents
Give six factors which have contributed to globalisation in the last 50 years.
4.1.1
Globalisation
*Improvements in transport infrastructure and operations
*Improvements in communications technology and IT (especially the internet, allowing a global media presence)
* Trade liberalisation resulting from agreements reached by the World Trade Organisation (WTO)
* Increasing number and influence of global (transnational) companies
* The end of the Cold War, which led to the opening up of formerly closed economies in communist countries and a subsequent increase in global labour supply
* The development of international financial markets.
What are the impacts of globalisation on individual countries?
4.1.1
Globalisation
Advantages:
AD - X driven growth & inward FDI
AS - Import cheaper FOP & immigration
Disadvantages:
Prebish-singer
Infant industry argument
What are the impacts of globalisation on governments?
4.1.1
Globalisation
Advantages:
TIGERS
Tax receipts (Y, VAT & Corp)
Disadvantages:
Tax avoidance (transfer pricing)
Footloose MNC - Laffer curve “race to the bottom”
Interdependence TIGERS
What are the impacts of globalisation on producers?
4.1.1
Globalisation
Advantages:
New X markets
Access raw materials / L force
Outsource/off-shore to reduce costs
Disadvantages:
Increased competition
Over reliance on international supply chains
What are the impacts of globalisation on consumers?
4.1.1
Globalisation
Advantages:
Deflationary pressure – real Y
Choice / quality of M
Disadvantages:
Supply side shocks – lead shortages
Fakes/low quality imports
Risk of monopoly forming – higher prices
What are the impacts of globalisation on workers?
4.1.1
Globalisation
Advantages:
GDP and employment
MNC growth and employment
Disadvantages:
Marx exploitation labour
MNC monopsony buyer (diagram)
What are the impacts of globalisation on the environment?
4.1.1
Globalisation
Advantages:
Global collaboration / treaties
MNC ability invest into renewable
Disadvantages:
Movement FOP/G&S = C02
Global GDP linked increase C02
Lack regulation in industrialising LDC
What are some reasons for international trade?
(4.1.2)
Specalisation & trade
This is because some countries hold a ‘Comparative advantage’ over others, meaning they can produce more with less opportunity cost
What is absolute advantage?
(4.1.2)
Specialisation & Trade
Absolute advantage means that an economy can produce a greater total of goods for the same quantity of inputs.
What is comparative advantage?
(4.1.2)
Specialisation & Trade
Comparative advantage occurs when one country can produce a good or service at a lower opportunity cost than another
UK
100 insurance premiums (50% FOP) = 250 iphones (50% FOP)
Therefore OC 1 insurance premium = 250/100 = 2.5 iphones
China
50 insurance premiums (50% FOP) = 1,000 iphones (50% FOP)
Therefore OC 1 insurance premium = 1,000/50 = 20 iphones
Therefore UK has the comparative advantage in producing insurance premiums as it incurs a lower OC i.e. foregoes 2.5 < 20
Using a numerical/graphical example, show how international trade is beneficial even when one country may have a comparative advantage in both goods.
(4.1.2)
Specialisation & Trade
What are the assumption made in the theory of comparative advantage?
(4.1.2)
Specialisation & Trade
Constant costs of production (ignoring economies and diseconomies of scale)
That transport cost are zero
There is perfect knowledge
Factors of production can easily be switched from producing one good to producing another
What are the advantages of specialisation and trade?
(Firms)
(4.1.2)
Specalisation & Trade
Larger market to sell to = economies of scale (increase in output = reduction in average cost). Linked to:
Purchasing
Marketing
Specialisation and the division of labour
Financial
Logistical
Lower average cost can increase profit margins or allow for lower prices if the G/S is price elastic = increase in TR
What are the advantages of specialisation and trade?
(Consumer)
(4.1.2)
SPecalisation & Trade
Lower prices = increase CS
More choice avaliable
What are the disadvantages of specialisation and trade?
(4.1.2)
Specalisation & Trade
Deficit (M>X) if a country’s goods and services are uncompetitive
Danger of dumping by foreign firms, i.e. selling at below average cost = increased unemployment as imports are a leakage
Increased exposure to external shocks from inter-dependence i.e. covid and supply chains
Unbalanced development – international specialisation based on free trade means that only those industries in which the country has a comparative advantage will be developed while others remain undeveloped
Global monopolies as global (transnational) companies become larger = limits competition = harm consumers
The monopsony power of global companies may mean that low prices are paid for commodities from developing countries = restrict growth and development
What is meant by the terms of trade?
(4.1.4)
Terms Of Trade Theory
Formula = Index X prices Divided by Index M Prices multiplied by 100
Definition = Amount of imports your exports can buy
How does the terms of trade affect competitiveness of a country?
(4.1.4)
Terms Of Trade Theory
What are some factors which might affect the terms of trade?
(4.1.4)
Terms Of Trade Theory
What is the Marshall Lerner condition
(4.1.4)
Terms Of Trade Theory
states that a currency devaluation will only lead to an improvement in the balance of payments if the sum of demand elasticity for imports and exports is greater than one
What have been the trends in global manufacturing trade over the past century
(4.1.3)
Pattern of Trade
LDC used export driven growth as low incomes domestically prevented the ability of consumption to drive AD but provided a labour cost advantage globally.
As exports of manufactured goods grew more developed countries were able to deindustrialise focusing on the production of services instead.
What are trading blocs
(4.1.5)
Trading blocs and the World Trade Organisation (WTO)
Trading blocs are simply groups of countries that establish rules for trade between all participating countries
How do trading blocs result in trade diversion?
(4.1.5)
Trading blocs and the World Trade Organisation (WTO)
Trade diversion means that trade patterns are more associated to protectionist measures on non-members and removal of protectionism for members.
This distorts the normal patterns of trade associated to either absolute or comparative advantage
What are monetary unions
(4.1.5)
Trading blocs and the World Trade Organisation (WTO)
These are customs unions which adopt a single currency
What is common market
(4.1.5)
Trading blocs and the World Trade Organisation (WTO)
These have the same characteristics as customs unions but also allow the free movement of factors of production
What is a customs union
(4.1.5)
Trading blocs and the World Trade Organisation (WTO)
These have free trade internally and a common set of protectionist measures.
What is a free trade area?
(4.1.5)
Trading blocs and the World Trade Organisation (WTO)
Groups of countries agree to abolish trade restrictions between themselves but maintain their own restrictions with other countries.
What are the benefits of trading blocs
(4.1.5)
Trading blocs and the World Trade Organisation (WTO)
enabling free trade between geographically close countries. This can lead to lower prices, increased export potential, higher growth, economies of scale and greater competition.
What are the drawbacks of trading blocs?
(4.1.5)
Trading blocs and the World Trade Organisation (WTO)
Retaliation from non-member countries.
Increased economic dependence
Shutting down the domestic industry. Increased competition creates winners and losers
What are the benefits of monetary unions?
(4.1.5)
Trading blocs and the World Trade Organisation (WTO)
Lower transaction costs
Price transparency
Eliminating exchange rate uncertainty
What are the drawbacks of monetary unions?
(4.1.5)
Trading blocs and the World Trade Organisation (WTO)
Transition costs (costs of changing price lists, slot machines, etc.)
Loss of independent monetary policy
Loss of exchange rate flexibility (including an automatic stabiliser)
What is the role of World Trade Organisation (WTO)?
(4.1.5)
Trading blocs and the World Trade Organisation (WTO)
Promote free and fair trade through multilateral talks and negotiations
Arbitrate between countries that are in dispute
Pursues a development agenda through supporting LDC in the infrastructural requirements to support trade
What is the World Trade Organisation (WTO)?
(4.1.5)
Trading blocs and the World Trade Organisation (WTO)
The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations
How do trade blocs create conflict with the WTO?
(4.1.5)
Trading blocs and the World Trade Organisation (WTO)
Trade bloc is an alternative option to the WTO and may make negotiations less important for them.
Trading blocs are often in a similar geographical region and therefore could have similar characteristics regarding development. Trading blocs could therefore increase inequality between LDC & MDC
Trade disputes can increase in a trade bloc as it encourages a geographical alliance against non-members.
Custom union has agreed protectionism against non-members. This limits free trade.
What are some reasons for countries seeking to restrict free trade?
(4.1.6)
Protectionism Theory
Protect infant industries and sunset industries
Protect employment / reduce risk of structural U
Reduce competition from countries with cheap labour and poor labour/environmental laws whereby a lack of regulation provides the absolute/comparative advantage rather than simply the factor endowment
What are some methods which countries may use to restrict free trade?
(4.1.6)
Protectionism Theory
tariffs
quotas
subsidies to domestic producers
non-tariff barriers
Draw a diagram to show the impact of tariffs on consumers, producers and the government.
(4.1.6)
Protectionism Theory
How could quotas be used to restrict imports?
(4.1.6)
Protectionism Theory
Absolute quota – a simple physical limit on the number.
Tariff rate quota – These allow a certain number of imports to gain a discount on the usualtariff rate.
Voluntary export restraints (VER) This is when a government limits the amounts of exports from one country to another for a particular type of good.
How could subsidies be used to restrict import
(4.1.6)
Subsidies to domestic producers are grants given to domestic producers to enable them to lower production costs, therefore lowering prices this therefore reduces M
What are some non-tariff barriers which could be used to restrict free rate?
(4.1.6)
Protectionism Theory
Labelling of products
Environmental regulations
Product specifications
Health and safety regulations
What is the impact of restricting free trade on consumers
(4.1.6)
Protectionism Theory
Higher Prices
Lack of choice
Distortion of the price mechanism
What is the impact of restricting free trade on producers
(4.1.6)
Protectionism Theory
Higher Costs
Scarcity of raw mats
What is the impact of restricting free trade on governments?
(4.1.6)
Protectionism Theory
Increase In tax rev
Protect infant & sunset industry
What is the impact of restricting free trade on living standards
(4.1.6)
Protectioism Theory
Increase P = Lower real Y due inflation
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