Theme 4.1 - International economics

Question 1

4.1.1 - What is globalisation?

Answer 1

Globalisation has many definitions
- The increasing convergence and interconnectivity of local markets into an emerging global market
OR
- The increasing integration of the worlds local, regional and national economies into a single international market

Question 2

4.1.1 - What are the key drivers of globalisation?

Answer 2

The internet
Advances in tech and transport/infrastructure - IT and communication
Space time compression
Containerisation
Improvements in transport, infrastructure and operations
Trade/trade liberalisation and reduced protectionism
TNCs
International financial markets

Question 3

4.1.1 - What are impacts of globalisation and global companies on consumers?

Answer 3

Given choice
Lower prices
In some cases a rise in prices
Loss of culture

Question 4

4.1.1 - What are impacts of globalisation and global companies on workers?

Answer 4

Some gain while others loss eg the global shift of the car industry
Increased migration
Fall in wages for low skilled workers
Increase for high skilled workers

Question 5

4.1.1 - What are the characteristics of globalisation?

Answer 5

Movement towards free trade of goods and services, free movement of labour and capital and free interchange of technology and intellectual capital

Question 6

4.1.1 - What are the impacts of globalisation and global companies on producers and workers?

Answer 6

Producers
- source products from more countries, reduced risk, exploit comparative advantage larger market = increase profit, unable to compete internationally will lose out

Workers - gain or loss of employment for some, increased migration, increased inequality, increased training and new jobs, sweatshops will see poor countries and low wages

Question 7

4.1.1 - What are the impacts of globalisation and global companies on governments?

Answer 7

Increase investment within countries
World class management techniques and tech
Political instability can be caused
Comparative cost advantages will change over time

Question 8

4.1.1 - What are the impacts of globalisation and global companies on the environment?

Answer 8

Increase in demand for raw materials - land scarring due to mining etc
Increase emissions
Climate change can be tackled

Question 9

4.1.2 - What is absolute advantage and the formula for average cost?

Answer 9

When an economy can produce a product at a lower AVERAGE COST than another

Average cost = total cost/no. of products

Question 10

4.1.2 - What is comparative advantage and the formula for opportunity cost?

Answer 10

The ability of a country to produce a particular good/service at a lower opportunity cost than another

Opportunity cost= total revenue/total profit

Question 11

4.1.2 - What are the assumptions of the theory of comparative advantage?

Answer 11

No transport costs
Costs are constant 
No economies of scale 
Only two economies producing two goods 
Traded goods are identical (homogeneous)
Factors of production are assumed to be perfectly mobile 
No tariffs or other trade barriers
Perfect knowledge when in fact there may be asymmetric information

Question 12

4.1.2 What is specialisation?

Answer 12

When an economic unit focuses on a narrow range of products, thereby developing a comparative cost advantage in producing these products over time

Question 13

4.1.2 - What are the advantages and disadvantages of specialisation and trade?

Answer 13

Advs:
Economies of scale to max = cost reduced
Choice for consumers = consumer welfare increases
Innovation = implies competition

Disadvs:
Overdependence on foreign trade
Changes in demand can lead to unemployment
Trade exposes a country to many risks
Trade can lead to a less equal distriubtion of income

Question 14

4.1.6 - What is protectionism and some examples of it?

Answer 14

Protectionism is the act of protecting domestic industries and jobs/employment by restricting/reducing trade

How:
Put taxes on imported products - tariffs
Allow only a certain amount of products to be imported/limit the quantity - Quotas
Manipulate currency - weaken it
Subsidies to local firms

Question 15

4.1.6 - What are the types of restrictions on trade?

Answer 15

Tariffs 
Quotas
Subsidies to domestic products 
Non-tariff barriers eg embargos
Import licensing
Legal and technical standards
Voluntary export restraint agreements

Question 16

4.1.6 - What are tariffs and the benefits and probelms with it?

Answer 16

A tax imposed by government on imports
- Increases the price of imported products making locally produced products more competitive

Benefits

• more local workers employed
• government benefit from tax revenue
• protects against dumping

Costs

• other countries can retaliate by imposing tariffs on goods
• local consumers loss out on their benefit
• distorts comparative advantage

Question 17

4.1.6 - What are quotas and its benefits and costs?

Answer 17

Limits the quantity of a good that can be imported
Limits the strength of external competition against local producers (protects them)
Have similar costs and benefits to tariffs expect they don’t generate government tax revenue

Question 18

4.1.6 - What are the impacts of protectionist policies on consumers, producers, government, living standards and equality?

Answer 18

• Consumers - higher prices, less choice
• Producers - domestic benefit can sell more goods at higher price - may suffer higher costs, foregin producers lose out as limited to where they can sell
• Workers - little difference, can be argued create new jobs
• Gov - short run benefit from tariff rev and political popularity, can lead to inefficient economy
• Living standards - deadweight welfare loss
• Equity - regressive effect on distriubtion of income as rise in price affects poorest

Question 19

4.1.8 - What is a free floating exchange rate system?

Answer 19

where the value of the currency is determined purely by market demand and supply of the currency with no target set by government eg UK and most others

Question 20

4.1.8 - What is a managed floating exchnage rate system?

Answer 20

where the value of the currency is determined by demand and supply but the Central Bank will try to prevent large changes in the exchnage rate on a day to day basis - done by selling currency and changing interest rates eg Japanese Yen

Question 21

4.1.8 - What is a fixed exchange rate system?

Answer 21

when a government sets their currency against another and that exchnage rate does not change eg the gold standard

Question 22

4.1.8 - What are the words to describe changes in currency?

Answer 22

• Appreciation - increase in value of currency using floating exchange rate
• Depreciation - fall in value of currency under floating exchange rate
• Revaluation - when the currency is increased against value of another (fixed)
• Devaluation - decrease in value of one currency against another (fixed)

Question 23

4.1.8 - What are the factors affecting floating exchange rates?

Answer 23

• interaction and changes of demand and supply
• demand for pounds determined by amount want to buy/visit/invest
• supply of pounds determined by amount of foreign goods want to buy, invest aboard, holidays/place money abroad, speculation
• currency affected by level of exports and imports, investment

Question 24

4.1.8 -How can governments intervene in an exchnage rate system?

Answer 24

• increase/decrease demand for currency - interest rates - up=strong down=weak
• gold and foreign currency reserves to manipulate value - strengthen pound - increase demand by selling foreign currency/gold in exchange for pounds

Question 25

4.1.8 - What are the arguments for and against fixed exchange rates?

Answer 25

Avoids currency fluctuations 
Encourages trade and investment 
Reduces cost associated with trade
Stable rate may reduce inflation
However can cause conflict with other objectives 
Have to intervene by raising interest rates - negative effect on other policies - decrease growth 
Easy to set at wrong rate 
Less flexibility

Question 26

4.1.8 - What are the arguments for floating exchange rates?

Answer 26

Not need to use reserves to buy pounds to keep target
Interest rates reserved for domestic monetary policy to control inflation
Able to partly auto-correct trade deficit
Reduces risk of currency speculation

Question 27

4.1.8 - What is competitive devaluation/depreciation?

Answer 27

Where a country deliberately intervenes in foreign exchange markets to drive down the value of theri currency to provide a competitive boost to their exporting industries
Weaker currency = encourage exports + discourage imports
Can cause inflation
Other countries may follow and reduce their currency as well

Question 28

4.1.8 - What are the impacts of changes in the exchange rate?

Answer 28

Current account of balance of payments
The Marshall-Lerner condition states that the sum of the price elasticities of imports and exports must be more than one (elastic) if a currency devaluation is to have a positive impact on the trade balance
The J-curve (diagram) shows how the current account will worsen before it improves - demand tends to be inelastic in the short run - no immediate recognition that british exports are cheaper/ imports are more expensive

Question 29

4.1.8 - What happens to the rate of inflation, FDI and economic growth and unemployment when exchange rates change?

Answer 29

Rate of inflation
Falls in exchange rate will increase inflation as imports become more expensive causing a rise in prices and a fall in SRAS

FDI
A fall in the currency may increase FDI as it becomes cheaper to invest
However, if the currency is continuing to fall then this is an indication that an economy has serious econ difficulties - discourages investment

Economic growth and unemployment
A weaker exchange rate is likely to increase exports + decrease imports = increase in AD - increase employment + econ growth