Theme 4.1: International economics

Question 1

What is meant by globalisation?

Answer 1

Process in which national economies have become increasingly integrated and inter-dependent

Question 2

Causes of globalisation

Answer 2

-Reduced protectionism
-Trade bans
-Growth of MNCs (multi national competitions)
-Technological advancements
-Mobility of labour

Question 3

Pros of globalisation

Answer 3

-Lower prices
-Benefits of trade
-Greater employment
-Benefits from large EOS
-Free movement of labour and capital
-Technological transfers and innovations

Question 4

Cons of globalisation

Answer 4

-Growing inequality
-Higher structural employment
-Environmental cost
-Trade imbalances
-Greater risk of external cost

Question 5

Definition of comparative advantage

Answer 5

A country should specialise in the goods/services it can produce with the lowest opportunity cost

Question 6

What is the definition of a trading bloc?

Answer 6

A group of countries that join together and agree to increase trade between each other

Question 7

What is meant by economic integration?

Answer 7

The process by which countries coordinate to reduce trade barriers and to harmonize monetary and fiscal policy

Question 8

What are the 6 types of economic integration?

Answer 8

• Preferential trading areas
• Common markets
• Full economic integration
• Free trade area
• Customs union
• Economic and monetary union

Question 9

Outline a preferential trading area (PTA)

Answer 9

Countries come together to reduce tariffs/quotas on CERTAIN GOODS/SERVICES

Question 10

Outline a Free trade area (FTA)

Answer 10

Countries come together to eliminate all trade barriers between each other BUT they are free to trade however they want with countries outside the FTA

Question 11

Outline a customs union

Answer 11

Freedom of trade area BUT without freedom of trade without countries outside the customs area

Question 12

Outline an Economic and monetary union

Answer 12

Countries within the union adopt the same currency, central bank and monetary policy

Question 13

Outline a full economic integration

Answer 13

Countries harmonize all policies e.g. The UK

Question 14

Outline a common market

Answer 14

In a common market, all trade barriers are removed between member countries. Also, all member countries must have a common external tariff son imports from non-member countries. Also, there is free movement of the factors of production.

E.g. European single market and Mercosur in South America

Question 15

What do terms of trade tell us?

Answer 15

The quantity of exports a country needs to sell to purchase a given amount of imports

Question 16

The formula for terms of trade

Answer 16

Weighted average of export prices / Weighted average of import prices X 100

Question 17

3 short-term factors affecting the terms of trade?

Answer 17

• Demand/supply of exports/imports
• Relative inflation rates
• Exchange rates movement

Question 18

3 long-term factors affecting the terms of trade?

Answer 18

-Incomes
-Productivity
-Technology

Question 19

How does a change in demand/supply of imports/exports affect TOT?

Answer 19

Increase or decrease in prices of imports and exports which directly affect the weighted average.
E.g.
Increase in supply of imports—-> Lower prices—-> smaller weight of imports—-> TOT improves

Increase in demand of UK exports —> Increased revenue from X —> TOT improves

Question 20

How does a change in relative inflation rates affect TOT?

Answer 20

Increase inflation—-> Increased price of imports—-> Increased spending—-> worsens the TOT

Question 21

What is the definition of a tariff?

Answer 21

Tax on imports to protect domestic producers

Question 22

5 benefits of free trade

Answer 22

-Comparative advantage
-Increased access for countries who can’t produce certain goods
-Lower prices
-Greater consumer choice
-Economics growth

Question 23

How does free trade lead to economic growth?

Answer 23

If countries do specialise, they can supply on the international market and increase GDP from revenue. Increasing exports leads to better trade bracket (x-m)——> economic growth

Question 24

How does free trade lead to lower prices of goods?

Answer 24

Competition - International competition leads to greater efficiency, lower costs meaning lower prices

Economies of scale - producing so much means there is a lower cost meaning lower prices

Technological transfers - business’/nations can replicate goods and technologies easier meaning they can benefit from better technology and increase productivity, leading to lower prices

Question 25

Why is the world supply line horizontal on a free trade diagram?

Answer 25

World supply is so large that for suppliers to produce the Q in just one market is easy so they don't need to increase price to increase quantity as world suppliers have comparative advantage

Question 26

Reasons for protectionism

Answer 26

-Infant industry argument -Protect against 'dumping' - Scale of a good below its cost of production due to excess supply -Protect domestic employment -Protect against 'unfair' low cost abroad -Raise government revenue -Protect product standards -Improve current account deficit - Avoid risk of overspecialisation

Question 27

APPLICAITON + Analysis Protectionism in Algeria

Answer 27

-During the 2016 the Algeria prime minister placed a quota on car imports, the car industry was one of the largest in Africa -Quota was set at 83,000 cars (reduced the supply of cars in Algeria) -This industry produced over half a million cars a year -Thousands of people were employed in the industry -Cars were being produced in neighbouring countries like Morocco at low prices, so Algerians began importing cheaper cars from Morocco. This decreased demand for cars in Algeria so derived demand for labour decreased, increasing unemployment. After the quota, Algerian consumers had to demand Algerian produced cars, increasing demand for Algerian cars and derived demand for labour

Question 28

What is the infant industries argument in regards to protectionism?

Answer 28

Newly developing firms need time to grow. Gov may put tax on imports to allow domestic firms to grow. New firms won't be able to compete internationally against bigger firms Infant industries do not benefit from economies of scale. This means that their cost of production is often higher than other countries. This means that they can’t compete with large industries from other countries. Subsides to domestic producers can help reduce the price of their goods.

Question 29

Explain dumping

Answer 29

Dumping occurs when foreign firms aggressively cut their price below average variable costs. This means that domestic producers can’t compete, forcing them out of the market.

Question 30

How does protectionism protect domestic employment?

Answer 30

If its difficult to compete internationally, then an industry in a country may decline causing unemployment in that certain industry

Question 31

How does protectionism prevent against dumping?

Answer 31

Quotas decrease the supply of goods at a low price Tariffs increase the pcrice of these goods to make them less price competitive to make it easier for domestic producers to compete with these international firms Trump accused South Korea of dumping millions of washing machines into the US at extremely low prices, meaning American firms couldn't compete, Trump then imposed a 30% tariff on washing machines

Question 32

Explain how unfair low costs abroad are a reason for protectionism

Answer 32

Countries in Asia can employ cheap labour, so a country may decide to stop imports from that country as they feel they can't compete to level the field.

Question 33

What is a quota?

Answer 33

A limit on the quantity of foreign-produced goods sold in the domestic market. A physical limit on a specific good imported in a set amount of time. This leads to a rise in the price of the good for domestic consumers, so they are worse off

Question 34

What is an embargo?

Answer 34

A COMPLETE BAN on trade with a particular country. Usually politically motivated

Question 35

Impacts of protectionist measures on consumers, producers, governments, living standards and equality

Answer 35

-Loss of allocative efficiency leading to loss of consumer welfare. -Extra cost on exporters -Tax from tariffs could raise more revenue for the government, which could be used to redistribute income to the poor -Tariffs are most damaging to those on fixed or low incomes -Means that inefficient, domestic producers are kept in production whilst efficient, foreign ones lose out

Question 36

What does the current account measure?

Answer 36

Economic transactions between countries. The main transactions are the trade in goods and services, income and current transfers. Income transfers are from the net earnings on foreign investment and net cash transfers. They include salaries and dividends.

Question 37

What does the capital account measure? What does the financial account measure?

Answer 37

Capital account measures transfers of the ownership of fixed assets The financial account involves investment e.g. Direct investment and portfolio investment

Question 38

Demand side causes for a current account defecit

Answer 38

-Strong exchange rate - Makes our exports more expensive to buy as another country has to buy more of our currency to buy our g/s which is unattractive. -Recession in another country - Causes exports to decrease as their demand decreases so they will buy less exports from us -Growth domestically - Consumers and firms have higher demand so they import more g/s to satisfy the demand

Question 39

Supply-side reasons for a current account defecit

Answer 39

-Lack of competitiveness of price and quality. -Lack of productivity -High relative inflation can cause prices of exports to be higher -Poor quality exports -> poor imports

Question 40

Ways to Fix a current account deficit

Answer 40

-Income tax - puts a limit on the number of imports consumers can buy as they have less disposable income. However, this can be damaging to those on low incomes -Lower interest rates to depreciate the value of currency. This causes exports to become cheaper for foreign buyers so Qd increases. -Supply-side policies could also help make the domestic economy attractive to investors.

Question 41

ANALYSIS How does increasing interest rates impact the value of a currency?

Answer 41

High interest rates ---> Domestic financial assets become more attractive to investors ---> leads to an increase in demand for the domestic currency, as foreign investors must exchange their own currency to buy domestic assets ---> Increased demand for the domestic currency causes its value to appreciate in the foreign exchange market ---> A stronger currency makes exports more expensive for foreign buyers and imports cheaper for domestic consumers ---> This can lead to a worsening of the current account and lower net exports, potentially reducing aggregate demand and economic growth in the long term.

Question 42

ANALYSIS How does inflation impact the value of a currency?

Answer 42

-Higher inflation means domestic goods become more expensive compared to foreign alternatives. -This makes exports less price competitive in international markets, leading to a fall in demand for exports. -Imports become relatively cheaper for domestic consumers, leading to an increase in demand for imports. -The current account on the balance of payments may worsen, as export revenue falls and import expenditure rises. -To pay for more imports, demand for foreign currency increases, while demand for the domestic currency decreases. -This leads to a depreciation of the exchange rate.

Question 43

If a country wants a successful tariff, do they want domestic supply and demand elastic or inelastic?

Answer 43

ELASTIC

Question 44

What is a trade subsidy?

Answer 44

Money grant per unit of output given to domestic suppliers to encourage them to increase domestic supply Form of protectionism Subsidy's lower the cost of production

Question 45

What is a fixed exchange rate? What is a floating exchange rate?

Answer 45

Fixed = An exchange rate determined by the government Floating = An exchange rate determined by forces of supply and demand

Question 46

Benefits of a floating exchange rate

Answer 46

Reduces the need for currency reserves - Fixed ER causes gov to need to hold onto foreign currencies. Freedom for domestic monetary policy - Don't need to worry about changes in interest rates. Can help improve current account deficit A useful tool for macroeconomic adjustment - Helps prop up the economy if there is a depreciation of ER Reduced risk of currency speculation

Question 47

Issues of using a floating exchange rate

Answer 47

Volatility - If left to S and D then it can go up and down very quickly which can decrease the incentive of FDI Self-correction of trade deficit Is Unlikely - Exports and Imports are only 2 factors which affect the price of a currency, there are other factors which aren't taken into consideration

Question 48

Benefits of a fixed exchange rate

Answer 48

Decreased ER uncertainty - Makes trade easier and more likely for FDI Some flexibility permitted Reduces cost of trade Discipline on domestic producers - They have to be more efficient

Question 49

Issues of using a fixed exchange rate

Answer 49

A large level of foreign currency reserves needed Interest rate effects Speculative attacks if ER is set too high or too low, can reduce the incentive for FDI

Question 50

Causes of currency appreciation

Answer 50

Increase in relative interest rates - foreigners save in UK banks to get greater rewards on savings. Speculations anticipate an increase in value of £ - Increased Demand for £ Increase in FDI - Foreign firms enter the UK and set up factories meaning they pay £ Rise in incomes abroad - Foreigners demand more UK exports. They have to buy £ so the demand for £ increases, does the price. Increase in competitiveness

Question 51

Causes of a currency depreciation

Answer 51

Decrease in interest rates Speculation anticipates a fall in the value of £ Firms move away from Britain Increase in incomes domestically

Question 52

Impacts of currency appreciation

Answer 52

SPICED Lower growth Higher unemployment - imports are less competitive so domestic demand falls so local companies try to reduce costs by cutting jobs Lower inflation - Demand pull and cost push Cheaper imports

Question 53

Impacts of currency depreciation

Answer 53

WIDEC Increase in employment in exporting and importing industries Higher inflation - Demand pull and cost push

Question 54

Outline the marshall learner condition

Answer 54

States that currency depreciation will only correct a CA deficit if : PED of exports + PED of imports > elasticity of 1

Question 55

Reasons for government intervention in a foreign exchange market

Answer 55

-Decreased exchange rate to increase employment -Increase exchange rate to fight inflation -Maintain a fixed ER -Stabilise a floating ER -Improve a CA deficit

Question 56

Goals of the WTO for trade

Answer 56

- Non-discriminatory - Free from barriers - Predictable - Promoting fair competition - Beneficial for developing countries through special provisions

Question 57

Definition of international competitiveness

Answer 57

The ability of a nation to successfully compete overseas and sustain improvements in living standards and output

Question 58

3 types of competitiveness

Answer 58

Price competitiveness - If products aren't price competitive relative to another country, then they will struggle to sell and compete Non-price competitiveness - If a nation can compete in other areas e.g. branding, brand loyalty, and service quality then it will be competitive overseas The ability of a nation to attract FDI - If a country can attract skilled entrepreneurs, business and capital from abroad then they are competing successfully

Question 59

What is the definition of trade creation?

Answer 59

Movement from a high cost domestic producer to a low cost producer inside the customs union When a country joins the customs union the tariffs are removed as there is now more free trade

Question 60

Impacts of trade creation

Answer 60

Gain in consumer surplus as tariff has been removed meaning they pay lower prices Gain in world efficiency Trade has been created from Q1-->Q2 to Q3--> Q4

Question 61

Definition of trade diversion

Answer 61

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

Question 62

Cons of trade diversion

Answer 62

-Higher prices for consumers -Loss of consumer surplus -DWL efficiency

Question 63

APP What was the total trade of goods between EU countries in 2017?

Answer 63

£3.1 billion euros

Question 64

APP Example of a free trade area

Answer 64

USMCA - But trump

Question 65

APP Example of a customs union

Answer 65

The EU

Question 66

APP Iran's comparative advantage in Gas production

Answer 66

-Iran holds 1,200 trillion cubic feet (Tcf) of proven gas reserves as of 2017 -Ranking #29 in the world -Accounting for about 17% of the world's total gas -Iran has proven reserves equivalent to 160 times its annual consumption levels.