Theme 4.1: International economics Flashcards
ARRA ARRA ARRA
What is meant by globalisation?
Process in which national economies have become increasingly integrated and inter-dependent
Causes of globalisation
-Reduced protectionism
-Trade bans
-Growth of MNCs (multi national competitions)
-Technological advancements
-Mobility of labour
Pros of globalisation
-Lower prices
-Benefits of trade
-Greater employment
-Benefits from large EOS
-Free movement of labour and capital
-Technological transfers and innovations
Cons of globalisation
-Growing inequality
-Higher structural employment
-Environmental cost
-Trade imbalances
-Greater risk of external cost
Definition of comparative advantage
A country should specialise in the goods/services it can produce with the lowest opportunity cost
What is the definition of a trading bloc?
A group of countries that join together and agree to increase trade between each other
What is meant by economic integration?
The process by which countries coordinate to reduce trade barriers and to harmonize monetary and fiscal policy
What are the 6 types of economic integration?
- Preferential trading areas
- Common markets
- Full economic integration
- Free trade area
- Customs union
- Economic and monetary union
Outline a preferential trading area (PTA)
Countries come together to reduce tariffs/quotas on CERTAIN GOODS/SERVICES
Outline a Free trade area (FTA)
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
Outline a customs union
Freedom of trade area BUT without freedom of trade without countries outside the customs area
Outline an Economic and monetary union
Countries within the union adopt the same currency, central bank and monetary policy
Outline a full economic integration
Countries harmonize all policies e.g. The UK
Outline a common market
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
What do terms of trade tell us?
The quantity of exports a country needs to sell to purchase a given amount of imports
The formula for terms of trade
Weighted average of export prices / Weighted average of import prices X 100
3 short-term factors affecting the terms of trade?
- Demand/supply of exports/imports
- Relative inflation rates
- Exchange rates movement
3 long-term factors affecting the terms of trade?
-Incomes
-Productivity
-Technology
How does a change in demand/supply of imports/exports affect TOT?
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
How does a change in relative inflation rates affect TOT?
Increase inflation—-> Increased price of imports—-> Increased spending—-> worsens the TOT
What is the definition of a tariff?
Tax on imports to protect domestic producers
5 benefits of free trade
-Comparative advantage
-Increased access for countries who can’t produce certain goods
-Lower prices
-Greater consumer choice
-Economics growth
How does free trade lead to economic growth?
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
How does free trade lead to lower prices of goods?
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
Why is the world supply line horizontal on a free trade diagram?
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
Reasons for protectionism
-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
APPLICAITON + Analysis
Protectionism in Algeria
-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
What is the infant industries argument in regards to protectionism?
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.
Explain dumping
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.
How does protectionism protect domestic employment?
If its difficult to compete internationally, then an industry in a country may decline causing unemployment in that certain industry
How does protectionism prevent against dumping?
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
Explain how unfair low costs abroad are a reason for protectionism
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.
What is a quota?
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
What is an embargo?
A COMPLETE BAN on trade with a particular country. Usually politically motivated
Impacts of protectionist measures on consumers, producers, governments, living standards and equality
-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
What does the current account measure?
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.
What does the capital account measure?
What does the financial account measure?
Capital account measures transfers of the ownership of fixed assets
The financial account involves investment e.g. Direct investment and portfolio investment
Demand side causes for a current account defecit
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
Supply-side reasons for a current account defecit
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
Ways to Fix a current account defecit
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
Reduce government spending .This would reduce AD and lead to fewer imports.Forces domestic firms to increase imports, which helps improve the disequilibrium.
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.
If a country wants a successful tariff, do they want domestic supply and demand elastic or inelastic?
ELASTIC
What is a trade subsidy?
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
What is a fixed exchange rate?
What is a floating exchange rate?
Fixed = An exchange rate determined by the government
Floating = An exchange rate determined by forces of supply and demand
Benefits of a floating exchange rate
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
Issues of using a floating exchange rate
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
Benefits of a fixed exchange rate
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
Issues of using a fixed exchange rate
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
Causes of currency appreciation
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
Causes of a currency depreciation
Decrease in interest rates
Speculation anticipates a fall in the value of £
Firms move away from Britain
Increase in incomes domestically
Impacts of currency appreciation
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
Impacts of currency depreciation
WIDEC
Increase in employment in exporting and importing industries
Higher inflation - Demand pull and cost push
Outline the marshall learner condition
States that currency depreciation will only correct a CA deficit if :
PED of exports + PED of imports > elasticity of 1
Reasons for government intervention in a foreign exchange market
-Decreased exchange rate to increase employment
-Increase exchange rate to fight inflation
-Maintain a fixed ER
-Stabilise a floating ER
-Improve a CA deficit
Goals of the WTO for trade
- Non-discriminatory
- Free from barriers
- Predictable
- Promoting fair competition
- Beneficial for developing countries through special provisions
Definition of international competitiveness
The ability of a nation to successfully compete overseas and sustain improvements in living standards and output
3 types of competitiveness
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
What is the definition of trade creation?
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
Impacts of trade creation
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
Definition of trade diversion
Movement from a low cost foreign producer outside the customs union to a high cost producer within the customs union
Cons of trade diversion
-Higher prices for consumers
-Loss of consumer surplus
-DWL efficiency
APP
What was the total trade of goods between EU countries in 2017?
£3.1 billion euros
APP
Example of a free trade area
USMCA - But trump
APP
Example of a customs union
The EU
