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Economics > Theme 4.1: International economics > Flashcards

Theme 4.1: International economics Flashcards

ARRA ARRA ARRA

1
Q

What is meant by globalisation?

A

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

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2
Q

Causes of globalisation

A

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

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3
Q

Pros of globalisation

A

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

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4
Q

Cons of globalisation

A

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

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5
Q

Definition of comparative advantage

A

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

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6
Q

What is the definition of a trading bloc?

A

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

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7
Q

What is meant by economic integration?

A

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

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8
Q

What are the 6 types of economic integration?

A
  • Preferential trading areas
  • Common markets
  • Full economic integration
  • Free trade area
  • Customs union
  • Economic and monetary union
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9
Q

Outline a preferential trading area (PTA)

A

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

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10
Q

Outline a Free trade area (FTA)

A

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

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11
Q

Outline a customs union

A

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

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12
Q

Outline an Economic and monetary union

A

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

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13
Q

Outline a full economic integration

A

Countries harmonize all policies e.g. The UK

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14
Q

Outline a common market

A

Customs union with deeper integration

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15
Q

What do terms of trade tell us?

A

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

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16
Q

The formula for terms of trade

A

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

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17
Q

3 short-term factors affecting the terms of trade?

A
  • Demand/supply of exports/imports
  • Relative inflation rates
  • Exchange rates movement
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18
Q

3 long-term factors affecting the terms of trade?

A

-Incomes
-Productivity
-Technology

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19
Q

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

A

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

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20
Q

How does a change in relative inflation rates affect TOT?

A

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

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21
Q

What is the definition of a tariff?

A

Tax on imports to protect domestic producers

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22
Q

5 benefits of free trade

A

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

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23
Q

How does free trade lead to economic growth?

A

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

24
Q

How does free trade lead to lower prices of goods?

A

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

25
Q

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

A

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

26
Q

Reasons for protectionism

A

-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

27
Q

What is the infant industries argument in regards to protectionism?

A

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

28
Q

How does protectionism protect domestic employment?

A

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

29
Q

Explain how unfair low costs abroad are a reason for protectionism

A

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.

30
Q

What is a quota?

A

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

31
Q

What is an embargo?

A

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

32
Q

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

A

-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

33
Q

What does the current account measure?

A

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.

34
Q

What does the capital account measure?

What does the financial account measure?

A

Capital account measures transfers of the ownership of fixed assets

The financial account involves investment e.g. Direct investment and portfolio investment

35
Q

Demand side causes for a current account defecit

A

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

36
Q

Supply-side reasons for a current account defecit

A

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

37
Q

Ways to Fix a current account defecit

A

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.

38
Q

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

A

ELASTIC

39
Q

What is a trade subsidy?

A

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

40
Q

What is a fixed exchange rate?

What is a floating exchange rate?

A

Fixed = An exchange rate determined by the government

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

41
Q

Benefits of a floating exchange rate

A

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

42
Q

Issues of using a floating exchange rate

A

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

43
Q

Benefits of a fixed exchange rate

A

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

44
Q

Issues of using a fixed exchange rate

A

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

45
Q

Causes of currency appreciation

A

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

46
Q

Causes of a currency depreciation

A

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

47
Q

Impacts of currency appreciation

A

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

48
Q

Impacts of currency depreciation

A

WIDEC

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

49
Q

Outline the marshall learner condition

A

States that currency depreciation will only correct a CA deficit if :

PED of exports + PED of imports > elasticity of 1

50
Q

Reasons for government intervention in a foreign exchange market

A

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

51
Q

Goals of the WTO for trade

A
  • Non-discriminatory
  • Free from barriers
  • Predictable
  • Promoting fair competition
  • Beneficial for developing countries through special provisions
52
Q

Definition of international competitiveness

A

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

53
Q

3 types of competitiveness

A

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

54
Q

What is the definition of trade creation?

A

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

55
Q

Impacts of trade creation

A

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

56
Q

Definition of trade diversion

A

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

57
Q

Cons of trade diversion

A

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

Economics (10 decks)

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