Theme 4.1.1-4.1.6

Question 1

What is globalisation?

Answer 1

Globalisation is the process of national economies around the world becoming more connected and interdependent socially, economically and politically.

Question 2

What movements does globalisation tend to bring?

Answer 2

-It can be defined as the ​increasing integration of the world’s local, regional and national economies into a single international market​.
● There is movement towards free trade of goods and services, free movement of labour and capital and free interchange of technology and intellectual capital.

Question 3

What factors have contributed to increasing globalisation?

Answer 3

● Improvements in transport infrastructure and operations have meant there are quick, reliable and cheap methods to allow production to be separated around the world.
● Improvements in IT and communication allow companies to operate across the globe
● Trade liberalisation and reduced protectionism has made it cheaper and more feasible to trade; this has been occurring since 1945. The breakdown of the ​soviet bloc and the opening of China has shown a whole area of the world for business to expand into.
● International financial markets have provided the ability to raise money and move money around the world, necessary for international trade.
● TNCs ​(large companies operating around the world) have led to globalisation by acting to increase their own profit as they want to take advantage of low labour costs. They sell and produce their goods all around the world and have the power to lobby governments.

Question 4

What is the impact of globalisation on consumers?

Answer 4

● Consumers have more ​choice since there are a wider range of goods available from all around the world, not just those produced in the UK.
● It can lead to ​lower prices as firms take advantage of comparative advantage and produce in countries with lower costs, for example low labour costs.
● In other cases, it is leading to a ​rise in prices ​since incomes are rising and so there is higher demand for goods and services.
● Many consumers worry about the ​loss of culture​.

Question 5

What are the impacts of globalisation on workers?

Answer 5

● In terms of employment, ​some people have gained whilst others have lost. ​There have been ​large scale job losses in the western world in manufacturing sectors as these jobs have been transferred to countries such as China and Poland.
● Increased migration may affect workers by lowering wages but migrants can also provide important skills and an increase in AD which increases the number of jobs.
● International competition has led to a fall in wages (or reduced growth) for low skilled workers in developed countries whilst increased those in developing countries.
● The wages for high skilled workers appear to be increasing, since there is more demand for their work; this is increasing ​inequality​.
● TNCs tend to provide training for workers and create new jobs.
● Those working in ​sweatshops will see poor conditions and low wages, but this is
better than other alternatives.

Question 6

What are the impacts of globalisation on firms?

Answer 6

● Firms are able to source products from ​more countries ​and sell them in more countries. This ​reduces risk since a collapse of the market in one company will have a smaller impact on the business.
● They are able to employ low skilled workers much cheaper in developing countries and can ​exploit comparative advantage and have ​larger markets​, both of which can increase profits.
● Firms who are ​unable to compete​ internationally will lose out.

Question 7

What are the impacts of globalisation on the government?

Answer 7

● The government may be able to receive ​higher taxes​, since TNCs pay tax and so do the people they employ. However, they could lose out through ​tax avoidance​.
● TNCs also have the power to ​bride and lobby governments, which could lead to corruption.
● If the government uses the correct policies, they can maximise the gains and minimise the losses.

Question 8

What are the impacts of globalisation on the environment?

Answer 8

● The increase in world production has led to ​increased demand for raw materials​, which of which is bad for the environment.
● Increased trade and production has also led to ​more emissions​.
● However, globalisation means the world can work together to tackle climate change and share ideas and technology.

Question 9

How can globalisation lead to economic growth?

Answer 9

-Increases investment in countries due to investment of TNCs through FDI as well as supply side investment to encourage TNCs.
-TNCs can bring new, more efficient technologies which can be beneficial to all industries.
-

Question 10

How can globalisation lead to economies shrinking?

Answer 10

● However, the power of TNCs can cause ​political instability as they may support regimes which are unpopular and undemocratic but that benefit them or could hinder
regimes which don’t support them
● Comparative cost advantages will change over time and so companies may leave
the country when it no longer offers an advantage which will cause structural unemployment and reduce growth.

Question 11

What is sustainable development?

Answer 11

Sustainable development involves meeting the needs of the present without compromising the ability of future generations to meet their own needs.

Question 12

What is a potential negative of globalisation?

Answer 12

One of the issues concerning globalisation is that economies are becoming too dependent on each other, which means if there are external shocks (such as a financial crisis, pandemic or recession of a major supplier’s economy, or changes in oil prices), many economies around the globe will be put at a significant risk due to not being self sufficient.

Question 13

What is FDI?

Answer 13

Investment which is undertaken in one country by companies based in another country. This occurs for three main reasons:
-Market seeking: engage in FDI so they can sell in a particular market
-Resource seeking: May invest to take advantage of key resources
-Efficiency seeking: Invest because they have decided that producing in this location would be more efficient than anywhere else around the globe.

Question 14

What are some examples of market-seeking FDI being important?

Answer 14

-In China, their open door policy since 1979 has proved to be a magnet for TNC’s investing into the nation.
-Japanese firm Nissan has also invested into northern parts of the UK to improve the efficiency of their automotive industry, and allow it to become specialised so that Nissan can have factories there.

Question 15

What positives can FDI bring to the host nation?

Answer 15

-It is hoped FDI will cause gains in employment, tax revenues as well and capital + technology to allow for economic growth.
-This will be especially important for developing countries who lack the ability to improve capital and technology by themselves, or lack the national income to raise their tax revenue.

Question 16

What negatives can be caused by FDI?

Answer 16

-If profits which come from the investment find there way into the hands of shareholders elsewhere in the world, the impacts on economic growth may be limited, due to withdrawals affecting the multiplier effect.
-Foreign TNCs may also be able to use their power to lobby against weaker governments in less developed countries, gaining themselves tax breaches which may reduce benefits of FDI.

Question 17

What is absolute advantage?

Answer 17

This is the ability to produce a good more efficiently than another region/economy (e.g with less labour)

Question 18

What is a comparative advantage?

Answer 18

This is the ability to produce a good relatively more efficiently (e,g at a lower opportunity cost than another location).

Question 19

What is the law of comparative advantages?

Answer 19

This is the theory that argues that there may be gains from trade arising when countries (or individuals) specialise in the production of goods or services in which they have a comparative advantage.

This can be true even if the two nations are producing products of similar nature, because they will be able to benefit from intra-industry specialisation, where different countries specialise in different parts of a manufacturing process.

Question 20

What did David Ricardo say about the importance of specialisation and international trade?

Answer 20

He recognised its importance for economic growth and development. He showed that countries could gain from trade through a process of specialisation.

For example, during the Industrial Revolution Britain could bring in raw materials from its colonies in Africa to supply the manufacturing it specialised in. Today, consumers in the UK are able to both buy and consume goods which simply wouldn’t have been able to be supplied in a domestic economy.

Question 21

What are the assumptions and limitations of the law of comparative advantage?

Answer 21

● Comparative advantage assumes there are ​no transport costs​, and these could
lower or prevent any comparative advantage.
● It also assumes ​costs are constants and that there are no economies of scales. Economies of scale help to increase the gains from specialisation.
● In the model, goods are assumed to be ​homogenous​, which is unlikely to hold in real life. The fact products aren’t homogenous makes it difficult to conclude that a country has a comparative advantage as their products can’t be perfectly compared.
● It also assumes that ​factors of production are perfectly mobile​, there are no tariffs or other trade barriers and there is perfect knowledge.
● Whether trade takes place will depend on the ​terms of trade​ between the countries.
-In reality, there is more than just two countries involved, and they produce more than just two products.
-The benefits received by the two countries may not be equal.

Question 22

How can a PPF show if international trade with specialisation is worthwhile?

Answer 22

The PPF of each economy will show the opportunity cost each country has (e,g the gradient) as well as which country has the absolute advantage for each product. If the combined PPF (the PPF if both economies produce at the maximum output in the product where they have a comparative advantage) is more outwards than the individual PPF’s, then theoretically they two nations will gain from international trade.

This combined PPF is known as the trading possibilities curve.

Question 23

What are the advantages of specialisation and international trade?

Answer 23

● Comparative advantage shows how ​world output can be increased if countries specialise in what they are best at producing, this will increase global economic growth.
● Trading and specialising allows countries to benefit from ​economies of scale​, which reduces costs and therefore decrease prices globally.
● Different countries have different factors of production and so trade allows countries to make use of factors of production, or the things produced by these factors, which they otherwise may have been unable to.
● Trade enables consumers to have ​greater choice about the types of goods they buy, and so there is greater consumer welfare.
● Trade also means there is ​greater competition​, which provides an incentive to innovate. This creates new goods and services and new production methods, increasing consumer welfare and lowering costs respectively.
● Countries which isolate themselves for political reasons, like North Korea, have found that their economies tend to stagnate.

Question 24

What are the disadvantages of specialisation and international trade?

Answer 24

● However, trade can lead to ​over-dependence, where some countries become dependent on particular exports whilst others become dependent on particular imports. This can cause problems if there are large price falls in the exports of if imports are cut for political reasons.
● It can cause ​structural unemployment​, as jobs are lost to foreign firms who are more efficient and competitive. The less mobile the workforce, the higher the chance that changes in demand due to trade will reduce output and employment over long periods of time. ​This is a big problem in the UK as some areas such as Manchester suffer from unemployment as their traditional industries declined, for example ship-building.
● The ​environment will suffer due to the problems of transport as well as the increased demand for resources e.g. deforestation.
● Countries may suffer from a ​loss of sovereignty due to signing international treaties and joining trading blocs, for example in the ​EU​.
● They may see a ​loss of culture as trade brings foreign ideas and products to the country.

Question 25

What is the significance of comparative advantage being dynamic?

Answer 25

This means that just becomes a country has a comparative advantage over another currently, this doesn’t mean that they will also have this advantage. It can change depending on factors such as: -Demographic changes -The availability of natural resources -R&D leading to innovation -Changes in the import controls (e.g tariffs and quotas) -Non-price competitiveness of firms can also lead to changes.

Question 26

What is the terms of trade?

Answer 26

The terms of trade measures the ​rate of exchange of one product for another when two countries trade. It tells us the quantity of exports that need to be sold in order to purchase a given level of imports. Movement in the terms of trades is said to be ​favourable if the terms of trade increase as the country can buy more imports with the same level of exports. This is called an improvement in the terms of trade. It is ​unfavourable ​if they decrease, when export prices fall or import prices rise. This is called a ​deterioration​.

Question 27

How are the terms of trade calculated?

Answer 27

(average export price index/average import price index) x100

Question 28

What factors will influence terms of trade in the short run?

Answer 28

● An improvement in the terms of trade will be caused by a rise in export prices or a fall in import prices. A deterioration will be caused by a fall in export prices or a rise in import prices. ● In the short run, ​exchange rates, inflation and changes in demand/supply of imports or exports ​affect the terms of trade since these affect the relative prices of imports and exports.

Question 29

What factors will influence terms of trade in the long-run?

Answer 29

● In the long run, an ​improvement in productivity ​compared to a country’s main trading partners will decrease the terms of trade since export prices will fall relative to import prices. This can be caused by new technology, more efficient labour etc. ● Another long run factor is changing incomes. ​This affects the pattern of demand for goods and services. For example, a rise in world income causes a rise in demand for tourism and so a country with a strong tourist industry, such as Spain, may see a rise in prices in that industry and hence an increase in their terms of trade. The Prebisch-Singer hypothesis suggests the long run price of primary goods declines in proportion to manufactured goods, which means those dependent on primary exports will see a fall in their terms of trade.

Question 30

What are the impacts of changes of terms of trade on the economy?

Answer 30

● If PED of exports and imports is inelastic, a favourable movement in terms of trade would improve the current account on the ​balance of payments ​whilst if it is elastic, a favourable movement would worsen the current account. ● An ​improvement in the terms of trade is likely to lead to a fall in GDP and a rise in unemployment, since if it is caused by a rise in export prices, exports will fall and if it is caused by a fall in import prices, imports will rise. Both of these causes a reduction in production within the country and so a fall in jobs and output. However, a long term decline in the terms of trade suggests a long term decline in living standards​ as less imports can be bought. ● It is important to look at the cause of the change. If an improvement has occured due to increased demand for exports, then this will be beneficial for the country. If a deterioration is caused by an improvement in international competitiveness, this will also be beneficial. The ​export and import revenues are more important than the price alone. For an improvement to be beneficial, export revenues must increase.

Question 31

What is the resource curve in terms of trade?

Answer 31

The term resource curse refers to a paradoxical situation in which a country underperforms economically, despite being home to valuable natural resources. A resource curse is generally caused by too much of the country’s capital and labor force concentrated in just a few resource-dependent industries. By failing to make adequate investments in other sectors, countries can become vulnerable to declines in commodity prices, leading to long-run economic underperformance.

Question 32

What are the patterns of trade?

Answer 32

Patterns of trade can be spilt into two different patterns. The geological patterns of trade (ie which countries will trade most with which other countries) and commodity patterns (which countries will export and import different goods and services).

Question 33

What are the factors which will influence patterns of trade?

Answer 33

-Changes in comparative advantage -Emerging and developing economies (e.g China is now a major exporter of manufactured goods). Developing countries now produce 41% of world exports in 2016. -Trading blocs and bilateral trading agreements (such as EU. Free trade rules and reduced/removed quotas will heavily influence which countries trade with who) -Changes in relative exchange rates: a long term change in exchange rates will affect the relative competitiveness of that nation’s goods and services, and therefore impact its patterns of trade. -Increased influence of WTO – Trade barriers reduced. -Opening up of Eastern Europe / Former soviet bloc countries to international trade. -Increase in FDI in developing nations– Leading to greater productivity and competitiveness in manufacturing

Question 34

What is the UK’s geographical pattern of trade?

Answer 34

-The EU as a bloc is the UK’s largest trading partner. In 2020, it accounted for 42% of UK exports of goods and services and 50% of the UK’s imports.. -The US is the UK’s largest (single country) trading partner. The UK exported £141 billion of goods and services to the US in 2020, 21% of all exports. This was more than double the value of exports to Germany, the UK’s second largest export market (£56 billion). -Trade with China has expanded rapidly in recent years. China now accounts for over 7% of UK imports (2% in 1999) and is the UK’s fourth largest source of imports. The UK exported £26 billion of goods and services to China in 2020, making it the UK’s sixth largest export market.

Question 35

What is the UK’s commodity pattern of trade?

Answer 35

-The UK has high levels of imports and exports. It is the 2nd largest exporter of services in the world. -The UK’s main exported goods are cars, fuels and pharmaceuticals. It’s main exported services are financial, transport and insurance. -The UK often imports and exports the same sort of goods (intra-industry trade). -Most of UK’s imports are from EU, China and the USA. They consist on non-monetary gold, road vehicles, electrical machinery and appliances. -The UK has a trade deficit in goods and a trade surplus in services.

Question 36

How has the UK’s pattern of trade changed in recent times?

Answer 36

-Since 2000 exports have fallen and imports have risen -The decline in UK exports is similar to that seen in most other industrialised countries – and is due from competition from emerging and newly industrialised economies such as China, India and Brazil. -UK imports have tended to rise for similar reasons: goods are cheaper to buy from less developed countries. -UK exports goods to countries such as China, whose economies are growing quickly, are rising. -But the level of exports going to China and India are both less than 5% of the UK’s total exports.

Question 37

What is intra industry trade?

Answer 37

Intra-industry trade is the trade of similar goods that are part of the same industry between two nations. Developed nations often participate in this because they can produce similar goods but it would not be efficient for every nation to produce all the goods that it needs just because it can. Engaging in intra-industry trade with nations that can produce similar goods, allows each nation to specialize where they have a comparative advantage.

Question 38

What is an example of intra-industry trade?

Answer 38

The US produces harvest machinery better than China, but China produces logging machinery better, China should specialize in logging machinery, and the US in harvest machinery, rather than both nations producing both. Both China and the US import and export machinery, but they trade different types. The need for efficiency and specialization helps drive this intra-industry trade

Question 39

How are the BRICS countries impacting patterns of trade?

Answer 39

These nations have impacted on the global economy in many ways, as many of their growths was built on rapid increases in exports. This as a result caused a global shift when many manufacturing roles moving from now developed countries to these emerging nations. This didn’t only affect many nations commodity pattern of trade, but also had a significant impact on their geographical patterns of trade.

Question 40

What are the reasons for restriction of trade?

Answer 40

-Infant industry argument -Job protect -Protection from potential dumping -Protection from unfair competition -Terms of trade -Danger of overspecialisation -To keep ‘dangerous goods’ out of country

Question 41

Why can infant industries cause restrictions on trade to be imposed?

Answer 41

An infant industry is one that is just being established within a country. They need to be able to build up a reputation and customer base and will have to cover a lot of sunk costs, meaning their AC will be higher. Therefore, the industry would be unable to compete in the international market and so the government protect them until they are able to compete on an equal level. This has worked well in ​Japan but in general tends to be ineffective as firms grow to be inefficient and the government tend to have a poor record of ‘picking winners’. There may be other more effective methods, such as subsidies.

Question 42

Why may there be restrictions of trade to protect jobs?

Answer 42

Governments may be concerned that allowing imports will mean domestic producers will lose out to international firms, and so there will be job losses within the country. Not only would this have negative economic consequences, it would be politically unpopular.

Question 43

Why may there be restrictions on trade to protect potential dumping?

Answer 43

Dumping is when a country or company with surplus goods sells these goods off to other areas of the world at very low prices, harming domestic producers in those countries. The government may need to intervene to protect domestic producers who are unable to compete with firms that are willing to make a loss. In ​China, tariffs are placed on stainless steel tubes from the EU and Japan to prevent from dumping.

Question 44

Why may there be restrictions on trade to protect from unfair competition?

Answer 44

Across the world, different rules apply and this means that producers in different countries can produce at different prices. Domestic producers may be unable to compete with a firm that has very low labour costs or very low health and safety costs due to regulation or with a firm that is heavily subsidised by the government. Some will argue the government should intervene to protect domestic producers from this.

Question 45

Why may there be restrictions of free trade to prevent a unfavourable terms of trade?

Answer 45

​If a country buys a large amount of imports for a certain good, this will increase demand for that good and hence increase the price. This will worsen the terms of trade and so therefore they can buy less imports with the amount of exports. Restrictions will reduce supply of the good and lead to a fall in the price received by the importer, so improve the terms of trade.

Question 46

Why may there be restrictions on free trade to prevent over specialisation?

Answer 46

​Some people believe that no country should become totally reliant on another for important products or materials and so it is important to introduce protectionism on these goods to prevent firms and consumers becoming reliant on them.

Question 47

What are tariffs?

Answer 47

These are ​taxes placed on imported goods which make them more expensive to buy, making people more likely to buy domestic goods.

Question 48

What do tariffs cause? (Look at diagram on PMT)

Answer 48

As the world price is now increase to the world price + tariff, there is more supply created by the domestic market, and less imports. Tariffs do also create government revenue, but this doesn’t also come without a deadweight loss, meaning economically tariffs are considered inefficient.

Question 49

What are quotas, and what impact do they have?

Answer 49

These are ​limits placed on the level of imports allowed into a country​, meaning people are forced to buy domestic goods if they want that good and the quota is already used up. Like tariffs, a diagram can be used to represent how the imposition of a quota leads to welfare loss. The government could introduce a quota of KL (in the above diagram) and this will have the same effect as introducing a tariff which raises price to P2​ .​ There will be a welfare loss and shift of consumer subsidy to producer subsidy but instead of tax revenue, there will be extra revenue for the exporting, foreign firms. Quotas also cause a DWL in efficiency, as domestic supply is more expensive than it would be for foreign firms to supply the good.

Question 50

How can subsidies to domestic producers restrict free trade?

Answer 50

These are ​payments to domestic producers which lower their costs and help them to be more competitive by enabling cheaper prices. Sometimes subsidies are purely given to goods that are exported whilst other times they are given to firms that have a large proportion of their sales as exports. Subsidies can also be given to domestic firms that compete with imports, usually in the form of indirect subsidies like tax breaks or cheap loans. Research and development subsidies will help the firm to be competitive by ensuring they have the most up to date technologies. One example of this is ​China, who subsidise their car industry. In order for this to occur, the government has to spend to pay the subsidy, meaning that consumers still indirectly pay more for the good through taxes.

Question 51

What are some examples of non-tariff barriers to restrict free trade?

Answer 51

● Countries can introduce an ​embargo​, which is a total ban on imported goods. ● They can introduce ​import licensing when countries/firms need a license to be able to import; by reducing the number of licenses they give out, the government can restrict the level of imports. ● The use of ​legal and technical standards means that some products cannot be sold in the country, for example specific specifications can be imposed for goods. -Intellectual property laws over patents and copyrights can be introduced. The ​EU has high standards, which is the main restriction on trade from outside the bloc. ● On top of this, countries can use ​voluntary export restraint agreements where they agree to limit the volume of exports to one another over an agreed period of time to allow domestic producers to grow and establish. -Domestic Subsidies -Exchange rates can be managed in order to affect the relative imports and exports.

Question 52

What is the impact of protectionist policies on consumers?

Answer 52

● There are ​higher prices for consumers as they are unable to buy imports at the cheaper price. It tends to raise the price of domestic producers since goods and services needed for the production of these goods may also suffer from import controls and it limits the competition for domestic producers so they have less incentive to be efficient. ● Moreover, they suffer from ​less choice. -Consumer surplus is reduced -Consumers may benefit from a better quality product as there may be stricter quality regulations/standards on the domestic market -As the increase in price is regressive, the impact will be greater on low-income households.

Question 53

What are the impacts of protectionist policies on the government?

Answer 53

● In the short run, governments benefit from protectionist policies as they can gain tariff revenues​ and they are ​politically popular​. ● However, it can lead to an ​inefficient economy ​which stifles long-term growth.

Question 54

What is the impact of protectionist policies on the foreign producers?

Answer 54

● Foreign producers will lose out as they are limited in where they can sell their goods. Inefficient, domestic producers are kept in production, whilst efficient, foreign ones lose out. -May not be too significant if they can find other international markets to trade in.

Question 55

What is the impact of protectionist policies on domestic producers?

Answer 55

● Domestic producers tend to benefit from import controls since they have less competition so can sell ​more goods at a higher price than otherwise and they will benefit from measures to increased exports. ● However, they may suffer from higher costs if there are ​controls on the imports -May suffer from x-inefficiency due to there being less intense competition in the market

Question 56

What is the impact of protectionist policies on the living standards?

Answer 56

● As the tariff diagram shows, the imposition of import controls results in ​deadweight welfare loss. ● It also causes trade wars since the introduction of restrictions often leads to retaliation ​by other countries. A recent example of this is the ​US-China trade war​, where each country continues to impose more tariffs on the other’s goods. This causes a reduction in trade and a reduction in growth

Question 57

What is an example of a UK tariff?

Answer 57

The UK has set a tariff of 10% on cars which are imported from outside of the EU.

Question 58

What is an example of a quota set by the UK?

Answer 58

The UK has quotas of foreign imports of beef and meat, to help keep Uk farmers competitive.

Question 59

What is an example of a non-tariff restriction on free trade being used?

Answer 59

-Until recently China ruled that all avocados coming from countries such as Kenya had to be frozen to -30°C and peeled before shipping, which discourages supply from these countries. -Trucks of fruit coming from North Macedonia to Serbia are subject to customs and sanitary checks, and long wait times at the border. Fresh fruit deteriorates the longer trucks have to wait at the border.

Question 60

What is a trading bloc?

Answer 60

A regional trading bloc is a group of countries within a geographical region that protect themselves from imports from non-members. They sign an agreement to reduce or eliminate tariffs, quotas and other protectionist barriers among themselves. They are a form of integration. Examples include ​NAFTA (North America), the ​EU​, ​ASEAN (Asia) and MERCOSUR (South America). Most regional trade agreements take the form of ​bilateral agreements​, between one single country and another single country. Some agreements are multilateral or plurilateral agreements, between at least three countries.

Question 61

What are the different levels of trade blocs?

Answer 61

-Preferential trading areas (PTA) -Free trade areas (FTA) -Customs Unions -Common markets -Monetary unions -Economic unions

Question 62

What is a preferential trading area?

Answer 62

These are where tariff and other trade barriers are reduced on some but not all goods traded between member countries.

Question 63

What are free trade areas (FTAs)?

Answer 63

​These occur when two or more countries in a region agree to reduce or eliminate trade barriers on all goods coming from other members. Each member is able to impose its own tariffs and quotas on goods it imports from outside the trading bloc. E.g NAFTA

Question 64

What is a customs Union?

Answer 64

A customs union involves the removal of tariff barriers between members and the acceptance of a common external tariff against non-members. This means that members may negotiate as a single bloc with third parties such as other trading blocs or countries. E,g Mercosur (Argentina, Brazil, Paraguay, Mexico and Venezuela).

Question 65

What are common (single) markets?

Answer 65

This is the first step towards full economic integration and occurs when members trade freely in all economic resources so barriers to trade in goods, services, capital and labour are removed. They impose a common external tariff on imported goods from outside the markets. For a common market to be successful there must also be a significant level of harmonisation of micro-economic policies, common rules regarding monopoly power and anti-competitive practices and the removal of custom posts. There may also be common policies affecting key industries such as the ​Common Agricultural Policy ​(CAP). The main goal of a common market is to establish a single market, the same way in which there is a single market within an individual economy. E.g the European Economic Area (EEA - 27 countries in the EU + Iceland, Norway and Lichtenstein)

Question 66

What are monetary unions?

Answer 66

​These are two or more countries with a single currency, with an exchange rate that is monitored and controlled by one central bank or several central banks with closely coordinated monetary policy. Some examples include the EU, the West African Economic and Monetary Union and the Economic and Monetary Community of Central Africa.

Question 67

What is an economic Union?

Answer 67

● An ​economic union ​is the final step of economic integration. There will be a common market with coordination of social, fiscal and monetary policy.

Question 68

What are the advantages of trading blocs?

Answer 68

● Free trade encourages increased specialisation, and this increases output, according to ​comparative advantage​. This specialisation also helps firms to benefit from economies of scale​, causing lower prices and costs, a comparative advantage. ● Firms may be able to grow much larger by creating a ​larger customer market​, but this may be difficult given different customer markets in different countries. It will be easier for some products, such as basic chemicals and cars, than for other products and easier between some countries, such as France and the UK, than between others, such as Iran and UK. Economies of scale will be increased further over time as companies expand. ● Firms inside the bloc are protected from cheaper imports from outside, for example those in the EU are protected from Chinese imports. ● Another dynamic benefit may be ​competition, as the removal of barriers means domestic industries face greater competition. This encourages innovation and lower prices, leading to improvements in productive and allocative efficiency. ● The increased trade may ​create more jobs​ if it leads to an increase in output. ● There will be ​increased choice ​for consumers.

Question 69

What are the disadvantages of trade blocs?

Answer 69

● Countries are no longer able to benefit from trade with countries in other blocs and the blocs are likely to ​distort world trade​, reducing the benefits of specialisation. Inefficient producers within the bloc are protected from efficient producers outside the bloc, called ​trade diversion​. ● There may be a ​reduction in competition as inefficient firms are driven out of the business and the market becomes oligopolistic, or mergers and acquisitions will reduce customer choice ● One dynamic loss may be the ​loss of resources​, as the most successful countries will attract capital and labour (since both are free in a common market) and so this heightens regional inequalities as the richest countries experience faster rates of growth. Firms may set up factories etc. in the poorer countries, as labour is cheaper, and therefore this will help them to grow but will also mean that they lose the most skilled labourers to more successful countries as this is where the best jobs are based. Could also cause structural unemployment. ● There could also be ​retaliation as the creation of one regional trading bloc will lead to the creation of others and this can lead to trade disputes. ● Creating and maintain trading blocs can ​distract governments from the gains of signing full free trade agreements​. Bilateral trade agreements can bring very little gain to the two countries making the agreement but can take up significant government resources. ● They ​distribute the gains from trade unequally​, with developed countries often gaining most and developing countries being impacted little. ● They may be weak if they cover a very ​limited range of goods​. ● They lessen ​national sovereignty​. ● Trading blocs can be seen as ‘​second best’ solutions in a world with protectionism. Economic efficiency would be maximised if there were no barriers to trade

Question 70

What is trade creation?

Answer 70

a stimulus for an increase in trade that ought to lead to a more efficient allocation of resources as each country exploits their comparative advantage, and trade blocs result in the imports of goods from efficient foreign exporters, rather than inefficient domestic producers.

Question 71

What is trade diversion?

Answer 71

-Membership of a trading bloc makes trade more attractive compared with trading with non-members. -The UK’s (former) membership of the EU biased our trade toward other members of the EU. This may involve buying products from within the EU that could have been bought more cheaply elsewhere prior to tariffs being charged.

Question 72

What is the Eurozone?

Answer 72

o T​he European Central Bank distributes notes and coins, sets interest rates, maintains a stable financial situation and manages the foreign currency reserves. o In the EU, the governments agreed not to exceed a fiscal deficit of more than 3% and not to have a National Debt of more than 60%. o For a monetary union to be successful, there should be free movement of labour, capital mobility and wage and price flexibility, fiscal transfers from one country to another when a country is performing poorly, and countries should share the same business cycle. The main problem for the EU is the lack of automatic fiscal transfers, for example these would have helped Greece, Spain and Portugal following the financial crisis of 2007-08.

Question 73

What are the costs and benefits of monetary unions?

Answer 73

-Monetary unions are good since they mean prices are fixed as all currencies are the same and there are reduced exchange rate costs, as well as less speculation which could reduce investment. -It becomes easier for prices to be compared across the union and so MNCs are less able to price discriminate. -The countries have to stick to the exchange rate agreed, meaning they have to have inflation discipline and be strict with wage increases. -However, there are financial costs involved with starting the new currency and there would be costs if the union broke up. There is a loss of policy independence as countries can’t use interest rates to cause changes in the economy (e.g fluctuations in output and employment), and countries are unable to change the value of their currency and what is good for one country may not be good for another (e.g was bad for Greece in the 2000 recession, but good for Germany, who predominantly exports).

Question 74

What is an example of a trade diversion for the UK cause by the EU? (Check PMT diagram)

Answer 74

The UK switching from New Zealand to European butter. Before, there would have been the same tariff on both New Zealand and European butter so New Zealand butter would have been bought since it is produced more efficiently and therefore is cheaper. o However, joining the EU meant that the tariff on EU butter was removed and so this became cheaper and consumption was switched to the higher cost EU butter. This reduces world-wide efficiency as countries are not buying from the most cost-effective supplier and therefore not fully utilising comparative advantage.

Question 75

When will a trade bloc likely lead to trade diversion rather than trade creation?

Answer 75

● A trading bloc is more likely to lead to trade diversion than trade creation when it has a very ​high external tariff as this will push countries to buy from within the bloc or if there is a ​relatively small cost difference between goods purchased within and outside the block. The higher the tariffs imposed by a country before joining the market, the more likely it is that trade creation rather than diversion will take place.

Question 76

When will a free trade agreement cause welfare to improve?

Answer 76

● If joining a FTA leads to more trade creation than diversion, it is ​welfare improving​. If it leads to more diversion than creation, the FTA is ​reducing welfare​.

Question 77

Who are the world trade organisation?

Answer 77

The World Trade Organisation was set up in 1995 to replace the GATT, which had aimed to reduce protectionism. It has two main aims: to bring about ​trade liberalisation and to ensure countries ​act according to the trade agreements they have signed.

Question 78

What happens if a country fails to follow the agreements set by the WTO?

Answer 78

If a country fails to follow its agreements, a country or group can file a ​complaint and the WTO will attempt to solve the issue through negotiations but the complaint can go to a panel of experts and countries must agree to their rulings. If they reject the ruling, the country which wins the ruling has the legal right to impose ​trade sanctions against the exports of the losing country. One example of a WTO ruling is Boeing being allowed to impose tariffs on Airbus for illegal subsidies in Europe in 2018.

Question 79

How does the WTO achieve their aims?

Answer 79

● They hold a series of talks called ​‘rounds’, the most recent of these is the Doha Round in 2001 which aims to cut protectionism on agricultural goods, reduce tariffs on manufacturing goods, increase access to markets in services, tighten intellectual property rights and give the WTO more power to settle disputes. ● One problem is that for any agreement to take place, ​all countries must agree to it and so any country is able to veto an agreement. This veto may also be politically motivated, for example retaliation against the US for something unrelated.

Question 80

What economic strategies conflict with the WTO?

Answer 80

● Regional trade agreements contradict WTO’s principles as a common external tariff on trade outside the trading bloc introduces protectionism. Customs unions and free trade areas can be seen as violating the WTO’s principle since not all trading partners are treated equally. ● However, they can ​complement the trading system and the WTO strives to ensure non-members can trade freely and easily with members of a trade bloc.

Question 81

Why do some people argue against the WTO?

Answer 81

● Some might argue the WTO is ​too powerfu​l or that it ​ignores the developing countries​, as developed countries do not trade freely with developing countries. ● The ​protectionist approach of the USA and China currently provides a threat to the WTO system.

Question 82

What conditions are necessary for a single currency such as in the Eurozone?

Answer 82

-The monetary policies need to be reasonably close for all the countries who want to participate -Many argue all should have similar inflation rates before joining, where as others say this isn’t needed, but a benefit of joining a single currency due to the inflation discipline required. -Relatively similar interest rates, so that capital flows aren’t destabilised when the single currency zone is set up. -Need to have a long term commitment to a stable fiscal policy (as is in the Eurozone rulings)

Question 83

How was the UK impacted by Brexit?

Answer 83

-By the 1990s, the EU was the recipient of 60% of UK exports, but with the introduction of tariffs due to leaving the EU, this % could fall and negatively impact the UK balance of trade. -Could also cause an increase in skills shortages as many skilled workers were migrants from the EU. -May cause inflation to rise if we have to pay more for (now tariffed) imports from the EU, or could decrease if new FTAs are made as a result of leaving (e.g trade agreements now with Australia). -Many were concerned being in the EU was starting to threat UK sovereignty. -Will likely reduce FDI between 6-9% as there will be more speculation post Brexit, which negatively impacts the exchange rate.