Unit 3 - Global Economic Activity Flashcards
Multinational
A multinational company/enterprise (MNC/MNE) is one that operates in more than one country. It has a headquarters in one country and branches or production facilities located worldwide.
MNC - Example
Apple Inc. - Headquarters in San Francisco, CA. Manufacturing facilities in China
MNC - Reasons for locating
Access to resources - natural resources or cheap labour
Quality of resources - e.g. highly skilled labour
Proximity to market
English speaking (in the case of the UK)
Access to EU - now in jeopardy
Grants offered by governments
Transport links - ports/roads/rail/airports
MNC - Advantages to host country
Jobs are created - unemployment reduced Increased exports Benefits to related businesses/suppliers Increased tax revenue for government Reduced benefit payments May bring ideas and innovations that can be used by other firms
MNC - Disadvantages to host country
Negative impact on competing firms
External costs - pollution, traffic congestion etc
Repatriation of profits to home country
The MNC may leave
Cost of government incentives
MNC may only provide low paid “screwdriver” jobs
Senior positions may be brought in from home country
Exchange Rate
The value of one currency in terms of another
e.g. £1 = $1.26
Exchange Rates - Appreciation
An increase in the value of a currency
e.g. £1 = $1.26 becomes £1 = $1.50
Exchange Rates - Depreciation
A decrease in the value of a currency
e.g. £1 = $1.50 becomes £1 = $1.26
Determinants of Exchange Rates
FOREX Market : Factors affecting supply and demand UK unemployment FTSE Market Trends Economic Growth Speculation Interest Rates
Appreciation Impacts - Individuals
Stronger £1 buys you more foreign currency
Increases a UK citizen’s purchasing power abroad
Cheaper to import goods from abroad
Cheaper to go abroad on holiday
Appreciation Impacts - Firms
If the firm exports, then demand for exports will fall
If the firm imports raw materials and components for production, then it is cheaper - and this represents a fall in the costs of production
Appreciation Impacts - Economy
Imports will increase - meaning a worsening of the current account deficit
Exporters will lay off workers
Importers can reduce prices so inflation may fall
Depreciation Impacts - Individuals
Weaker £1 buys you less foreign currency
Decreases a UK citizen’s purchasing power abroad
Dearer to import goods from abroad
Dearer to go abroad on holiday
Depreciation Impacts - Firms
If the firm exports, then demand for exports will rise
If the firm imports raw materials and components for production, then it is dearer - and this represents a rise in the costs of production
Depreciation Impacts - Economy
Exports will increase - meaning a reduction of the current account deficit (or a surplus)
Importers may lay off worker due to an increase in the costs of production
Inflation may rise because importers increase prices to protect their profit margins
Features of the EU - Single Market
There are no trade barriers between the 27 member countries
27 after Brexit
Features of the EU - Shengen
Workers can move freely to work in other EU countries. Also there is free movement of capital
Features of the EU - Common External Tariff
All goods imported to any country in the EU (from outside) face the same tariff
Features of the EU - Maastricht
Set workers rights - for example there is a maximum number of hours workers can work for each week
EU - Reasons for trading
Proximity
Culture
Single Market
Demand
Eurozone - Features
Countries which use the euro as their currency
Currently 19 member countries
They all have a common monetary policy
The interest rate is set by the European Central Bank
Global (Free) Trade - Advantages
Allows countries to benefit from specialisation
Increases consumer choice
Increases competition - and therefore efficiency
Creates additional business opportunities
Enables firms to benefit from the best workforces, resources and technologies from anywhere in the world
Global (Free) Trade - Disadvantages
Protectionism :
International trade with low cost economies is threatening jobs in many developed economies and reducing opportunities for growth in less-developed economies
Contributing to rapid resource depletion and climate change
May increase the exploitation of workers and the environment
May be increasing the gap between the rich and the poor countries
Trade Barriers
Import Quota - Limit on amount
Import Tariff - Indirect Tax on imports
Higher Standards - e.g. stricter health and safety regulations)
Campaigns to buy local goods
Subsidies - protects infant industries so they can go on to compete with MNCs
Embargoes - complete ban on imports from another country
Developing Countries/Economics - Characteristics
Low GDP per capita Lack of human capital Lack of investment in infrastructure Lack of education and training Dependency on agricultural products Reliance on on or two exports High unemployment Poor level of healthcare
Aid to Developing Economies
Free trade - e.g. reduce trade barriers
Debt relief - allowing non-repayment of debt interest
Capital equipment - providing machinery
Tied Aid - Giving cash provided it is used to buy UK exports
Technical expertise - provide people who can help e.g. with engineering projects
Education - provide teachers, books etc
Military Aid - provide equipment and personnel
Emergency Aid - e.g. provide food in a drought or flood
NIC (Emerging Economy)
Newly Industrialised Country : i.e. BRICMINT Brazil Russia India China Mexico Indonesia Nigeria Turkey
NICs - Characteristics
High level of foreign direct investment Availability of cheap labour Moving from primary to secondary industry High Levels of Exports High Rates of Economic Growth Increased Infrastructure Increased levels of education Reduced poverty and higher living standards Favourable tax and regulatory regimes Improved Healthcare
UK Main Exports
Machinery (including computers)
Vehicles
Pharmaceuticals
UK Main Imports
Cars
Transportation
Textiles
UK Export Partners
Europe - Germany and Switzerland
United States
Asia - China
UK Import Partners
Europe - Germany and France
Asia - China
United States
Eurozone Membership - Advantages
Reduce risk of trading (Exchange rate does not fluctuate)
No transaction costs so increased investment
Price transparency - easier to compare prices
Could increase (or at least protect) FDI in Scotland
Could lead to low inflation and increased competitiveness
Eurozone Membership - Disadvantages
Monetary policy committee no longer able to set interest rates
Interest rate said by European Central bank might not suit every country - e.g. UK has higher percentage of variable rate mortgage holders
Cost of changing over to the Euro is very high i.e. High menu costs
EU Membership - Disadvantages
Contribution to EU Budget - Membership Fee (eg 2016 UK fee was £13.1bn)
Lack of Control - eg Tariffs and Migration policies may not suit every country
Competition for U.K. Firms
Lower wage economies
EU Membership - Advantages
Unrestricted movement of goods, services and labour among countries
Greater consumer choice
Greater competition encourages efficiency
Bigger market for exporters
More employment opportunities
Cheaper supplies
Economic Growth encouraged
Trade Barriers - Reasons for Imposing
To protect domestic industries from foreign competition - to safeguard domestic output and employment
To correct a significant deficit on the balance of payments - restricting imports should reduce the value of imports in relation to the value of exports, thereby restoring balance
To protect infant industries from foreign competition - giving them time to become established
To protect strategic industries such as agriculture - needed in countries, especially in times of war or disasters
To preserve health and safety within a country (Or to preserve particular species or the environment)
World Bank - Low income
$1035 or less per person
World Bank - Lower middle income
$1036 to $4085 per person
World Bank - Upper middle income
$4086 to $12615 per person
World Bank - High income
$12616 or more per person
Developing Economies - Examples
Afghanistan
Sierra Leone
Chad
Cambodia
EU Enlargement - Advantages
Addition of labour and land should boost economic growth and create new jobs
Lower wage costs in new member states provides opportunities for firms to cut costs by relocating their operations
UK skill shortages could be reduced by an inflow of labour from Eastern Europe
EU Enlargement - Disadvantages
Jobs may be lost if firms relocate to take advantage of the lower wage costs in the new entrant countries
A sudden influx of labour from Eastern Europe could dampen wage growth
All the new entrants have living standards below the EU average so the distribution of new regional funds will be altered in favour of new entrants
The UK (and particularly Scotland) will not only receive less regional aid, it may also lose its rebate
EU Enlargement
When new economies/countries join the European Union e.g. Most recent member is Croatia
