unit 3 go over Flashcards
Describe the theory of comparative advantage.
This is when a country can produce goods/services at a lower opportunity cost than others (1).
This means it would sacrifice less of one good in order to produce another good (relative to a second country) (1).
A country will benefit by specialising and producing this good or service (1). This would ensure world output/standard of living would increase (1).
Then rest of the marks are gained from showing a table with examples
Describe the theories of absolute advantage.
Absolute advantage
Refers to a situation where countries are more efficient at producing some good/services than other countries. (1 mark) This could be a result of low cost labour/high skilled labour/factor endowment/ climate. (1 development mark)
For example, China has a large low cost labour force giving it an absolute advantage in textile production. (1 development mark)
Any country with an absolute advantage should specialise and trade. (1 development mark) This will lead to increased world output and improved living standards. (1 development mark)
Strategies to attract fdi
Trade and investment agreements - if you get trade deal with ireland then can trade freely with the other 26 countries
Low labour costs attraction of relatively low unit labour costs for example labour intensive manufacturing
Investment in high quality critical infrastructure such as ports and telecoms
availability of natural resources (for example, oil, forests, land)
a skilled workforce (1). This helps improve productivity levels
EU membership (currently) which eliminates trade barriers (1).
This allows a non-EU company to trade as though it were an EU
company
Advantages of fdi
Infrastructure improvements ultimately leading to economic growth. For example chinese firms set up firms in africa and build bridges and dams e.t.c.
Better training for local workers leading to improved human capital
Creates new jobs leading to higher per capita incomes and households savings
Lift in level of factor productivity which also increased GNI per capita
Capital deepening - i.e. there is more capital per worker to use in production
Tax revenue may increase as job opportunities may increase as a result of fdi
Disadvantages of fdi
local firms may struggle as are faced with increased competition (1)
increased pollution from factories etc (1)
depletion of non-renewable resources
‘screwdriver’ economy may be created where job creation is centred in the low skilled/low paid assembly area or management jobs remain with foreign firm (1)
The profits from the business will be repatriated to the home country. (1) This is an outflow/this is bad for the Balance of Payments/this means less money is circulating in the UK economy
Management jobs may not be created/top jobs in the multinationals may be retained for employees of the home country. (1) ‘Screwdriver’ jobs which are created do not create as much potential for growth/improved standards of living
Tax avoidance by some multinationals reduces government income.
Discuss advantages for UK firms of a depreciation in the value of sterling.
benefits firms who export their goods and services abroad (1). Goods will be cheaper for foreign consumers (DEV) (1) therefore volume of export sales may increase (DEV) (1)
increases profits for UK firms involved in tourism (1) for example, hotels may benefit from an influx of tourists who will visit the UK
Explain the factors that may increase demand for sterling on foreign exchange markets
The volume of UK exports rise (ID) so foreign consumers need to purchase more sterling (1). For example, if more foreign tourists visit the UK they will need access to sterling to pay for UK goods and services (DEV) (1).
UK interest rates rise (ID) so ‘hot money’ inflows may increase (1). This is because investors will convert more currency to sterling to seek a higher rate of return (DEV) (1).
If speculators anticipate that sterling will rise in the future (ID) the demand for sterling will rise as they seek increased profits/returns
Low rates of inflation in the UK (ID) make UK goods/ services appear cheaper, so foreign consumers will demand more sterling to purchase them (
Explain the benefits to a developing economy of hosting a multinational company.
The MNC provides job opportunities (ID) as the demand for labour will increase (1). This will reduce unemployment (DEV) (1).
Creates additional tax revenue for the developing economy’s government (ID) which can be used to stimulate growth (1).
multinationals may improve roads, rail networks etc this can benefit whole communities
Increases economic growth (ID) as the MNC increases the developing economy’s output
Explain why a strong pound could have british holidaymakers “reaping the benefits of this on the continent”
Imports such as foreign holidays are cheaper (ID) so British holidaymakers will be more able to travel abroad. (1 mark)
UK tourists will be able to buy more Euros for their pound (ID) which will make their holiday seem better value for money. (1 mark)
This means that they can buy more luxurious goods and services/book more expensive/longer holidays abroad.
Including a numerical example is a mark aswell
Advantages of eu membership
Advantages
Eu countries are on average 12% richer a decade after they join than they would be otherwise
Economies of scale - uk firms have access to over 500m people across europe
Increased competition may lead to improved choice and quality with lower prices
Increased number of alliances and joint projects
Lower costs of production with zero tariffs/quotas
Increase mobility of labour and capital could lead to lower business costs and lower unemployment (move to another eu country to get a job)
The EU has the following features:
Free movement of goods and services
Removal of tariffs and quotas
A common set of product, health and safety standards
The removal of tariffs and quotas on imports and exports. This means countries can trade with each other freely with no limits, and helps to lower the costs of production
Countries have to contribute membership fees into the EU
There is a european central bank for the eurozone (countries that have adopted the euro as their form of currency)
Farmers within the EU are provided with subsidies which allows them to keep prices for crops steady and also makes sure that there aren’t any shortages of crops.
Common external tariff
Free movement of labour and capital
Disadvantages of eu membership
Firms have moved to central and eastern europe to cut costs
Bureaucracy - far more paperwork has to be completed to obey all eu rules and policies
Taxation rates not harmonised therefore different rates of vat and corporation tax still create a competitive advantage for some countries
Advantages of the single currency
Advantages
Removes transaction cost (previous trade cost an estimated 5% GDP)
Exchange rate stability which makes forward planning easier
Increased inward investment
Greater price transparency
Forces governments to control inflation and budget deficits
The european central bank will be free of political influence
disadvantages of the single currency
Loss of monetary independence to the european central bank
Can lead to the expensive costs of having to change price lists,tills and vending machines etc
‘Contagion’ when there are difficult eurozone problems to solve which creates negative sentiment affecting all economies.
Describe the roles of:
i) World Trade Organisation (2)
aims to promote free trade (1) attempts to remove barriers to trade (1) hold trade rounds (1) mediates in trade disputes (1) enforces members’ adherence to agreements (1) can impose penalties/compensation (1)
