UNIT 4 NOTES Flashcards
why do countries trade with each other? x4 (4.1)
↪ difference in factor endowments
↪ variety & quality of goods
↪ gains from specialisation
↪ political motivation
implication of free trade x3 (4.1)
↪ cheaper prices for domestic consumers
↪ increase in output and export revenue for exporting country
↪ loss in domestic production with will lead to closure of businesses and increase in domestic UE
benefits of free trade x9 (4.1)
↪ increased competition
↪ lower prices
↪ greater choices
↪ acquisition of resources
↪ more foreign exchange earnings
↪ access to larger markets
↪ economies of scale
↪ more efficient resource allocation
↪ more efficient production
aims of a tariff x2 (4.2)
↪ lower the amount of imports
↪ increase domestic production
effect of a tariff x6 (4.2)
positive:
↪ protecting domestic economy
↪ maintain/restore jobs
↪ domestic safety and environmental concerns
negative:
↪ allocative inefficient (welfare loss created)
↪ loss of consumer benefits
↪ helping inefficient domestic producers
effect of a quota x6 (4.2)
positive:
↪ domestic producers better off
↪ domestic employment increases
negative:
↪ domestic consumers worse off
↪ government has no financial rewards
↪ increase in inefficiency w/ global misallocation of resources
neutral:
↪ foreign producers may be worse or better off (depending on whether they can get inside the quota
benefits of using a quota x3 (4.2)
↪ lowers quantity of imports
↪ no pressure on the government budget
↪ simple and easy to use
limitations of using a quota x5 (4.2)
↪ politically unfriendly (against WTO principles)
↪ inefficient (waste of resources)
↪ unfair punishment to efficient importers
↪ need to decide which country to put quota on
↪ lack of government revenue (compared to tariffs)
aims of an export/production subsidy x2 (4.2)
↪ promote exports (export subsidy)
↪ reduce quantity of imports (production subsidy)
benefits of using a subsidy in international trade x4 (4.2)
↪ domestic producers become more competitive
↪ decreases the cost of production to domestic producers
↪ maintain jobs
↪ relieve political pressure
limitations of using a subsidy in international trade x5 (4.2)
↪ domestic producers will become more dependent on the subsidy
↪ inefficiency (welfare loss produced)
↪ opportunity cost for the government
↪ risk of budget deficit
↪ unfair to foreign importers who are competitive
aim of administrative barriers x2 (4.2)
↪ to increase overall costs of importing
↪ reduce the amount of imports
protection of infant industries as an argument for trade protection (4.3)
national security as an argument for trade protection (4.3)
health and safety/environmental standards as an argument for trade protection (4.3)
anti-dumping as an argument for trade protection (4.3)
unfair competition as an argument for trade protection (4.3)
balance of payment correction as an argument for trade protection (4.3)
government revenue as an argument for trade protection (4.3)
protection of jobs as an argument for trade protection (4.3)
economically least developed country diversification as an argument for trade protection (4.3)
misallocation of resources as an argument against trade protection (4.3)
retaliation as an argument against trade protection (4.3)
increased costs as an argument against trade protection (4.3)
higher prices as an argument against trade protection (4.3)
less choice as an argument against trade protection (4.3)
domestic firms lack incentive to become more efficient as an argument against trade protection (4.3)
reduced export competitiveness as an argument against trade protection (4.3)
free trade vs. trade protection
depends on a country’s:
↪ CA and AA (HL concept)
↪ economic performance
↪ political climate
is the PTA effective in achieving economic integration? x6 (4.4)
advantages:
↪ reducing/eliminating tariffs on selected goods and services
↪ lower overall trade barriers
↪ improved relationship between countries
disadvantages:
↪ against WTO principles
↪ discriminatory against non-members
↪ threat of corruption
types of trading bloc x3 (4.4)
↪ free trade area (FTA) (i.e. NAFTA)
↪ customs union (i.e. CEFTA)
↪ common market (i.e. treaty of Rome)
differences between FTA + customs union, customs union + common market x2 each (4.4
FTA vs customs union
↪ members in both trading blocs have no trade barriers on exports within themselves
↪ FTA members can have their own trade policies to non-members, but customs union must have the same policies
customs union vs common market
↪ customs union = limited freedom of movement of capital and labour whereas common market = complete freedom of movement of all factors of production
↪ customs union = abolition of visible trade barriers but not on invisible trade barriers (i.e. technical, environmental standards), whereas common market can
disadvantages of the formation of a trading bloc x3 (4.4)
↪ loss of sovereignty
↪ challenge to multilateral trading agreements
↪ trade diversion (inefficient)
aims and objectives of the WTO x2 (4.4)
↪ help their members on different trade policies to raise living standards
↪ operates global system of trade rules and helps LICs to build their trade capacity
functions of the WTO x4 (4.4)
- = important
↪ * set & enforce rules for international trade
↪ * resolve trade disputes
↪ monitor further trade liberalisation
↪ provide a forum for negotiating trade liberalisation
factors affecting the influence of the WTO x2 (4.4)
↪ difficulties in reaching agreement on goods and services
↪ cannot prevent high income countries from putting trade barriers on primary goods from low income countries/giving subsidies to domestic farmers
↪ unequal bargaining power of members
why do we need exchange rates? x4 (4.5)
↪ international trade
↪ foreign direct investments (long term capital movement)
↪ government intervention to achieve macroeconomic objectives
↪ speculation (international traders)
appreciation and depreciation within a floating ER system (4.5)
↪ if there is excess demand for the currency on the forex market, then prices rise (the currency appreciates)
↪ if there is an excess supply of the currency on the forex market, then prices fall (the currency depreciates)
changes in demand and supply for a currency x10 (4.5)
↪ foreign demand for exports
↪ domestic demand for imports
↪ inward/outward foreign direct investment
↪ inward/outward portfolio investment
↪ remittances
↪ speculation
↪ relative inflation rates
↪ relative interest rates
↪ relative growth rates
↪ central bank intervention
devaluation and revaluation of a currency in the fixed exchange rate (4.5)
DEVALUATION
↪ if the currency has a higher value than it can be maintained, the government will change the fixed rate to a new, lower value
↪ decrease currency strength
REVALUATION
↪ if the currency has a lower value than it can be maintained, the government will change the fixed rate to a new, higher value
↪ increase currency strength
debits and credits of the balance of payments (4.6)
in 1 year, all inflows of payments (credits) must exactly equal the outflows of payments (debits)
